Investment showdown -- beyond the Roth, SDP, & TSP

[Pajaro]

In case you have not seen it, the 2015 TSP contribution limit has been raised to $18,000 (same for 401k plans)

https://www.tsp.gov/planparticipation/eligibility/contributionLimits.shtml

[Jughead]

I rolled my TSP traditional over to a Vanguard Roth this year. It was pretty straight forward. Setup an account with Vanguard. Request a transfer of the funds with TSP. Once the funds transferred I converted to a Roth. The final statement from TSP reflected exactly how much was tax free. It took about six weeks for TSP to give me my money. I think you can only do this if you separate or retire. Be aware if you do what I did, convert from traditional to Roth that you just generated X amount of income and you can potentially put yourself in a higher tax bracket. It was the the right time for me, YMMV.

BLUF: Has anyone done this and managed to keep the tax-exempt portion separated from the taxable portion? How? Suggestions and/or pitfalls of doing so?

Long-winded version: I'm a retiree, looking at options for my TSP. About 20% of my balance is tax-exampt. Ideally, I'd like to get that amount into my Roth IRA, and the rest of it into my 401(k) [goal is to get the tax-exempt portion into a Roth, to grow tax-exempt; keep the tax-deferred portion in a tax-deferred retirement account; and not have any current-year tax liability due to the rollover].

I see contradictory info on the TSP website: several places state that any withdrawal (and they appear to include rollovers--"transfers," as they call them--as a withdrawal) is made proportionally from taxable and tax-exempt balances; while other places state that transfers to qualified retirement accounts are made from taxable amount "first," followed by tax-exempt money "if required" to meet the withdrawal amount requested, with the caveat that if the plan cannot accept tax-exempt amounts that those funds are paid directly to the owner. The TSP withdrawal can only be made in whole-number percentages, and only one account can be named for any given withdrawal.

Options I'm considering:

1. Make two different withdrawals. Make a rollover withdrawal in a percentage that most closely matches the actual taxable portion (roughly 80%) of my account into my traditional IRA. Once the dust settles, make a 100% rollover withdrawal into my Roth IRA. Rollover the traditional IRA balance into my 401(k) (in order to preserve future tax-free "back door" Roth contributions). Assumes that the "taxable portion moves first" is accurate. Pros: mostly gets what I want, I never have to touch the money directly [tax issues], and is pretty straightforward. Cons: impossible to exactly match my taxable / tax-exempt proportion to a whole-number percent, so I'll have to either move some tax-exempt to the traditional (foregoing future tax-free gains on that amount) or put some taxable amount into my Roth (thus oweing taxes in the year of conversion). This is basically what my broker is suggesting.
2. Put the whole amount into a traditional IRA in a plan that cannot accept tax-exempt funds, thus getting a check direct to me for the tax-exempt portion. Rollover the IRA balance into my 401(k), as in #1. Make a self-directed rollover of the tax-exempt amount in my Roth IRA. Pros: keeps all taxable & tax-exempt amounts separate; no current-year tax liability. Cons: don't know if it'll work (!!!)--can the tax-exempt amount be rolled-over in this manner? My research seems to indicate that I'd have a 60-day window to get it done. Biggest "con" is, if I screw this up, I'd have an enormous tax liability and/or end up losing any future tax-exempt growth potential of the tax-exempt balance.
3. Put the whole amount into a traditional IRA in a plan that can accept tax-exempt funds. Let the dust settle, then rollover the whole amount into my 401(k), under the assumption that my 401(k) plan cannot accept tax-exempt funds--with the result that the taxable amount moves over to the 401(k), as in #1, and the tax-exempt portion remains behind in the IRA. Convert the traditional IRA balance (all tax-exempt at this point) to the Roth IRA account, as with the annual "back door" method. Pros: gets the job done, gets the taxable & tax-exempt amounts separated, no current-year taxes. Cons: I suspect that my 401(k) plan can accept tax-exempt, rendering this option moot.
4. Leave it in the TSP until beginning retirement withdrawals. Pros: don't need to do a thing; low TSP fees. Cons: gains on tax-exempt portion are taxable; limited investment options.

My brain hurts.... This is, admittedly & without a doubt, a "good problem" to have--but, if anyone's skinned this cat already, I'd appreciate any words of wisdom. Internet beer all around....

[Butters]

Just do all 4.

[Royal]

Anyone have some insight on what's happening with oil prices? Any good investments to be made from the volatility?

[OregonHerc]

Anyone have some insight on what's happening with oil prices? Any good investments to be made from the volatility?

My opinion: there's a power struggle going on between large oil producers (Royal Dutch Shell, ExxonMobil, etc) and OPEC. Supplies have gone up due to increased drilling/new methods, but OPEC is not wanting to cut production (to try to raise prices), thinking that they can outlast the companies. Oil companies have reduced their exploration and production costs to a break even of around $45/barrel (according to some), which is much lower than OPEC's average (estimated at $55-60).

As far as investments, I'm not a CFA, but I would utilize put options on oil company's stocks. I'm thinking we're going to see a pull back in their share prices, due to a squeeze on their profits.

