What to do with TSP

[dwilson]

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I am currently in the Air Force and enrolled in the TSP. I was just curious if someone has any advice on how i should allot my funds. I just changes my funds. I used to have 70 percent inG and 30 in C funds. Ichanged it to 20in G funds 60 in C funds and 20 in S funds. I am 24 years old so i still have a while till retirement. Is this a good way togo for now? Also is the TSP better then a Roth IRA? Thanks for any help.



David Wilson

 

[tsptalk]

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Hi David -

Welcome. We talk allocation all the time here so if you become a regular reader, you'll be a pro in no time .

Check out some of the other posts regarding longer term outlooks,strategies and retirement planning. Also check out the short and longer term comments pages.

http://www.tsptalk.com/comments.html - updated daily

http://www.tsptalk.com/longer_term.html - updated as needed

If you have any questions after that, let us know.

Thanks,
Tom

 

[azanon]

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I am currently in the Air Force and enrolled in the TSP. I was just curious if someone has any advice on how i should allot my funds. I just changes my funds. I used to have 70 percent inG and 30 in C funds. Ichanged it to 20in G funds 60 in C funds and 20 in S funds. I am 24 years old so i still have a while till retirement. Is this a good way togo for now? Also is the TSP better then a Roth IRA? Thanks for any help.

Well, first things first, follow Toms advise above being that this is his site.

My only comment is that if you want to just be lazy, but have the best chances of having the most money, go with 100% stock at 24 years old (C/S/I blend). Peter Lynch (former Magellen fund manager) made a convincing argument that stocks are superior to other investments, especially when one has 4 decades in which to invest one's money.

The G fund just cant not keep up with inflation, and there is no rationale i can think of that a 24-year older needs to be in any kind of defensive position, if that money in your TSP is genuinely for your retirement - which is 40years away. From a market timing point of view, fixed income investments are a really bad deal now (prime rate at 4%), and the market alreadydeteriorated in2000-2002 (its over with, IMHO).

Your last question - TSP vs Roth. Well, if you're in a high tax bracket now, that makes TSP more attractive, and Roth more attractive if the converse is true. That being said, I think TSP is much better simply because you can legally withdraw the money without penality if you choose to retire at 55 whereas with a Roth, you will have to wait until you're 59 1/2. Finally, you may or may not know it isnt necessarily an either/or unless your funds are limited. You can do both, if you have enough money.

 

[Rolo]

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Definitely try to do both, TSP first.

High or low tax bracket, you still have the benefit onnot paying taxes on your income contributed to the TSP.

A simplistic example:

Scenario 1: $20,000Taxable income=

$3,000 in taxes @ 15% rate
​

Scenario 2: $2,000 TSP contributions =

$18,000 taxable income =

$2,700 in taxes @ 15% rate =

$300 in your pocket

​

I'm with Azanon. Stick with stocks right now and you will change when you want to try the fancy stuff. I am 66%-S, 34%-I right now. G is only when nothing looks good, which would be peculiar.

 

[Mr. Duke]

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I agree... do both ...However, I feel the Roth would be my main objective....Looking strictly at the initial tax savings does not outweight the advantages of paying the tax upfront on $3000 Roth Contribution and then ALL gains from there on out will never be taxed ............period!

To be effective you will need an on-line brokeage firm to reduce the cost of trades..

 

[azanon]

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From a tax point of view of which is better - meaning Roth vs Traditional types (which TSP is a traditional type) - it has everything to do with whether your tax rate would be higher now, or when you withdraw the funds way down the line. If your marginal rate is 25% now, but you think it will only be 15% when you retire, then TSP would actually be superior to Roths. If the converse were true (higher marginal tax rate when you retire), then Roths would be better. Obviously, for all of us we have to guess what we think our marginal rate would be when we retire.

Me? I see it as one bird in the hand vs two in the bush; point being I actually prefer traditional types because I know, for sure, i'm getting 25% off for federal and another 6% for state (our state tax rate). For all i know, we might have a president 30 years from now that reduces my marginal rate to 10% when i retire then i would have made a bad choice going with Roths once i meet the match in TSP.

One point though- Roth's do allow you to save more (since you have already paid taxes on them) and are the way to go if you can afford to fund them to the max.

 

[Rolo]

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Mr. Duke wrote:

I agree... do both ...However, I feel the Roth would be my main objective....Looking strictly at the initial tax savings does not outweight the advantages of paying the tax upfront on $3000 Roth Contribution and then ALL gains from there on out will never be taxed ............period!

That is a very, very good point, especially since the gains will be larger than the contributions.



Mr. Duke wrote:

To be effective you will need an on-line brokeage firm to reduce the cost of trades..

I use USAA for my IRAs and stick with NTF/No Load/No Redemption Feefunds, at least for now. I can shuffle as often as I want and I do not want fees to chip away at my tax-advantaged funds. It wouldn't be so bad if I could pay fees from outside the account.



azanon wrote:

From a tax point of view of which is better - meaning Roth vs Traditional types (which TSP is a traditional type) - it has everything to do with whether your tax rate would be higher now, or when you withdraw the funds way down the line.

I really plan on being in a higher tax rate when I retire; I still prefer my income to go up rather than stay the same. I also have business income and taxable investment income to contribute to that in addition to retirement income.

