contribution question

[24k]

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I am 25 years old. This is my first job. I would like your advise on how I should invest my money. TSP will match the first 3% dollar for dollar and the next 2% .50 for each percent. I am currently contributing 5%.

5% (contribution)+ 1%(automatic) +4%(match) =comes to a total of 10%

Should I contribute more than the what they will match or should I keep it at 5% and put the other money in a roth IRA.



Keep in mind I would like to buy a house in the near future.

 

[24k]

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I forgot to mention I gross 30,000.

 

[Guest]

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Rokid recently posted the following for another in a similar situation:

"The [highlight= #ffff88]Vanguard[/highlight] 2045 fund (designed for a person retiring in 2045) currently holds 70.8% total stock market (C&S Funds), 17.8 European/Pacific stock (I Fund), and 11% bonds (F Fund), and .4% cash. To date, it has returned 14.41% in 2004. Note: my comments only apply to abuy-and-hold portfolio."

Much of what you ask is based upon what you project you will need at retirement, how long you plan to work for the Feds, as well as a variety of other factors. You will find much wisdom in these forums. I hope this is helpful

 

[pyriel]

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24kgold wrote:

I am 25 years old. This is my first job. I would like your advise on how I should invest my money. TSP will match the first 3% dollar for dollar and the next 2% .50 for each percent. I am currently contributing 5%.

5% (contribution)+ 1%(automatic) +4%(match) =comes to a total of 10%

Should I contribute more than the what they will match or should I keep it at 5% and put the other money in a roth IRA.



Keep in mind I would like to buy a house in the near future.

Hello 24Kgold...

I did the numbers for you in an excel worksheet. There are three worksheet and they are based on your current contribution (5%), 15%, and $15K (max starting 2006). I also based your return for 8% (very conservative). Just look at the number and see why you should not base your contribution because of the agency matching. The worksheet also projected that your gross pay will never increase. By the way, Did you know that you can borrow from your TSP to pay for your house downpayment? Not everyone will recommend it but why save it somewhere else when you can do it here.

Another aspect that is not showing at excel worksheet is the fact that it will help you in tax. Every dime you put into TSP will bring you to a lower tax bracket. So instead of being taxed by the IRS for $30K, you will be taxed $28,500.00 (5% contribution), $25,500.00 (15% contribution), and $15,000.00 ($15K contribution) respectively. Savings you will receive in taxes if you are single without dependents are as follows:

$30,000.00= $4,316.00 (taxes that must be paid)

$28,500.00 = $3,941.00 (taxes that must be paid)

$25,500.00 = $3,479.00 (taxes that must be paid)

$15,000.00 = $1,904.00 (taxes that must be paid)

So you see, if you decide to contribute more for your TSP, the taxes that you must pay will keep decreasing.

Hope this helps....

Pyriel...

PS... Once you buy a house, your tax payment will go down even more. This is where you have to play around with your W4 but that will be another post. Just read around within this site and you will learn alot from these guys. The people here are great and they are very knowledgeable and helpful. Additionally, if you ever get some extra cash, throw them into a ROTH IRA as well. Good Luck. I wished that this opportunity was available to me when I was 25:^

 

[Spaf]

imported post

24kgold wrote:

I am 25 years old. This is my first job. I would like your advise on how I should invest my money. TSP will match the first 3% dollar for dollar and the next 2% .50 for each percent. I am currently contributing 5%.

5% (contribution)+ 1%(automatic) +4%(match) =comes to a total of 10%

Should I contribute more than the what they will match or should I keep it at 5% and put the other money in a roth IRA.



Keep in mind I would like to buy a house in the near future.

24K.......At least take advantage of the matching contribution. I am big on pillow funds. 3mo to 1yr salary in easy access i.e., mutual funds that you can get to in an emergency (medical, loss of job, accident, etc). A house is a good investment for equity, but it can't be quickly cashed in. Remember the IRS, a mortgage lets you itemize. What about kids and their education, their are savings plans that have a tax advantage. What are your goals? You need to come up with a series of financial plans and how they fit your needs. Extra money could be added to your TSP. But remember thats for your retirement is 35 years down the road. Probably transfer it to a IRA and withdraw somewhere near 4% a year in retirement. You could transfer your TSP into another annuity on retirement, TSP has that as an option. If you cash out, you gotta pay those deferred taxes i.e., 20%.

Basically, your big financial plan should have several sub plans, with TSP being one of many of the subs. It all has to sort of fit together. Then have an accountant check your plan and tweak things to your best tax advantage.

Rgds Spaf

 

[Mike]

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Well, you can borrow against your TSP at any time, so that is easily accessible if you wish to dip into the account to purchase a house (assuming of course that the gov't processes TSP loans expeditiously - I've never done it, so I don't know if this is true or not). The issue you must weigh here is whether or not you can make more in the market than you'll save by adding to the down payment. Personally, I think I'll make more with my money in the market than I'll save with a larger down payment (since 30 year mortgage rates are hovering in the 5.75% range right now), so I won't dip into my retirement for this purpose.

Regarding your question about additional TSP witholding vs. contributing to a Roth,personally I like the Roth better, since it's tax-free at retirement, plus youhave flexibility with it (rather than G, F, C, S, and I, you can invest in thousands of funds). You can also withdraw up to $10,000 for a first-time home purchase. However, I think you must wait 5 years after opening the account before you can make even qualified distributions without penalty. Note: if you open aRoth for 2004 (can do this all the way up to April 15th, 2005 I think), the five-year wait commences from January 1, 2004 rather than the time you actually open theRoth.

And as mentioned previously, you do get a tax advantage by contributing more to the TSP - however, at a gross income of $30,000, the advantage isn't tremendous. You're already in a low tax bracket, so the Roth is probably the better option - since the length of the investment will pay off handsomely down the road, all tax-free. Think about it this way - an investment of $3000 (Roth max for 2004) will be worth approximately $44,356 when you are age 60, assuming a relatively modest 8% annual return. Taxes on that $44,356 will be 0. So basically you either save a few hundred in taxes now, or you save thousands later.

 

[pyriel]

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24K,AsI told you, there are alot of good people here that will give you advise. You just have tofind out what will work for you. I'd like to give you one more tip. For buying a house,how about starting with a fixer upper. You can buy them low, live on it for two years while you fix it during the weekend, then sell it after two years.Profitsyoumakeis non taxable which you can then use to buy a bigger fixer upper orthe house that you really want.My friend is doing thisand hehas moved 4x within the last 8 years.Everytwo years he moves into abigger house with bigger profit. Another thought is to look for a duplex or a 4plex (4 plex is still considered a residential loan and not a commercial loan).Let yourtenant(s) pay for your mortgage. After several years,you can refinance and then buy the house you really want. The cash out that you will get on the refinance is what I call free money because you never have to pay taxes on them. Either way, you should still have theduplex or 4plex. Assets that will be paying for itself.

Mind you, please do your research and due diligence.

 

[les2l8]

Just paid off our credit card debt (60k in 32 months). It feels great to only have to deal with my mortgage. Now, I want to focus on TSP. G 15%, C 30%, S 30%, I 25%

 

[Show-me]

Just paid off our credit card debt (60k in 32 months). It feels great to only have to deal with my mortgage. Now, I want to focus on TSP. G 15%, C 30%, S 30%, I 25%

That is fantastic!!!! Congratulations!