Would you use a Roth TSP? Do you Roth?

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This topic contains 2 replies, has 2 voices, and was last updated by  Ramona Winkelbauer 6 years, 10 months ago.

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  • #150980

    Steve Ressler

    Next week it looks like the federal government is going to announce a Roth TSP option – Federal Times has a great article about it where it says all folks will be notified in mid-February.

    Would you use a Roth TSP? Do you have a Roth IRA now?

    Some notes I picked up on PMF-Central on the topic:

    1) One thing to think about is that there are subtle differences between a Roth IRA and a “Designated Roth Account” – which is what I think they will be rolling out. Most of what people know/have read about are Roth IRA’s – here’s a nifty chart from the IRS with the main differences:

    2) The traditional 401(k)/TSP option invests pre-tax contributions, and you
    pay taxes on the way out (at retirement). The Roth option invests
    after-tax contributions, and you do not pay taxes on the way out (at
    retirement). I may be simplifying, but that’s generally the case.

    The traditional option is better for those who think they are in a higher
    tax bracket now than they will be in retirement. Basically, you make a lot
    now, so you don’t want to pay those taxes now, you defer them to later in
    the traditional TSP.

    The Roth option is preferable if the opposite is true: You make very
    little now but expect to make more later. As the article said, good for
    Military, judges, etc. Those folks will make more when they retire if they
    join the private sector, judges leave the bench for a firm, etc. But they
    paid their taxes on the investment when they contributed (in the lower tax
    bracket) and take it out tax free later.

    3) Some people had questions on contribution limits with Roth IRA – the designated Roth account is governed by the 401k/TSP contribution limit, which for 2012 is $17,000. Outside of the 401k/TSP limit, there is a $5,000 limit on Traditional or Roth IRA contributions for 2012. These limits are different if you’re over age 50.

  • #150984

    Ramona Winkelbauer

    Q: from the IRS chart, I see:

    Roth IRA Designated Roth Account

    Contribution limits $5,000 / $6,000 (if age 50 or older); $16,500 / $22,000 (if age 50 or older).

    The question is: is this $16,500 in addition to the TSP limits OR does this include the current TSP limit?

    I.e., I’m maxing out my TSP limit of $16,500/year; is this $16.5 of Traditional IRA plus an additional $16.5 of Roth?

    Upon reflection, It looks like instead this would allow me to characterize some part of this money as Roth money but doesn’t change the overall amount pointed to retirement goals. So what the TSP Roth option appears to offer is a way to put money in the TSP funds that is treated as Roth once you withdraw it.

  • #150982

    Luke J. Kluchko

    The Roth approach still appears more attractive since it is obvious that taxes will need to rise in order to maintain the status quo.

    Found this interesting book that just came out about how to shift some TSP resources to precious metals. Fascinating.


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