Thread: Why Put Tax-Free Money in TSP?

Remember, Roth IRA is taxed money now, but not taxed later.....deployed people paying NO taxes benefit from this........

TSP is tax-deferred....you pay taxes on it LATER. If you are not paying taxes on any earned income then it is only a "savings" channel.

So the trick is to balance out your tax liabilities.

You will have less tax breaks as you get older. You'll have paid off the house....you'll have no kid write-offs...etc

So, you'll want the majority of your income to be off the radar...I didn't max my TSP until I was off-setting it with a Roth IRA.....

So, the answer to this thread is ONLY if you have no other investment avenue.......

You've probably already read this, but I'll post if for others awareness:
TSP to Roth Rollover FAQs from TSP.gov

I agree that the best thing it serves as is a backdoor way to pump a bunch of money into a Roth account.

And as you stated, you will have to pay taxes on earnings and other taxable contributions, no different than converting a Traditional IRA to Roth IRA.

So, ideally if you do something like this you time it to happen in a year when you already have a low AGI -- maybe while going to school, or if you EAS in the same year that you have CZTE pay, or you move back in with your parents and eat peanut butter ... .

There are two other things you may want to consider:
1) TSP has very low expenses relative to mutual funds or brokerage commission fees for trading. Those expenses outside of TSP can eat away at earnings to some degree.
2) It would have to be researched to determine viability, but if you can work some arrangement where you keep a small amount in the TSP account (partial rollover?) it would be a nice safety feature to have it available. Let's say later in civilian life you are earning too much to contribute to a Roth, and you contribute to a 401(k) instead. Later you find that your corporation's 401(k) has high expenses compared to TSP. If your TSP account is still open (even if its just $50 or something) you could roll your 401(k) into your lower expense ratio TSP account.

Just some thoughts to keep in mind. Good luck.

Anthony

ps - where are you hanging your helmet?

Thanks for the input Anthony. I guess more information about a persons situation always helps.

I will retire in the next couple years so all the earning in TSP will be limited to a short period of time and "shouldn't" affect my AGI too heavily. I am active duty and have a family so my AGI is never an issue when it comes to taxes and in todays modern Army I can be guaranteed some tax free dollars almost every calendar year with the possibilty of an occassional year of no deployments about every 3rd or 4th year. This is my third deployment since 2005 (2008 was the only year I didn't have deployed time). The unit I am in right now in Iraq is likely already planning for the trip to Afganistan even though we haven't redeployed yet.

I contacted a financial adviser about a partial rollover and the possiblity of doing just the tax free portion and it is not an option. Any rollover would be a proportionate fraction of the entire amount of taxable and non-taxable.

You have to keep at least $200 in TSP if not in govt service (able to contribute) or they just mail you a check for the balance.

My rationale for this plan is that if I deploy again before I retire I could put maybe $20k in TSP tax free over the next 3-4 years. At the same time I will put in another $20k in my Roth IRA. Lets say I am very fortunate and earn around 8% and my earnings in my TSP are around $10k. The year I retire I roll over the $30k from the TSP into my Roth and pay maybe a few more taxes that year (1.5k would be 15% on the 10k earnings and is what I estimate based on my earnings and assuming I don't deploy that year). That entire amount of $30k then will sit in my ROTH IRA for 15 years and grow tax free until I reach my 60th birthday. I haven't crunched the numbers yet (and maybe I should) but I am pretty sure that paying a little in taxes now will be way more beneficial than paying a lot of taxes on the earnings when I REALLY retire at around age 60.

2011 will quite possibly be the first year in 17 years that I might actually not recieve all the federal taxes I pay back in the form of a tax return. So far contributing to TSP hasn't been shown to provide any benefit, but maybe in the future and possibly during the tax free times.

Thanks again.

An odd thought, but something to consider - maybe...

Putting tax free money into a tax deferred account is probably a hassle. You will have to somehow inform your buddies at the IRS every year regarding the portion of contributions that are tax free money. Then you will have to figure out a way to separate the growth and earnings of the tax free portion from the normal contributions. Only then - when you are enjoying your blissful retirement - can you claim a documented portion of your distributions are tax free.

Maybe there is a mechanism for our fighting forces out there. Maybe TSP breaks it down for you. But I haven't seen it.

If not, I don't think it worth the hassle, or the court time, or the potential for free room and board at the Greybar Motel.

I would MAX out the Roth using inexpensive ETF/Mutual funds that map to TSP (S&P 500, Russell 2000, EAFE, AGG - see quotes). I would want a true cash vehicle (Money Market), a low cost REIT, a true Emerging Market Fund, and some commodities.

And, maybe even a Russian bride so you can double your contributions - yuk, yuk

Originally Posted by Show-me

My two cents is Roth first, beings it is tax free and gains and withdrawal would be tax free.

I beleive this is the best of all the strategies for tax free income... wish I could get some .