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Thrift Savings Plan (TSP) Q&A


Guest baileyf16

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Has anybody done a Traditional TSP to Roth IRA conversion? Pain level?

I've been trying to research the same thing. It is possible however you will have to pay the tax burden on whatever amount you transfer over from your TSP. I haven't been able to confirm yet the rate at which you are taxed but I believe the entire sum is essentially added as taxable income for the tax year you make the conversion. So it could have a huge impact if you push yourself into the next tax bracket. I'm looking at getting out of the Air Force and going back to school so when I make the conversion it would be in a year with very little income so I'm hoping it would be a small tax burden. Otherwise I'll just roll it into a traditional IRA.

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I follow, except for the Traditional TSP contributions for the non-deployed months. Your taxable income for the year is already lower, so is your tax bracket. Wouldn't the roth make more sense for the whole year too?

I guess, on that same line of reasoning.. When the roth tsp comes online, and we now have a traditional and roth version of both the tsp and ira, when would it make sense to contribute to the roth flavor of one and the traditional of the other in the same year? My only guess is that the traditional contributions would help lower your tax burden on your roth contributions. But the whole reason you are contributing to the roth is becaus e you expect to be in a higher tax bracket in retirement, which is when you'll now have to pay higher taxes on those traditional contributions.

Am I missing something?

I just ran the numbers on my effective tax rate on entitlements (does not include any TDY pay as I'm too lazy to look it up). Just looking at Base Pay, Fly Pay, BAH, BAS, COLA, etc, my effective tax rate with no months of tax-free for 2011 works out to 8.40%. I'm fairly certain that I can't beat that after I get out/in retirement...so, perhaps Roth IRA + Roth TSP is the way to go?

Any tax smart people with some thoughts?

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  • 2 months later...

My .02 on Tradition vs Roth.

The value of a Roth is that you take the money out Tax Free. The value of a Traditional is that you put the money in Tax Free. The question comes in how to maximize the two.

1) You need to know your taxable income for the year. Remember to take into account any credits or exemptions that apply.

2) Look at what tax bracket that puts you in. Are you close to the next higher/lower bracket? Are you making to much to qualify for some credits or exemptions? How much of a fudge-factor did you use in step 1?

3) If you are square in the middle of a tax bracket and not missing out on any money due to your income level then odds are a Roth is your best bet. It will reduce your taxable income later where it may make the difference of a tax bracket (or two).

4) If you are near the bottom of your tax bracket use a Traditional to get you into the next lower bracket. Remember non-wage income (Investments, lottery winnings, etc). Once you are in that lower bracket put the rest into a Roth

5) If you are near the top of your tax bracket consider putting a little into Traditional. This will help in case you miscalculated your earnings. The majority should go into a Roth.

6) If you are missing out on some other tax benefits due to your income level use a Traditional to lower your level. This is the same as #4.

7) If you have a high-paying job lined up for when you get out of the military that also has a pension plan use a Roth. Your pension is most likely taxable income. So if you're getting out at 20 and coming back as a GS-whatever planning to do another 20 your two pensions together will probably keep you in a fairly high tax bracket the rest of your life. Pay a little tax now and save a lot later.

Other considerations:

Taxes fill from the bottom while tax savings pull from the top. What do I mean by this? Every dollar you take out of your income is removed from the highest tax bracket first. When it is put back into your income (ie withdrawals from a traditional) it fills the lowest bracket first. Even if the tax rates go up for each bracket in the future, odds are the brackets themselves will get larger. This means it will take more dollars later to fill the lower brackets than what it takes now. Just food for thought.

Roth IRAs have ways you can withdraw from them prior to retirement without paying a penalty. Traditionals do not. If you want to be prepared for that possibility keeping at least some of your money in a Roth may be wise.

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You also need to look at the effective tax rate. For example, my effective tax rate for 2011 was ~8.69% without a single CZTE month. It is highly unlikely that I will ever be able to beat that rate later in life...

Yeah not really. Operate on the marginal rate.

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  • 4 months later...

Update...more details to come:

-----Original Message-----

From: DFAS Sent: Wednesday, September 19, 2012 9:55 AM

Subject: Policy and Procedures Update - AC ROTH TSP Message #1

TOPIC: Active Component (AC) ROTH TSP Message #1

1. This is the first in a series of numbered messages dealing with the policies and procedures for the new military ROTH TSP option.

