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Thread: SMART! or DUMB?

  1. #1

    Lightbulb SMART! or DUMB?

    I have been a USPS employee for 22 years and actively participating in TSP. I have 5 years to go. Last year I bumped up my contributions from 15 to 20% and fully switched over to the ROTH option.

    I am now questioning that strategy. (i was thinking these were two accounts with separate balances and accounting....thinking i could specifically tap the Roth when needed to avoid higher tax bracket...i am aware of 59 1/2 age and 5 yr participation rules)

    For the first time, I had a large IRS bill this year which got me questioning things.

    Was this smart or dumb?


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  3. #2

    Default Re: SMART! or DUMB?

    If your tax rate will be GREATER in retirement than it is now, it was a smart move.
    If your tax rate will be LESS in retirement than it is now, probably not a good move.

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  5. #3

    Default Re: SMART! or DUMB?

    Quote Originally Posted by DShell View Post
    For the first time, I had a large IRS bill this year which got me questioning things. Was this smart or dumb?
    Sounds like you just forgot to adjust your withholdings for taxes because your contributions to roth are not tax deferred. Lower your exemptions and/or have them take extra our of your check each pay period and you should be fine next year and hopefully have a refund vice a tax bill.

    I like the Roth and who wouldn't like tax free earnings. I'm too far along to switch now and I need the tax deferred deduction to lower my taxable income.
    TSP: 2007=6.4%, 2008=(39.95%), 2009=30.96%, 2010=17.04% , 2011=(4.92%), 2012=17.74%, 2013=26.58%, 2014=5.39%
    TSP Talk: 2015=???

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  7. #4

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    Default Re: SMART! or DUMB?

    Quote Originally Posted by DShell View Post
    I have been a USPS employee for 22 years and actively participating in TSP. I have 5 years to go. Last year I bumped up my contributions from 15 to 20% and fully switched over to the ROTH option.

    I am now questioning that strategy. (i was thinking these were two accounts with separate balances and accounting....thinking i could specifically tap the Roth when needed to avoid higher tax bracket...i am aware of 59 1/2 age and 5 yr participation rules)

    For the first time, I had a large IRS bill this year which got me questioning things.

    Was this smart or dumb?
    Balance, it requires balance when determining if you want to defer taxes or have tax free income and how much.

    https://investor.vanguard.com/ira/ro...raditional-ira

    It has the standard questions.

    I think you were premature in switching because you had an increase in taxes for the year. You seem to NOT want this. Go to that site and read the questions. I think you will then be able to balance how you want to invest at this point in your life.
    THIS IS WHERE I WOULD PUT SOMETHING TO REPRESENT MY THINKING, BUT THEN THEY SHOW UP!
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  9. #5

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    Default Re: SMART! or DUMB?

    Quote Originally Posted by DShell View Post
    I have been a USPS employee for 22 years and actively participating in TSP. I have 5 years to go. Last year I bumped up my contributions from 15 to 20% and fully switched over to the ROTH option.

    I am now questioning that strategy. (i was thinking these were two accounts with separate balances and accounting....thinking i could specifically tap the Roth when needed to avoid higher tax bracket...
    There were a bunch of threads started when the Roth option was first coming out. I was one of those who was very excited about it at first, but then VERY disappointed when the TSP Roth regs came out! Like you, I also thought it would have 2 accts with separate everything....but NO!

    In order to get those benefits (often called 'Tax Diversification'), I kept all my TSP in the regular 'Traditional TSP' but transferred a good chunk of my outside 'Traditional IRA' into 'Roth IRA'. Now, when I get ready to withdraw funds, I do not have to take the same % out of both Traditional and Roth accounts. I can also do different fund allocations between Traditional and Roth (I like to have my Roth a little more risky so it can also potentially get a better return....tax free.). I still have some Traditional IRA, but in the 'real world' the accounts ARE kept separate. For putting in, having a different fund mix, and taking out. MUCH BETTER CONTROL !!

    Just a possible suggestion....that's how I got around the impossible regs.
    There are 10 types of people in the world. Those who know binary, and those that don't!!
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  11. #6

    Default Re: SMART! or DUMB?

    Quote Originally Posted by uscfanhawaii View Post
    There were a bunch of threads started when the Roth option was first coming out. I was one of those who was very excited about it at first, but then VERY disappointed when the TSP Roth regs came out! Like you, I also thought it would have 2 accts with separate everything....but NO!

