2006 tsp becomes unlimited?

[pyriel]

I would like to know if anyone can help me concerning the issue of tsp contribution becoming unlimited at the onset of year 2006. I'm in active duty in the military and the current maximum contribution I can put in is 9% of my base pay. I am also 36 years old. IRS code 402(g) states that max I may contribute is 30K or 25% of income, whichever is lower. Can someone validate this. I would like to put 25% of my current income to tsp so that I may lower my taxable income. Are people aware of this significant event which would be happening in year 2006?

[tsptalk]

http://www.tsp.gov/uniserv/features/chapter16.html#sub1

[Rolo]

I wonder if they will offer more funds, given the increase in cash to be managed.

[tsptalk]

There is a new "L" fund coming next year I believe. Called Lifestyles, it will be more of a diversified account of the other funds.

[smine]

The web site about the new forthcoming funds can be found at http://www.govexec.com/dailyfed/0404/041904d1.htm

In doing some math, I figure when the "unlimited" contributions occur in 2006, one will need to figure their income and "catch-up" plans, since there will be a cap of $20,000.00 There's unlimited then there is unlimited with a twist!:P

[Rolo]

tsptalk wrote:
There is a new "L" fund coming next year I believe.
hehehee, "Lahahahoooooser!" immediately popped in my head. Actually, it should be "L" for the "Lazy Fund" for those too lazy to take the time to learn how to be responsible for their own money.

My only problem with it is that we all pay for it and get nothing new. From that article: (thanks for the link, smine)



"For simplicity's sake, for efficiency's sake, the cost of this project is going to be allocated across the plan," he said.

"Efficiency." "Government".

bwah ha hahaaaaa! oh my.

[zarth]

smine wrote:
In doing some math, I figure when the "unlimited" contributions occur in 2006, one will need to figure their income and "catch-up" plans, since there will be a cap of $20,000.00 There's unlimited then there is unlimited with a twist!:P
Smine, don’t forget to consider any matching contributions you might be receiving.

Most of us probably receive some type of matching contributions throughout the year as long as we don’t hit the maximum. If you contribute too much, too fast, you’ll lose out on “free” money. :shock:

[smine]

Thanks for thinking of us old folks, Zarth! Been there so long that I finally got to 9%; not thinking we're matched at all!

[pyriel]

Zarth, Thanks for the info. However, would the rules change for the "free money" on 2006. My wife works for DOD and contributing in FERS. Their admin can't seem to give me a definitive answer on this. Between "free money" vs. lowering tax bill due to maximum contribution, I wonder which one would be better.

[pyriel]

Smine, I just had a revelation... Planning for 2006 is a major task for many TSP members who are not very familiarized with the system. Although, we will be allowed to put in 15K (or 20K for some), not too many people will be able to afford them if they are not ready NOW. 15K (if they want to max on contribution) divided 26 pay period is about 577 dollars, and to some that is alot of cash.

[zarth]

Pyriel – Good question on the TSP matching “free money” once we hit 2006. But the way I read it, TSP will cap most of us at 15K from then on…and as long as you don't reach that limitbefore the end of the year, the matching will continue.

BTW, the 1% Agency Automatic Contribution continueswhether you reach the limit or not. (it's independent)

Take a look at this file from the TSP web-site, it might answer a few questions.

http://www.tsp.gov/forms/ocfs91-13.pdf

[smine]

Agree that $577 give or take is quite a sum. I'm already at the max of 9% then catch up (since I'm over 50!). It's about $385 now. I suppose it all depends on your salary, since we're speaking of percentages. You are right. The deductions can get steep and planning ahead is the thing to do now. I was a little surprised to see how much would come out of each check!