2. ROTH TSP for Active Component members will be implemented starting October 1, 2012. Members can initiate paperwork (TSP-U-1 dated May 2012) to open up a ROTH TSP account effective October 1st, with initial contributions to be collected in November 2012, in accordance with current TSP rules and policies.

3. The first part of the member's TSP deduction will be withheld from the member's November midmonth pay, with first full ROTH TSP deduction amount transmitted to the TSP Agency Technical Services (ATS) on November 30, 2012.

4. Specific information regarding member sign-up and FSO action will be published in subsequent messages.

5. AF implementing instructions will be published by AFAFO as needed.

6. This message was coordinated with AFAFO.

7. Removed

8. Please ensure the widest dissemination.

9. Removed

10. Removed

V/R,

DFAS-JFLM/IN

Military Pay Operations - Indianapolis (Air Force) Chief, System Liaison & Procedures Division

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Will we be able to do this through MyPay or do we have to fill out a paper TSP-U-1?

Not sure yet. Message said to complete the form but also says more specific info is forthcoming.

I'd keep checking back to this URL: http://www.dfas.mil/militarymembers/rothtspformilitary.html

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So am I mistaken in thinking that, when deployed to a CTZE area, there is no appreciable difference between Roth and traditional TSP contributions (neither are taxed going in or coming out)?

If you make Traditional TSP contributions while in a CZTE, your contribution is non-taxable. The earnings that contribution makes are taxable upon withdrawal.

If you make Roth TSP contributions while in a CZTE, your contribution and all earnings from that contribution are non-taxable.

Rather significant difference, IMO.

  • Upvote 2
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  • 2 weeks later...

Not sure yet. Message said to complete the form but also says more specific info is forthcoming.

I'd keep checking back to this URL: http://www.dfas.mil/...ormilitary.html

Looks like MyPay is 'live' as of today with Traditional/Roth. On first read it is two different methodologies:

The Thrift Savings Program provides an opportunity to invest in your future. You have the opportunity to elect a percentage of your pay for traditional TSP and/or a dollar amount for Roth TSP.

In order to make a Roth contribution, one percent (1%) of basic pay must be elected from traditional or Roth TSP (if you have a traditional TSP election in addition to your Roth TSP election, then you do not have to include an additional 1% basic pay in your Roth contribution to be eligible).

To elect Roth TSP on myPay, you must select one monthly dollar amount as your contribution. Only basic pay, incentive pay, special pay and bonuses are eligible for contribution to TSP. You can use myPay to make contributions from basic pay, monthly incentive pay, and monthly special pay, however, elections for Roth contributions from bonuses, one-time special pay and one-time incentive pay must be submitted to your finance office. One-time special and one-time incentive pays are received lump-sum or in annual or other non-monthly installments.

When determining the monthly amount you wish to contribute to Roth, consider how much basic, incentive pay and special pay you earn and allow for deductions such as forfeitures, Montgomery G.I. Bill, Social Security and Medicare tax, Armed Forces Retirement Home deduction, federal income tax withholding, Servicemembers' Group Life Insurance (SGLI), Family SGLI, Traumatic SGLI, state income tax withholding, debts, garnishments, alimony, child support, allotments, TSP loans, traditional TSP, traditional TSP catch-up, IRS tax levies, and any fines. Traditional TSP is deducted before Roth TSP.

The maximum amount you can contribute to a Roth TSP for calendar year 2012 is $17,000; that maximum includes any deferred contributions made to traditional TSP. Roth contributions can be made from combat zone tax exempt pay as well as post-tax pay.

They way I read it is that I can clear out all my % from the Traditional block and only put in the exact $ amount I want pulled each month in the Roth block. However, this amount only comes from basic pay...if I want to contribute from flight pay, I need to fill out the form and take it to finance.

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Mypay says,

You can use myPay to make contributions from basic pay, monthly incentive pay, and monthly special pay, however, elections for Roth contributions from bonuses, one-time special pay and one-time incentive pay must be submitted to your finance office.

The way I read that it seems like if you want to put money from your ACP bonus into Roth TSP you have to do so at the finance office. Monthly incentive pay (i.e. flight pay) should be no problem since it's all from your paycheck and you just enter the dollar amount you want.

Anyone have any insight why traditional TSP continues to use a % of pay where Roth uses a dollar amount? Seems unnecessarily complicated, why not just use one measure for both?

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Source.

You can choose between two tax treatments for your TSP contributions:

Traditional (pre-tax)—You defer paying taxes on your contributions and their earnings until you withdraw them. If you are a uniformed services member making tax-exempt contributions, your contributions will be tax-free at withdrawal but your earnings will be subject to tax.