Tax law X years from now is pretty much impossible to speculate; however, given the trend, would you bet that they would be higher or lower in X years? I'm betting higher.

So, I'll pay the lower taxes now.

 

[Mr. Duke]

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Amen....pay now... no tax on any gains down the road

 

[azanon]

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When it comes to TSP though, there's a better advantage to consider than just the traditional IRA like tax treatment it receives; that is you can legally get the money penalty free when you are eligible to retire (and DO retire) under FERS - which is 30 years of serviceor less if you take an early out. If you started federal service at 25 or less, that means you can get it as soon as 55 years old.

In contrast, you will be waiting till 59 1/2 for a Roth.

Regarding the tax part though, i really cant afford to max TSP, and two Roths yet (my wife's and mine) so i really dont worry about it too much, traditional vs Roth. Its 6 in one hand, half a dozen the other. I really dont see much difference. If the tax rates are hypothetically the same before and after - you will have exactly the same amount of money in the end regardless of which you chose. (assuming you have a hypothetical 10K you pay taxes on in the case of the roth first (meaning you invest ~ 7500), or invest the full 10K in a traditional)

I really plan on being in a higher tax rate when I retire

I dont, or i'm not trying to. IMHO, it's most logical to attempt to be in the same financial shape (by that, i mean having living off a similar expenditure relative to one's earnings) throughout one's life for the sake of balance. I think we can all agree its sad when someone is a hyperconsumer, but they get to 60+ years old and have no savings. However, i (personally) think its equally sad if someone lives a deprative life throughout their working and youthful years (defined as saving ~ 20% of ones earnings, or more, for example), only to someday be a shriveled up old person with a big bank account. To my knowledge, no one has yet figured out how to secure a U-Haul to a hersche. (btw, i'm not trying to insult any older users here; i'm well aware I will be old someday too; god willing)

So i'm shooting for balance - we'll see how i do. My hypothetical goal is to have an estate large enough to pay for my funeral and any loose ends in my estate at my death.

 

[tsptalk]

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In contrast, you will be waiting till 59 1/2 for a Roth.

One caveat to the Roth. You can always take out the money you deposit without penalty or taxes. So if you retire at 57 you can use your principle until 59 1/2 when you can take out your earnings.

If the tax rates are hypothetically the same before and after - you will have exactly the same amount of money in the end regardless of which you chose. (assuming you have a hypothetical 10K you pay taxes on in the case of the roth first (meaning you invest ~ 7500), or invest the full 10K in a traditional)

If I understand what you are saying, I'm not sure I agree. If your $10,000 pretax TSP or traditional IRA grows to $100,000, or your $7,500 after tax Roth investment grows to $75,000, you payno tax with the Roth, but you pay taxes on the entireTSP and traditional withdrawals. Am I misunderstanding you?

 

[Pete1]

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Hmmm, did not realize you could start drawing from TSP prior to 59.5 (except for substantially equal payments). Are you referring to withdrawing substantially equal payments orare there different withdrawing rulesfor TSP as opposed to other 401K plans?

 

[azanon]

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If I understand what you are saying, I'm not sure I agree. If your $10,000 pretax TSP or traditional IRA grows to $100,000, or your $7,500 after tax Roth investment grows to $75,000, you payno tax with the Roth, but you pay taxes on the entireTSP and traditional withdrawals. Am I misunderstanding you?

Yeah, that's right. In your example, the TSP will be 100,000 in the end, then you pay taxes on it (at the same 25% rate that you paid the roth in the beginning). 25% of 100,000 is 75,000, is it not?

For the Roth, you paid the 25% taxes upfront, so you're investing 7500. Earning at the same rate as the traditional, it will be $75,000 in the end, and you do not pay taxes on it .... cause its a Roth.

In both cases, you have $75,000 after the taxes were paid.


(note: i'm aware that TSP matches the first 5% - this is only a discussion of what to do after you've met the match....., prematch, its no contest - TSP is by far the better option)

 

[tsptalk]

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In your example, the TSP will be 100,000 in the end, then you pay taxes on it (at the same 25% rate that you paid the roth in the beginning). 25% of 100,000 is 75,000, is it not?

Never thought of it like that. Interesting.

Q: If I begin to take monthly TSP withdrawals at age 55 following my retirement, am I subject to the IRS pre-age 59.5 "early-withdrawal" penalty? Ed: No. Under one of the exceptions to the 10% penalty, those individuals between 55 and 59.5 who retire from Federal service and commence their TSP withdrawals are not subject to the 10% penalty.

I think that's what Pete was talking about. The annuity with substantially equal payments.

 

[Mr. Duke]

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Good work azanon, got a good point about the matching contributions...all Roth contributions are out of our pocket....nothing like free money with TSP...Early withdrawls are also a good point...I've just started Civil Service (2.5 years) but have contributed initially to Traditionals and then Roths since inception...Always thought Roth was the best thing since Viagra, :lGod willing and the creek don't rise I will continue to max out both options. However, the tax liability I would have to agree will be higher down the road then currently ...but on the other hand depending on the amount of money being withdrawn to live on may be at a loweramount and possibly a lower tax bracket if no additional work income is brought in... ABSOLUTELY MIND NUMBING AT THIS POINT.........JUST PRAY TO HIT THE LOTTERY!!!!

gooooooooooooooooo E-BAY!!!!!!!!!!!!!!