Jump to content

Recommended Posts

The benefit of a tax break now is that it benefits you now, which can make the Traditional more attractive to some people. The Traditional vs Roth is a crystal ball question, and it all depends on which crystal ball you want to view your future through in terms of what is best for your specific situation.

If you make a few reasonable assumptions.

1. Your income tax rate will be higher in retirement than it is right now.

2. You are possibly able to max your TSP contribution of $18,000 for 2015.

Then ROTH TSP is infinitely better because $18,000 after taxes is a lot more money to be earning compound interest when you finally get it than $18,000 of before tax income from Traditional TSP. But that means you will have less money now, and you will be paying more taxes now.

This is the reason the government doesn't let "high income" (129,000 single/191,000 married filing jointly) people use Roth Investments. It is meant as good deal for "low to medium income" people to encourage them to save for retirement.

If you are going to contribute less than $18,000 to your TSP than it depends on your exact situation wether Traditional vs Roth is better for you, but I don't think you would ever be grossly wrong to bet on the Roth in the vast majority of situations.

A good argument of the Roth (which I already max) vs. Traditional. My question involves investing additionally into a Traditional IRA in order to lower my AGI to take advantage of certain tax credits/breaks that are only available to lower income filers.

Link to comment
Share on other sites

A good argument of the Roth (which I already max) vs. Traditional. My question involves investing additionally into a Traditional IRA in order to lower my AGI to take advantage of certain tax credits/breaks that are only available to lower income filers.

Well your contribution options for taxable income are

$5,000 into an IRA either Roth or Traditional (or a combination of the two as long as your IRA contributions don't exceed 5,000)

and

$17,5000 (2014) or $18,000 (2015) into a 401k in this case TSP.

Here are some examples where a traditional investment makes more sense than a Roth.

Example 1.

- You are not planning on retiring from the military. This matters because it means that you won't have the military retirement setting a floor for your income tax rate in retirement, because a military pension will all be taxable income.

- You already have a lot of ROTH investments so upon reaching retirement you will have access to some non-taxed income.

- The math works out that by contributing a certain portion of your income into a traditional you qualify for additional tax breaks now. Earned income credit, child tax credit, deductions for student loans, etc. Basically it keeps your AGI below phase out limits for these items.

-This also still leaves the door open for a ROTH conversion down the road as well.

In this situation you have a lot of flexibility, but also a lot of complexity. When you retire you should have a sizable amount of money in both Roth and Traditional and you can effectively manage your tax bracket by choosing which to withdraw from. Additionally, if you really want to dive into it you could always live off the Roth tax free, and borrow from the balance of the traditional within IRS guidelines. This would prevent you from being taxed on the traditional while still being able to utilize the funds as a virtually interest free loan from yourself. Also, you could provide tax free gifts from your traditional IRA as well within IRS guidelines to avoid paying income tax on them as well while still being able to use/move the funds. The only gotcha is the required distributions at age 70 1/2 at which point in time your ability to control your income tax rate is no longer in play and your decision to contribute to a traditional may bite you in the ass if you have enough money in it. Hence why you may have wanted to exercise the ROTH conversion option previously mentioned.

Example 2.

-You are married and your spouse makes a lot of money, but you are still under the Roth contribution limit.

-At some point in the future you suspect your spouses income level will drop significantly and remain that way until retirement.

In this case you are in the situation to where your income level in retirement could very easily be lower than your current income level. Therefore it is to your advantage to avoid a tax rate of say 28% or higher on that portion of your income in order to pay a lower effective tax rate later on say 10-15%.

That said I think (**my opinion**) using traditional contributions to earn tax breaks is at best a break even, or short term gain with a slightly reduced return in the long run in most cases. Short of doing the math based on A LOT of assumptions though I can't speak smartly to your exact situation.

Link to comment
Share on other sites

I already UTSF and saw a very posts earlier talking about variable-universal life insurance. I was wondering what people's thoughts were in general about these types of policies. I understand there are huge incentives for advisors to push these, more expensive than term insurance, should build (potentially significant) cash value, has mostly positive tax benefits, and gives the adviser/insuree ability to adjust as needed. Any additional thoughts would be appreciated. My adviser is pushing it pretty hard, and whereas it appears to be part of a comprehensive plan, I want to be sure he's pushing this for the right reasons...

Link to comment
Share on other sites

AAFMAA offers great rates and no aviation "penalty fees."

Been with them for years. $800K in coverage for about $35/month. My spouse also has a policy with them (she's not military) for the same premium and coverage.

AAFMAA is great.

Link to comment
Share on other sites

I already UTSF and saw a very posts earlier talking about variable-universal life insurance. I was wondering what people's thoughts were in general about these types of policies. I understand there are huge incentives for advisors to push these, more expensive than term insurance, should build (potentially significant) cash value, has mostly positive tax benefits, and gives the adviser/insuree ability to adjust as needed. Any additional thoughts would be appreciated. My adviser is pushing it pretty hard, and whereas it appears to be part of a comprehensive plan, I want to be sure he's pushing this for the right reasons...

If he is with First Command, you can be sure he is not pushing it for the right reasons.

  • Upvote 1
Link to comment
Share on other sites

  • 4 weeks later...