Roth (after-tax)—You pay taxes on your contributions as you make them (unless you are making tax-exempt contributions), and your earnings are tax-free at withdrawal as long as you meet certain IRS requirements.

Edited by nsplayr
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Traditional IRA contributions are deductibles from your taxable income. (benefit now)

Roth IRA contributions are not deductive from your income. (benefit later)

I do not think regular TSP contributions are deductible from your taxable income. Does any have data that says otherwise?

Traditional TSP contributions reduce your taxable income now (contribution is made prior to paying income taxes). Similar to a traditional IRA in that respect. I think it only matters on federal and state income taxes though. Social Security and Medicare taxes are computed on pre-contribution income.

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Looks like MyPay is 'live' as of today with Traditional/Roth. On first read it is two different methodologies:

They way I read it is that I can clear out all my % from the Traditional block and only put in the exact $ amount I want pulled each month in the Roth block. However, this amount only comes from basic pay...if I want to contribute from flight pay, I need to fill out the form and take it to finance.

Fly pay is not a bonus, one-time special pay or one-time incentive pay. It is an incentive pay so you should be able to include in your specified monthly amount.

"You can use myPay to make contributions from basic pay, monthly incentive pay, and monthly special pay,"

I think DFAS had to go with a specified dollar amount since they didn't get the system totally reprogrammed to handle all the percentage math madness. Think of it as an allotment of your pay. It actually is an easier way to handle it with your regular monthly pays.

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Fly pay is not a bonus, one-time special pay or one-time incentive pay. It is an incentive pay so you should be able to include in your specified monthly amount.

"You can use myPay to make contributions from basic pay, monthly incentive pay, and monthly special pay,"

I think DFAS had to go with a specified dollar amount since they didn't get the system totally reprogrammed to handle all the percentage math madness. Think of it as an allotment of your pay. It actually is an easier way to handle it with your regular monthly pays.

MyPay only has one box to put in an amount for Roth TSP, unlike the four boxes I have for the Traditional TSP. I guess I got lost with the consolidation of boxes. The paper form has all four boxes. It is not the most intuitive online system IRT now.

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I hope they institute the percentage allotment for the Roth TSP like they have for traditional TSP. Automatic deposit increase anytime you get a pay raise / promotion. Hard to miss money you never saw.

It think DFAS' plan is to eventually get to the percentage amount for the Roth, but may take them a little more time to get the code changes programmed in the system.

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FYI: My biggest question was if Roth TSP contributions would affect my Roth IRA. The answer is no. I don't see any reason why this isn't a far better deal for the vast majority of the military. Changing my contributions first thing tomorrow.

www.tsp.gov: If you are eligible to contribute to a Roth IRA, making Roth contributions to your TSP account will not affect your Roth IRA contribution limits.

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Update...more details to come:

-----Original Message-----

From: DFAS Sent: Wednesday, September 19, 2012 9:55 AM

Subject: Policy and Procedures Update - AC ROTH TSP Message #1

TOPIC: Active Component (AC) ROTH TSP Message #1

1. This is the first in a series of numbered messages dealing with the policies and procedures for the new military ROTH TSP option.

2. ROTH TSP for Active Component members will be implemented starting October 1, 2012. Members can initiate paperwork (TSP-U-1 dated May 2012) to open up a ROTH TSP account effective October 1st, with initial contributions to be collected in November 2012, in accordance with current TSP rules and policies.

3. The first part of the member's TSP deduction will be withheld from the member's November midmonth pay, with first full ROTH TSP deduction amount transmitted to the TSP Agency Technical Services (ATS) on November 30, 2012.

4. Specific information regarding member sign-up and FSO action will be published in subsequent messages.

5. AF implementing instructions will be published by AFAFO as needed.

6. This message was coordinated with AFAFO.

7. Removed

8. Please ensure the widest dissemination.

9. Removed

10. Removed

V/R,

DFAS-JFLM/IN

Military Pay Operations - Indianapolis (Air Force) Chief, System Liaison & Procedures Division

I know the TSP limit is 50k if you have been deployed. Does that mean if I was deployed at any time during the year that I can contribute up to the 50k for 2012? Or would I have to have been deployed for the whole year?

Also, in reference to points #2 and #3 above from Finance Guy: If I make changes to mypay today to contribute to the Roth TSP option, will it not apply to any of my October wages?

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