[MilitaryToFinance]

My opinion: there's a power struggle going on between large oil producers (Royal Dutch Shell, ExxonMobil, etc) and OPEC. Supplies have gone up due to increased drilling/new methods, but OPEC is not wanting to cut production (to try to raise prices), thinking that they can outlast the companies. Oil companies have reduced their exploration and production costs to a break even of around $45/barrel (according to some), which is much lower than OPEC's average (estimated at $55-60).

As far as investments, I'm not a CFA, but I would utilize put options on oil company's stocks. I'm thinking we're going to see a pull back in their share prices, due to a squeeze on their profits.

I'll start by saying I don't cover Oil & Gas so this is just based on discussions with people who know it better than I do.

This is really a war against US domestic production. The Saudis have always been the swing producer and the main controller of supply/pricing as they have massive reserves and a cost of production closer to $25/barrel. They are feeling pain but nowhere near the pain of others at current prices and they want to squeeze out the massive growth in US production at a higher cost. When looking at Shale most people give a range of $60-$80 as the "cost of production" but that is the life-cycle cost including amortized cost of exploration and drilling. The marginal cost to keep pumping in places where drilling is already happening is much lower. This is where my expertise breaks down but I would guess it is closer to $45-$50 before they actually start shutting down wells. The people who get hit first and hardest are exploration folks. At current prices Exxon can't pay both its dividend and its planned capex and they already stated publicly that the dividend won't be cut. I think this will be a common trend across the industry as exploration for new wells at current prices isn't economic. The last plunge in oil prices brought the ROE on oil companies down to the low single digits. The problem with the Saudi's plan is we are increasingly more efficient in all of our uses of oil which is putting a long-term damper on demand.

All that said, everybody knows all of this already and it is baked in to many of the prices. Stocks are down and vol has been bid way up(60%-90% IV on many of the shakier names) so buying puts is pretty expensive. You could short calls to take in the premium if you have strong conviction that oil will stay depressed for a while but the negative gamma could kill you if there is a snap-back in prices. Over the last few years banks seemed to forget that oil prices can go down and these companies were able to pile on lots of cov-light debt that could end up in bankruptcies or at least highly distressed restructuring. Overall I doubt there is much long or short that an average person should be investing in right now unless you have a huge amount of time to commit to researching the space and figuring out the marginal production costs for various wells and companies.

[waveshaper]

My best friends son works on the deep water oil rigs in the Gulf of Mexico. Yesterday they received a "warning order" from corporate HQ; Prepare to be laid-off. One more thing; it sucks to be Russia right now and that's a good thing.

[Royal]

This is really a war against US domestic production. The Saudis have always been the swing producer and the main controller of supply/pricing as they have massive reserves and a cost of production closer to $25/barrel.

This is the part I was most curious about. I've been waiting for the claim against the Saudis to be substantiated. Thanks for the insight.

[waveshaper]

The oil and Ruble tumble continues.

The Russians seem to have a sense of humor;

https://twitter.com/RuNetMemes/status/531176060604645376/photo/1

Russian priorities are shifting.

https://twitter.com/TwitBeka/status/540159713217097728/photo/1

[discus]

So, this thread tends to make my eyes water. I'm the type who likes to invest my pay checks in hookers and blow, because that always holds its value... However, my grandmother recently passed and left us with around $100k in a life insurance policy. So, I'm looking to all you smart folks out there. Since I am currently deployed to Afghanistan for 7 more months, is there a good way to parlay that money into something awesome? Not into risky investments at all...

[Ram]

The fall of the Ruble lately reminds me of a joke I heard in the '90s:

Son: Father, I want 5 Ruble so I can has go to grocery store to buys Vodka and milk.

Father: 20 Ruble? Since you has a job, why do you need 50 Ruble?

[Bobby]

So, this thread tends to make my eyes water. I'm the type who likes to invest my pay checks in hookers and blow, because that always holds its value... However, my grandmother recently passed and left us with around $100k in a life insurance policy. So, I'm looking to all you smart folks out there. Since I am currently deployed to Afghanistan for 7 more months, is there a good way to parlay that money into something awesome? Not into risky investments at all...

NSFW Warning!

So this dude only spent around $100K for this....NSFW link below

http://www.shockmansion.com/2014/03/27/video-i-love-my-body-because-its-plastic-man-spends-over-100000-to-change-himself-into-a-female-blow-up-sex-doll/

[Disregard]

So, this thread tends to make my eyes water. I'm the type who likes to invest my pay checks in hookers and blow, because that always holds its value... However, my grandmother recently passed and left us with around $100k in a life insurance policy. So, I'm looking to all you smart folks out there. Since I am currently deployed to Afghanistan for 7 more months, is there a good way to parlay that money into something awesome? Not into risky investments at all...

You can contribute up to $53,000 in 2015 to TSP with your tax exempt pay, but I think that the money beyond the normal cap of $18,000 has to go to the traditional TSP (18K to Roth, 35K to Traditional). You can move your traditional TSP tax exempt contributions to a Roth account after you leave the service so that the earnings are also tax exempt when you withdraw instead of only the contributions (Earnings on tax exempt contributions in TSP are taxable.). Put the rest in Vanguard or 529?

