Stay In Traditional Or Add A Roth

[James48843]

I retired two years ago. I had a small amount in Roth, and a large amount in traditional.

If I had to do it all over, I think I would make it AT LEAST 50% in Roth, as thus allows you to pick which source of funds you want.

Now I take regular for the monthly payout, and Roth money sometimes if I need a big expenditure- had to fix a roof, for example, and didn’t want to invoke a big tax payout.


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[evilanne]

I have been contributing 100% into Traditional for about 18 years, about a year or so ago I wanted to up my contributions so started with the Roth. As of now I'm doing 5% into Traditional and 7% into Roth. What I'm trying to figure out is it makes any sense to have started contributing into the Roth after 18 years of being just in Traditional. I still have about 17 years to go before I turn 60 years old and that's the age I would love to retire at. Planning on increasing my contributions again soon as well. Would it be better to just go back and do 100% into Traditional? Very new to all this. Any advice would be much appreciated.

It works out about the same if you assume you are going to be in the same tax bracket, which is very likely if you contribute to TSP over your 30 year career. Generally your income should be increasing over time and the best time to contribute to Roth is early in your career. Being retire from Federal Government, I would recommend having a mix (I've been slowly converting funds from Traditional to Roth IRAs and still contributing to my Roth)
I would recommend putting as much as you can into Roth as you are able to without going into the next higher tax bracket (current lower tax rates expire in 2025). I would recommend contributing the maximum to outside IRA before increasing TSP because you have more flexibility. Although you cannot withdraw any earnings until 59.5 without penalty, you can withdraw your contributions at any time. Plus there are no RMDs and you beneficiary doesn't have to pay taxes on a Roth if it has been at least 5 years since you started contributing.

What has me confused if the amount I'd have total when I hit retirement. Some people have told me since I have been in traditional since the beginning that it would be best to just keep 100% of my contributions there rather than have started the roth but can't tell me why. Would I have more money total if I kept it all in traditional rather than splitting it up?

Like if I had $300K as of today in traditional and decided to start up a roth putting 5% into it wouldn't it make more sense to just add that 5% to my traditional rather than start the roth? Wouldn't I make more money at the end that way? Just talking about total money at the end.

You will have more taxes withheld from you paycheck if you contribute to Roth TSP and pay more taxes now. When you do withdraw it however, you will not owe any taxes on it.
Let's say you contribute $100K ($6K/yr for 17 years) and it grows to double that amount, $200K. At age 60, you could withdraw the whole Roth amount and not owe any additional taxes on it. If you withdrew $200K after you retire from TSP that is mostly traditional, what Tax Bracket would you be in when you add it you your other income (W-2 income + pension + supplement + other income)? It gives you more flexibility in managing your taxes if you need to make any large withdrawals for whatever reason. Once you reach RMD age, you really have little control when it comes to distributions and you may end up in a higher tax bracket if you invest well.

 

[Bullitt]

Don't forget, 300k in traditional is not the same as 300k in a Roth. You will owe less in taxes today if you prioritize the TSP over Roth.

Unless you know what your tax bracket will be in retirement, you'll never know we exactly what you should optimally prioritize. Most find themselves in a lower tax bracket in retirement but not everyone does. We have no idea what the tax brackets will be five years out let alone 30 so any estimate takes current rates and extrapolates them into the future.

Your best bet is to open a Roth IRA outside of TSP if your income allows. You'll have more more flexibility and probably less headaches dealing with an actual investment bank than the government.

 

[PearlWhiteGT]

Thanks for that info. What has me confused if the amount I'd have total when I hit retirement. Some people have told me since I have been in traditional since the beginning that it would be best to just keep 100% of my contributions there rather than have started the roth but can't tell me why. Would I have more money total if I kept it all in traditional rather than splitting it up?

Like if I had $300K as of today in traditional and decided to start up a roth putting 5% into it wouldn't it make more sense to just add that 5% to my traditional rather than start the roth? Wouldn't I make more money at the end that way? Just talking about total money at the end.

 

[Bullitt]

It all comes down to paying taxes now or later.

The advantage of a Roth option is not having to worry about paying taxes on withdrawals in the future. This could relieve some headaches down the road when you want to withdraw savings without bumping up a tax bracket.

The advantage of the traditional option is tax break today. This is a big one because tomorrow is no guarantee.

Both Roth TSP and TSP have Required Minimum Distributions (RMD) at 70-72 years of age depending on the political climate. You cannot withdraw from Roth TSP until 59 1/2. TSP you can make withdrawals in your 40's or 50's depending on what category FERS you retire as.

 

[PearlWhiteGT]

I have been contributing 100% into Traditional for about 18 years, about a year or so ago I wanted to up my contributions so started with the Roth. As of now I'm doing 5% into Traditional and 7% into Roth. What I'm trying to figure out is it makes any sense to have started contributing into the Roth after 18 years of being just in Traditional. I still have about 17 years to go before I turn 60 years old and that's the age I would love to retire at. Planning on increasing my contributions again soon as well. Would it be better to just go back and do 100% into Traditional? Very new to all this. Any advice would be much appreciated.