    In order to get those benefits (often called 'Tax Diversification'), I kept all my TSP in the regular 'Traditional TSP' but transferred a good chunk of my outside 'Traditional IRA' into 'Roth IRA'. Now, when I get ready to withdraw funds, I do not have to take the same % out of both Traditional and Roth accounts. I can also do different fund allocations between Traditional and Roth (I like to have my Roth a little more risky so it can also potentially get a better return....tax free.). I still have some Traditional IRA, but in the 'real world' the accounts ARE kept separate. For putting in, having a different fund mix, and taking out. MUCH BETTER CONTROL !!

    Just a possible suggestion....that's how I got around the impossible regs.
    Great explanation, USC, as always...
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  13. #7

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    Default Re: SMART! or DUMB?

    Back when the market tanked in 2000-2003, I became aware of Roth. there were calculators online that helped me decide whether it made sense to convert some of my small outside trad IRA to Roth or not. I had some funds in a small non-deferred trad IRA, some in tax-deferred trad IRA. meaning that I had already reached a point where I couldn't tax-defer contributions any more, even tho earnings could still be tax-deferred. I had stopped contributing to trad IRA by then at all, and focused on tsp contribs and had just started mortgage paydown.

    while the market was down (my accounts as well), I decided to convert a portion of the trad IRA to roth (lower taxes on the conversion due to market loss). the calculators said that made ok sense at that point, since I was still pretty far away from retirement, and the amount I converted to Roth was less than what I kept in the trad IRA. It's tricky situation when you have trad IRA with both deferred contribs and taxed contribs. Be careful, get help if not sure you understand the rules in that scenario.

    Past few years, I've focused on maxing tsp and also putting what I could in outside roth account. not usually successful at maxing the roth, because I am maxing the tsp first.
    "life can only be understood backwards, but it must be lived forwards" - soren kierkegaard

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  15. #8

    Default Re: SMART! or DUMB?

    Quote Originally Posted by DShell View Post
    I have been a USPS employee for 22 years and actively participating in TSP. I have 5 years to go. Last year I bumped up my contributions from 15 to 20% and fully switched over to the ROTH option.

    I am now questioning that strategy. (i was thinking these were two accounts with separate balances and accounting....thinking i could specifically tap the Roth when needed to avoid higher tax bracket...i am aware of 59 1/2 age and 5 yr participation rules)

    For the first time, I had a large IRS bill this year which got me questioning things.

    Was this smart or dumb?

    I'd research it a bit more (and probably check with a tax pro). I could have sworn I saw something about being able to change your mind - on page 30 - something about "recharacterize contribution" (within a certain time frame) in IRS Publication 590 ----> http://www.irs.gov/uac/About-Publication-590
    Last edited by coastalite; 05-29-2015 at 08:56 AM.

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  17. #9

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    Default Re: SMART! or DUMB?

    Recharacterizing Your IRA Contribution Or Roth Conversion

    It's important to really check things like this out before making big decisions that have tax consequences-either way.
    "life can only be understood backwards, but it must be lived forwards" - soren kierkegaard


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  19. #10

    Default Re: SMART! or DUMB?

    Quote Originally Posted by coastalite View Post
    I'd research it a bit more (and probably check with a tax pro). I could have sworn I saw something about being able to change your mind - on page 30 - something about "recharacterize contribution" (within a certain time frame) in IRS Publication 590 ----> http://www.irs.gov/uac/About-Publication-590
    Yes, I missed the deadline to further edit... but I was going to also add that you might consider finding some kind of tax professional/estate planner - someone who specializes in this very type of thing & who is of a fiduciary nature - so that their advice is usually a one-time fee for their time - and they have no stake in any of your money... their only job is to give you the best possible advice that is only in YOUR best interest (not theirs).

    Our financial planner, for example, was not a fiduciary - so he was more concerned with trying to sell us life insurance and mutual funds that paid HIM the most money (not necessarily looking out for OUR best interest - so you definitely have to be careful).

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  21. #11

    Default Re: SMART! or DUMB?

    Quote Originally Posted by alevin View Post
    I've focused on maxing tsp and also putting what I could in outside roth account. not usually successful at maxing the roth, because I am maxing the tsp first.
    That is what we're trying to do... max out the TSP at the full $18K AND ALSO max out BOTH of our Vanguard ROTH IRA's at $5500 x 2 = $11K.

    Personally, I think it's wise to have both types (IRA & ROTH)... However, I don't know that I would want both kinds in the TSP (because of the rules the OP mentioned).

    I like the idea of OP bumping up from 15% to 20%. Accumulation of more shares = a good thing.

    I also LOVE the idea of being able to make additional "catch-up" contributions at age 50+. We hope to be taking full advantage of that as well (when the time comes).

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