TL;DR: Max out TSP

[Butters]

You can contribute up to $53,000 in 2015 to TSP with your tax exempt pay, but I think that the money beyond the normal cap of $18,000 has to go to the traditional TSP (18K to Roth, 35K to Traditional). You can move your traditional TSP tax exempt contributions to a Roth account after you leave the service so that the earnings are also tax exempt when you withdraw instead of only the contributions (Earnings on tax exempt contributions in TSP are taxable.). Put the rest in Vanguard or 529?

TL;DR: Max out TSP

No, buy gold and oil wells. That is what the advertisements on FOX News Radio say. Also, buy a dry cleaning business. Edited December 17, 2014 by Butters

[MilitaryToFinance]

is there a good way to parlay that money into something awesome? Not into risky investments at all...

You realize those two are almost mutually exclusive right? You're going to have to take risk if you want to be able to generate returns high enough to make $100k into "something awesome" down the line. If you really don't want risk you can buy treasuries at ~2.20% for 10 years. You're guaranteed to get your $100k back plus interest but you might not beat the rate of inflation over those 10 years. If you want to do any better than that you'll have to take risk and invest in the stock market.

[discus]

You realize those two are almost mutually exclusive right? You're going to have to take risk if you want to be able to generate returns high enough to make $100k into "something awesome" down the line. If you really don't want risk you can buy treasuries at ~2.20% for 10 years. You're guaranteed to get your $100k back plus interest but you might not beat the rate of inflation over those 10 years. If you want to do any better than that you'll have to take risk and invest in the stock market.

OK fair enough. Valid point. So if I want to at least beat the rate of inflation, is a Roth the way to go? I know I'm looking at a 10 year investment schedule at least. I'm by no means a "high roller", but I'm fairly sure that having that money languishing in a savings account would not beat inflation either. So I guess I should modify my question to ask "what's the best way to beat inflation, and what are the associated risks"?

[Day Man]

A Roth vs traditional has no effect on your gains, just how it's taxed (current vs future, respectively). The market has historically outperformed other investment vehicles (bonds, CDs, etc), but has also had its rough spots (2008). An actively managed fund (like VTIVX) will automatically adjust your holdings to account for a decreasing amount of risk as you near your target retirement date.

[Helo Kitty]

Does anyone recommend any Vanguard ETFs?

I'm currently maximizing my ROTH IRA contributions and also contributing to my TSP. I've established a 6-month emergency fund and now looking to expand my stock investments.

[brabus]

I don't have any ETFs with Vanguard, but I have a few managed funds with them that have done well. That's where I put my additional investments beyond IRA/TSP. Sure you can do better if you're very smart on this stuff/have a lot of time, but for guys like me who do not have the time/desire to devote to 9-level personal investment, Vanguard has been a great option. I don't mind leaving it to the pros to manage my portfolio; the penguins on my iceberg are busy with other things.

[ARIs 'R' Us]

Just opened my Roth TSP, looking forward to hearing an opinion on this!

Another question: has anyone used a Traditional IRA to lower their tax bracket? For example, last year my adjusted gross (after 1 month of tax free kicked in) was about $4K too high to get the retirement savings credit (10% of savings up to $800 if I recall). I didn't think about it last year, but if I had post-contributed $4K to a 2013 Traditional Roth, I would have dropped my income enough to get an additional $800 credit, an immediate 20% return, plus any straight income tax deduction benefits.

Does my math sound valid, or is there something I'm missing (besides future taxation of earnings, etc). I'm already maxing my Roth IRA.

[ThreeHoler]

Anyone else having issues with trying to update their Roth TSP contributions on myPay?

Also, I am not sure I am a huge fan of the changes for the Roth contributions based on the TSP-U-1 (since I can't see the set-up in myPay). I preferred entering a dollar amount versus setting a percentage of my after tax income. Made the math for max contribution much easier to figure out.

That said is the % for the Roth calculated before or after taxes? I.E. 27% for traditional would be = 27% Roth, or is 27% traditional > 27% Roth. I assume it would take that percentage after taxes (Trad % > Roth %), but it isn't really explained very well anywhere.

It should be pre-tax % still for Traditional and Roth contributions.

I had no problems changing my contribution today.

Math for max contribution is still easy: figure out the percentage that just undercuts the limit. If you get a tax free month, then just over contribute by bumping to the next percent of pay since the max goes up quite a bit when you get CZTE.

[Magellan]

It should be pre-tax % still for Traditional and Roth contributions.

You are correct. "Roth TSP is calculated based on gross pay but deducted from net pay."

Source: http://www.dfas.mil/militarymembers/tspformilitary/tspac.html

Edited: Due to finding a clear wording regarding the change.

Edited January 2, 2015 by Magellan

[Magellan]

Does my math sound valid, or is there something I'm missing (besides future taxation of earnings, etc). I'm already maxing my Roth IRA.

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.

[ARIs 'R' Us]

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.

[Magellan]

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.