[pyriel]

I went to publication 17 and looked at the tax table. Someone with a 50k salary (for this example, ill use “single”) have to pay $9316.00 for tax. But if they invest 15K, they will only have to pay $5566.00 (35K taxable income). This is a difference of $3,750.00. By changing their exemption via W4 (increased # of dependent), they can get $144.00 back every pay period ($3750.00 divided by 26 pay period). So in reality, by playing with his or hertaxable income, the $577.00 I mentioned in my earlier email is actually now down to $433.00 ($577.00 minus $144.00 back by increasing # of dependent via W4). For those with catch up contribution, the difference is even higher.

[pyriel]

This is the information I gathered for a couple who are 50 years young and "married, filing jointly." If one of them earns 50K and the other earns 47K, their tax bracket would be $17876.00. If they both contribute to their maximum of 40K (20K each), their taxable income would go down to $57K which would bring them down to tax bracket of $7876.00. That is a difference of $10K back in their pocket.This means thatmoney leaving their hands(we can argue the point that it is not leaving their hands since it is going to their retirement plan) is only 30K and not40K as we first projected. Am I off the wall here? If I am not, this is more free money for people's pocket instead of Uncle Sam.

[pyriel]

Going back on my last post, would this mean that an immediate25% return is accomplished here. I must really be off the wall and i'm not sure if this is right. Can someone reverify? Thanks...

[tsptalk]

It's a great way to save, but don't forget you do eventually pay the taxes.

Now a roth IRA is another great way to save. An argument can be made to stash some of that money into a roth where your earnings grow tax free. Your after tax money is saved into the roth IRA but you don't have to pay tax on the gains when you take it out.

[zarth]

The Roth IRA route is a great option – I utilize it as well as the TSP. I put in the max amount into my Roth every year ($3,000 limit for 2004).

The only possible down side from Pyriel’s perspective would be that the Roth contributions are coming from post-taxed income. You will get to have your future earnings tax-free, but you have to pay the contribution’s taxes up front.

But when I look at the potential future growth from the compounding interest, it tends to make it all worthwhile for me. :^

[pyriel]

Hmmm... I am currently maxing both but I would like to know the analysis of which one is more beneficial if an individual has to make a choice on which one to fund first. Roth or TSP. Of course, if there is a matching contribution, TSP will be a winner here. But what about those military service members who don't receive a matching contribution? Which one should they fund first, Roth or TSP?

[pyriel]

Once I reach 60 years old and I have both TSP and Roth IRA, which one should Istart withdrawing first? I'd like to say Roth because I will not be paying taxes ondistributions. Once I deplete my Roth, start on TSP. My analogy is that I will be older and will not need as much distribution, henceI will not need to withdraw as much.With retirement pay with the militaryto supplement, I believe that it would be enough. Is there a flaw to my logic?

[Rolo]

pyriel wrote:
Hmmm... I am currently maxing both but I would like to know the analysis of which one is more beneficial if an individual has to make a choice on which one to fund first. Roth or TSP. Of course, if there is a matching contribution, TSP will be a winner here. But what about those military service members who don't receive a matching contribution? Which one should they fund first, Roth or TSP?
I max both, as well as SEP IRA--it is hard to pass up those tax benefits. "It's not how much you make, but how much you keep!"

To answer your question, I would say TSP for sure if it keeps you from moving into the next tax bracket. I will funda Traditional rather than a Roth IRA when I begin to hit my current bracket's ceiling in order to stay there.



pyriel wrote:

Once I reach 60 years old and I have both TSP and Roth IRA, which one should Istart withdrawing first? I'd like to say Roth because I will not be paying taxes ondistributions. Once I deplete my Roth, start on TSP. My analogy is that I will be older and will not need as much distribution, henceI will not need to withdraw as much.With retirement pay with the militaryto supplement, I believe that it would be enough. Is there a flaw to my logic?
It looks sound. The other thing that you may want to consider is estate planning. I am hazy on this since I have no heirs, but I believe that inherited equities' cost basis is reset at the time of inheritence, so your beneficiaries will not have to pay taxes on prior gains. Therefore, you want to use TSP last.

