15k limit by year 2006. Are you ready?

[pyriel]

2006 is a significant event for TSP participants. Just wondering how many here are ready to max out with the 15k limit by year 2006? We all know that the more we save the more we will benefit in the end. This purpose of this poll is to show how many are ready to max TSP and how many are not ready. If they are not ready, I'd like to get some input and discussion onwhat are they doing to reach that goal. Thank you.

[Mike]

To contribute $15k to TSP, I'd have to kick in nearly 30% pretax. Sorry, but even for a miser like me, that's insane. :P

I'll just continue to raise my TSP witholding by 1% per year (currently at the maximum of 15% :shock:)and max out the Roth. At my age, this is more than enough.

[Birchtree]

If my wife will allow - I'll do the full $20K and be pleasantly satisfied.

[Sr]

Folks who have 15+ years to retirment need to seriously reconsider contributing anything more than the match amount (5%)in to TSP. This is because oftwo importantreasons:

1. The max tax amount you save 20%+by contributing this extra money will be dwarfed by the taxes you will pay when you get to retire. Any one here does not belive that, with all those deficit the gubbermint is running, they will not be stuck with higher taxes on income 20 years from now? Also, Remember, the extra 10% you are "allowed" to contribute alsowill not escape the social security taxes (7.65%) and so you really are not saving that much in taxes as you think.

2. Since the asset class available in TSP is very limited, you are better off opening your own Roth IRA elsewhere and investing in emerging markets, oil, gold, natural resources, utilities, international real estates, and yes, even junk bonds--all asset classes you are unlikley to find any time soon in TSP.

Also, worst of all . don't forget that even in these days of computerized investing, it takes any where up to 2 pay periods to get your TSP contributions actually get fully implemented on your paycheck. That is 28 days when in emergency you want to adjust your pay!!!

[pyriel]

Mike & Sr,

Although the asset classes for TSP are limited, don't you think that it is much easier to move your funds to safety when there is a need. I've also done some analysis about TSP growth vs. ROTH growth and I am finding that there really is not much difference even TSP participant has to pay tax towards the end. I felt the same way in the beginning until I ran them through excel. Do you think that either one of you can do one and show us your result. I just want to validate it with my findings.

[Birchtree]

Sr,

My plan is to have my family unit in the 15% tax bracket when I finish employment.

My hope is that eventually my defined benefits pension will be converted to a defined contribution plan - that will allow me full control of the resources - take only the money that I want. My wife has already made her conversion - so her money belongs to her to invest as appropriate. Social security can wait until later years. By being in the 15% bracket - and that requires planning - all capital gains and dividend income is 95% tax free. The TSP program will add to income because of the RMD - but if one slowly converts to a traditional IRA and then rolls those funds gently into a Roth IRA one can possibly have income without increasing the tax bracket.

I would prefer to be independent of any set pension plan or annuity program and just invest the funds as I see applicable - the money would be mine. Forget the monthly pension check - social security will fill that gap. The TSP provides ample options to make money - all one needs is to avail and participate. Take some risk and use the money to make more money.

Dennis

[Rolo]

Birchtree wrote:
If my wife will allow

WTF?

Quite a non-sequitur after that Katrina post. :shock:

Maybe you should change your 'r' to a 't'. :l

[Rolo]

$15K into TSP...been thinkin' about that for a while. I wanna, but I don't wanna.

I can...but just because I can doesn't mean I should.

I can...but I won't have anything for Scottrade and I really miss playing with stocks...and the ridiculous gains and that "Master of the Universe" feeling. :D

I didn't know SS tax was not exempt on 403(b) contributions...that does make it less appealing.

I do need to make sure I don't pop a bracket...guh...more fiddling with numbers just to keep my own money....TEDIOUS.

I find it hard to believe that a well-managed regular brokerage account won't outperform (as in "kick the crap outta") a well-managed TSP investment. The profit-opportunities of..well...the whole world are much greater than five index funds.

I definitely will up my TSP..but the max...for now, yes...but I'll see.

[Birchtree]

rolo,

A Roth IRA has a lot more potential and flexibility for sure. The only problem is it takes so long to build a position that you can do anything with - it takes money to make money. It's great if one is younger and has ample time to build resources. In 2006 I can put in $5000/year - it just takes forever. Rolling from a traditional IRA when in a lower tax bracket to the Roth IRA will build faster. You just have to live on savings so one doesn't have a large tax bracket - requires much planning.

Dennis

[pyriel]

Birchtree wrote:
Sr,

My plan is to have my family unit in the 15% tax bracket when I finish employment.


With all that investment that you have, it is hard for me to fathom that you'll make that 15% tax bracket.;-) Wishful thinking, perhaps?

