Roth IRA Retirement Plan

[Marche24]

I've been reading on the benefits of a Roth IRA and I like the fact that you could withdraw all your contributions at any time w/o paying penalties. That got me thinking on the possibility of early retirement. Right now I'm contributing 15% to my TSP, but as you all know you can't touch that money until you are 60 years old (I think is 60), so I was thinking that it might be a good idea to lower my contribution enough to max out the Roth IRA (or just a bit and put the extra cash on the IRA) that way I could tap into my contributions and retire a couple years earlier. Plus I can invest and grow my money instead of having it on a savings account. Thoughts?

 

[Bullitt]

Roth is 59 1/2.

Pulling money from a Roth IRA in an emergency can be a PITA. It's not the same as pulling money from an emergency fund (money market) since you'll have to first liquidate stock and second, fill out some forms. Keep in mind that's contributions, not gains. So if bought TSLA at 200 and it's at 1,800, you can sell it and only withdraw 200. You would literally have more money in a money market account paying .01%.

RE: Roth vs 401K; bottom line is pay taxes now vs pay taxes later. One benefit to the 401k is that it lowers your taxes today. We have no idea whether we'll be in a higher or lower tax bracket in retirement. (Likely lower.)

Government employees are in a unique situation as TSP is second to none in simplicity, selection and fees. If you're in a situation where your spouse has a poorly managed 401k (high fees, etc.) contribute enough to get the match, max out a Roth IRA, then fund the rest into the 401k.

 

[Marche24]

Hey, thanks for the feedback... Well I would still have cash for any emergency, what I would be investing would be the extra cash.

Sorry if obvious, but I don't get why I would have more money with a money market than investing it. From what I've read, you can expect to double your money if your 10 year annualized rate of return is 7%. Looking at many Index funds, their 10 year annualized rate of return is 10%+, how does a money market beats that with an annual interest rate of 1%?

 

[Bullitt]

I don't get why I would have more money with a money market than investing it.

I'm talking strictly from the standpoint of pulling your contributions out at any time before 59 1/2.

I've been reading on the benefits of a Roth IRA and I like the fact that you could withdraw all your contributions at any time w/o paying penalties.

 

[evilanne]

I've been reading on the benefits of a Roth IRA and I like the fact that you could withdraw all your contributions at any time w/o paying penalties. That got me thinking on the possibility of early retirement. Right now I'm contributing 15% to my TSP, but as you all know you can't touch that money until you are 60 years old (I think is 60), so I was thinking that it might be a good idea to lower my contribution enough to max out the Roth IRA (or just a bit and put the extra cash on the IRA) that way I could tap into my contributions and retire a couple years earlier. Plus I can invest and grow my money instead of having it on a savings account. Thoughts?

Go for it! It is a good strategy for early retirement. It gives you more flexibility with taxes down the road if you need to make a large withdrawal at anytime in retirement. Just remember that although you can withdraw the contributions at any time without penalty before 59.5 there is a penalty on withdrawing any of the earnings. There are some exceptions to the penalty for education or buying a home.

 

[Bullitt]

Better strategy would be to contribute to 401k, Roth IRA and taxable investments.

Instead of trying to outsmart the system by withdrawing Roth contributions and impeding any future compounding, use the taxable to fund an 'early retirement' until age 59.5. What good is an account that won't shine until you are 60+ if you know you're going to pull from it in your 50's?

 

[evilanne]

Better strategy would be to contribute to 401k, Roth IRA and taxable investments.

Instead of trying to outsmart the system by withdrawing Roth contributions and impeding any future compounding, use the taxable to fund an 'early retirement' until age 59.5. What good is an account that won't shine until you are 60+ if you know you're going to pull from it in your 50's?

. That works as well. It really depends on the what Marche24's situation is (how many years in government and how many to go before retirement) and what age they consider early retirement to be. Marche24 may want to consider putting all or part of TSP contributions into Roth. There are ways to access TSP Traditional prior to 59.5, under SEPP if prior to age 55 at retirement and if you retire under FERS at 55 or older, you can withdraw any amount you want within TSP. Not totally sure about accessing Roth TSP as I didn't have one, but outside rules should apply in that you should be able to withdraw contributions without penalty. After the 5% TSP match, fully funding a Roth IRA should be next on the list, whether the remaining amount is to be invested is put in TSP or in a regular brokerage account is an individual choice. Typically, you should have enough cash or near cash funds on hand to handle most emergencies as they arise and should not dip into any retirement account. It may be a PITA to withdraw funds if needed for an emergency, but so is getting a TSP or regular loan. I see more of an advantage in building the outside Roth each year and hopefully never having to use it for an emergency, but it is still a viable option.

Marche24, See Early Retirement & Financial Independence Community They include a lot of information on early retirement and things to consider from all walks of life, not just Federal Government. Taxable investments are a good option, as Bullitt recommends. If you don't plan to retire from the Federal Government, taxable investments would be more important to consider. In addition to your TSP, the 2 best benefits of FERS retirement are an actual pension and FEHB that you can carry into retirement. Most people outside of government only have their 401K or equivalent plan. There are also various Retirement calculators available that are more complicated than the tools on the TSP website.