Ok, so my wife & I both max out our Roth IRAs (mine from USAA, hers from Vanguard). I've also been putting away about 9% of basic pay into a traditional TSP. Been thinking about converting the TSP to a Roth. Is it smart to keep the traditional TSP since we are already putting in $11K/year with our Roths? Thoughts from the peanut gallery?

Link to comment
Share on other sites

Ok, so my wife & I both max out our Roth IRAs (mine from USAA, hers from Vanguard). I've also been putting away about 9% of basic pay into a traditional TSP. Been thinking about converting the TSP to a Roth. Is it smart to keep the traditional TSP since we are already putting in $11K/year with our Roths? Thoughts from the peanut gallery?

Not sure about TSP conversion, but if you're talking about trying to decide whether to invest in traditional vs Roth TSP then I'll bite.

Roth is purely a tax treatment of your investment. So it's not a diversification issue in terms of investments-which is kind of what I think you're asking. However, diversification of your tax basis can be a very useful thing.

You have to decide whether you think your tax rate will be higher in the future. But you already knew that.

The baseline for most of these discussions are that you have $15k to invest, if you pay tax and put it in a Roth then you invest less that $15k this year, but it's all tax free when you withdraw. If you put that $15k in a traditional tsp account then its pretax so you get all of $15k in the account now but you pay tax on all of it later.

If you and your wife are in a position to max out your Roth IRA and TSP, I would rather have $23k (I think that's the limit this year-18 in tsp and 5 in Ira?) of after tax money than $23k that I still have to pay taxes on.

Then again, the Feds could renege on the whole Roth thing altogether.

So as with most things, it depends.

Good luck.

Link to comment
Share on other sites

Slightly off topic, but Vanguard typically has the lowest costs of all of the investment firms, so consider the fees that USAA is charging you. It's a simple process to change your USAA IRA to Vanguard. I switched mine a year and a half ago and I've been very happy.

Link to comment
Share on other sites

It depends. You have to consider your current tax situation and your projected future tax situation.

For most military people, the Roth side of things is pretty nice, especially if you get CZTE and can reduce your taxable income significantly. In that case, money invested in the Roth IRA and Roth TSP (also the earnings) never get taxed.

Link to comment
Share on other sites

especially if you get CZTE and can reduce your taxable income significantly. In that case, money invested in the Roth IRA and Roth TSP (also the earnings) never get taxed.

AFAIK, Roth TSP contributions cannot come from tax-exempt money....

Link to comment
Share on other sites

AFAIK, Roth TSP contributions cannot come from tax-exempt money....

Roth TSP can come from tax exempt money but only up to the deferred contribution limit ($18k this year). If you want to put more than that into tsp (I think the limit is $53k or so) that can (actually has to) come from tax exempt money but it has to go into traditional TSP.

Link to comment
Share on other sites

Roth TSP can come from tax exempt money but only up to the deferred contribution limit ($18k this year). If you want to put more than that into tsp (I think the limit is $53k or so) that can (actually has to) come from tax exempt money but it has to go into traditional TSP.

Ah... that's the distinction I was missing. Thanks!

Link to comment
Share on other sites

  • 3 weeks later...

Did DFAS screw up anyone else's Roth TSP contributions for February? Nice of them to tell me ahead of time that they're going to take all of my Feb contribution from my end of month paycheck.

Also sweet that they emailed my CC to let him know that I won't be receiving any money at the end of the month. Now he wants me to go to A&FRC and shit to look into getting an advance for March. I told him I got more than I expected for the first half, and I'm not retarded so I'm good.

I guess more of you tards live check to check than I thought.

Link to comment
Share on other sites

The Frontline documentary really played up how "confused" people are with investing. How confusing can it be to deposit money into your IRA starting in your 20s? I mean, people will figure out whatever is important to them, but for some reason Americans don't think they need to take care of themselves anymore. Now that defined benefit pensions are a thing of the past and 401k accounts are the norm, people actually have to figure it out instead of just coasting.

Link to comment
Share on other sites

I think you overestimate basic financial education and properly-placed values among Americans. Members of my own extended family spend $300 on a hockey jersey, yet have 0 savings or investments. Comes down to values, and values are hard to change in adulthood.

Link to comment
Share on other sites

Inspired by the Frontline piece I checked the expense ratio of the TSP L2040... was 0.029% at the end of 2013 which seems great.

USAA's 2040 fund expense ratio is 0.86%/0.83%.

Vanguard's 2040 fund expense ratio is 0.18%.

Maybe I should transfer my USAA Roths into Vanguard.

(Edit to add some math: a $75,000 Roth IRA, with annual additions of $5,500 and a growth rate of 6% over 30 years will cost $150,000 in fees at an expense ratio of .86% and $34,000 at an expense ratio of .18%.)

Edited by Homestar
Link to comment
Share on other sites

Inspired by the Frontline piece I checked the expense ratio of the TSP L2040... was 0.029% at the end of 2013 which seems great.

USAA's 2040 fund expense ratio is 0.86%/0.83%.

Vanguard's 2040 fund expense ratio is 0.18%.

Maybe I should transfer my USAA Roths into Vanguard.

(Edit to add some math: a $75,000 Roth IRA, with annual additions of $5,500 and a growth rate of 6% over 30 years will cost $150,000 in fees at an expense ratio of .86% and $34,000 at an expense ratio of .18%.)

I bailed on USAA mutual funds 4 years ago and never looked back.

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.
Note: Your post will require moderator approval before it will be visible.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

×
×
  • Create New...