Contingent upon how much you withdraw and tax cutoffs, you may want to do a little of both to keep your taxable income much less than your gross income. That way, when your Roth runs out, you will not be stuck with only a taxable source from which to withdraw and wind up in a higher bracket later. e.g. Roth = Ace in the hole.

[azanon]

To answer your question, I would say TSP for sure if it keeps you from moving into the next tax bracket. I will funda Traditional rather than a Roth IRA when I begin to hit my current bracket's ceiling in order to stay there.


Just want to make sure you understand the ramifications of moving into another tax bracket. This is sometimes misunderstood, is why:

The only siginificance of "moving into a new tax bracket" is that it identifies what your marginal tax rate is. For instance, ifmy overall earnings went$1,000 over into the 28% tax bracket, all that means is that i will have to pay 28% tax rate ONLY on the excess 1K, but i'll still only pay at a 25% rate all the monies in that bracket, and 15% for all the money in that bracket, and so on and so forth. Point: being 1K into the 28% bracket DOES NOT mean i will have to now pay at the 28% rate for all the money i made that year.

So there's no reason to worry about sliding into a new bracket. You'll just have to pay the higher rate only on those funds that spill over into that bracket. No big deal, and no reason to adjust what you do in most cases.

NOW..... if you make so much money that you may be subject to the alternative minimum tax (AMT), now THERE'S a reason to lower your taxable income. AMT can be quite nasty, so i'm told.

[Rolo]

Oh, wow, I did not realise that, az, good point! (No matter how much time I spend on tax law, there is always all this stuff that still eludes me, guh!)

Although your point mitigates it, I think my point still stands. If I were only $1,000into the 25% bracket, then I still want to keep that $100 tax difference in my pocket (25% * $1,000 vs. 15% * $1,000). I've beenplanning to stay in this bracket as long as possible, perhaps even until retirement. You can look at it as an instant 10% gain on my income just for arranging things just so, especially if it is as easy as putting $1,000 in the TSP, which would effectively cost you only $900.

[bkrownd]

pyriel wrote:
Smine, I just had a revelation... Planning for 2006 is a major task for many TSP members who are not very familiarized with the system. Although, we will be allowed to put in 15K (or 20K for some), not too many people will be able to afford them if they are not ready NOW. 15K (if they want to max on contribution) divided 26 pay period is about 577 dollars, and to some that is alot of cash.

Is the $577 bi-weekly before or after the agency match is added on? If after, how does the part of the agency contribution you only collect AFTER vesting (i.e. some might never receive it) figure in?

tia, bkr

[smine]

They don't match mine because we're old system CERS. It has only been a recent act to allow old system people to go up in % invested. We stayed at 5% forever, so being able to increase our investments was great. I agree that this amount will be tough for some folks each check but it will be worth it in the long run.

[Mike]

Is the $577 bi-weekly before or after the agency match is added on?

I just saw this post and thought I'd resurrect the thread.

The IRS maximum applies to what you contribute to the retirement plan. The agency match is not a factor here, since it has no bearing on your taxable income.

FWIW, it is impossible for me to contribute the IRS maximum until I have paid off my student loans in 2008.

[bkrownd]

FWIW, it is impossible for me to contribute the IRS maximum until I have paid off my student loans in 2008.

Doh! That's a long time. Anyhow, first things first. I'm enjoying watching my TSP rise by $620 every other week. Some weeks it gets paid more than I do. :)

[Birchtree]

bkrownd,

My good fellow participant, if you are dumping that money into the G fund every two weeks, you are spinning your wheels. Please say it isn't so.

Since the end of December my dollar cost averaging into the C fund has provided prices of $13.96, $13.70, and $13.74, I wouldn't mind a $13.60 if I could get it. It's a long way to $17.00, and I plan to remain until victorious.

Dennis

[bkrownd]

My good fellow participant, if you are dumping that money into the G fund every two weeks, you are spinning your wheels. Please say it isn't so.

New contribs are 20% G 40% C 40% S. Gotta have some G reserve to spend when the other funds slide.