[Pete1]

Birchtree,

I agree with what you are saying regarding position. My plan is to max the TSP where about 85% of the balance of our retirement accounts reside and contribute the tax savings generated by TSP contributions plus anything else I can muster to our Roths. Will not be able to max out TSP and both my wife and my Roths, but cannot ignore the power of the TSP compounding at this point.Will begin convertinggradualllyfrom TSP to Roth in the lowest tax bracket available at my MRA of 56 (43 now). May get bit by higher ratesthan 15% at my MRAbutthe TSP is the money makerdue to positoning and the compoundingshould help to compensate for a higher tax rate at MRA 13 years from now. The TSP is like a rather enormous snowball at this point as compared toour Roths (about 5% of our savings is in the Roths). I will only convert up to the ceiling of the lowest tax bracket available each year. Will take social security as late as possible.

[Birchtree]

Pyriel,

You are over looking the advantages of capital gains - you take them only when you feel the desire - there is no rush to the IRS.

There have been so many companies in the last ten years making employee conversions of defined pension plans to defined contribution plans, that I'm sure Uncle will eventually do the same. That's probably one reason the L funds are being offered in TSP - the mechanism for the conve rsion will already be in tact. The advantage of the defined contribution plan is that it works just like TSP, only you are in control of the income that is available - you can take it all at once or none until you are ready and then you name the amounts and conditions of distribution. There is of course the RMD. Staying in the 15% bracket does require planning - but I think it can be done and will allow me to keep more of what I have earned.

Dennis

[pyriel]

B,

If you do that, you will never be able to finish off your retirement fund. I guess this is the reason why you are converting them to ROTH so that your heir will benefit towards the end. I like that kind of thinking... Just don't shortchange yourself...

P

[Mike]

I can't crank out scenarios on Excel until I become better at using the program. This won't happen until I get a new computer (sometime in the next 3 weeks), since my current system is 5 years old and is having "issues"... :shock:

In the meantime, here are my thoughts:

- When you're young (and lower on the federal payscale *cough*), it makes no sense to try to even come close to maxing out the TSP contribution. $15K is almost 30% of my base annual pay. Considering that I, along with most other young workers, have student loan debt + car loan debt + a mortgage (or in the process of saving money to purchase a home), it is highly unrealistic to expect to lop off $15k pre-tax for anything, particularly if it is for something that won't be needed for another 30+ years.

- Roth vs. TSP is a more complicated issue. This will require me to crunch some numbers... hopefully, I'll have a system within a couple weeks and can do that. For the time being, regarding my own situation, I believe that my tax rate will only go up over time. Part of that belief is due to being early in my career, meaning I have not hit my peak earning potential yet. Part of it is also due to the belief that my minimum distribution at retirement could very well be higher than my gross pay is right now. The third part of this belief stems from government mismanagement of its finances and entitlement programs, which will inevitably lead to cut backs and higher taxes to compensate. At any rate, I'm already kicking in 15% to the TSP and maxing the Roth (two years running), plus I have a modest brokerage account with scottrade and am also utilizing a moneymarket account for emergency reserves. If anyone reads this and expects me to do more, I say bite me. :P

[Pete1]

Mike,

Sounds like you are on track. Startingyour contributions while you are young will give compounding an opportunity to work for you and your plan to achieve a strong position in both a Roth and TSP should work outgreat 30+ years from now.Enjoy those 30 years with your family and friendsadding to TSP contributions when it makes sense for you financially. WhenI spoke to aCFP recently, he pointed out how many things could change between now and my retirement. 30 years is a very long time, very fuzzyin terms of what we know now (even Yoda has difficulty with this - the future is difficult to see, always changing :)).I guess if a had a word of caution in regards to what you are doing it would be to be very careful regarding your assumptions about tax rates 30 years from now. You may be in a higher bracket later and overall, taxes may be higher but at the same time - you areforegoing a certain tax break now, contributions now, over 30 years of compounded earnings on those contributions - in reactionto a perceivedtax structure 30 years from now.Opportunity costs makechoices like contributing to a Roth or TSP difficult sometimes.

[Show-me]

Hey Mike,

What you eating? Beans and rice. Great job and stick to your guns!

[JohnnieB1]

full 20K for me

[Rolo]

Birchtree wrote:
A Roth IRA has a lot more potential and flexibility for sure.
I fund both, TSP and Roth, and can still put $15K into TSP and $8K into my Roths, so TSP vs. Roth is not an issue for me. My dilemma is TSP @ 15K vs. Scottrade (regular brokerage account) since I won't have much for discretionary spending if I max TSP and try to rebuild my Scottrade account.

Oh! I just realised another factor: Scottrade is marginable and TSP is not, so my potential gains double. Also, you cannot short-sell in the TSP.

I will probably not fund the TSP fully at first in favour of Scottrade and once I get momentum going there, then fund TSP fully. I'll adjust as market conditions dictate, I suppose.

Birchtree wrote:
In 2006 I can put in $5000/year - it just takes forever.

Not unless yer old.

[Rolo]

Pete1 wrote:
...be very careful regarding your assumptions about tax rates 30 years from now. You may be in a higher bracket later and overall, taxes may be higher but at the same time - you areforegoing a certain tax break now, contributions now, over 30 years of compounded earnings on those contributions - in reactionto a perceivedtax structure 30 years from now.

Exactly! Go with the definites rather than the "maybe"s. You don't want to forfeit all of that time, the bigger factor in the formula for growing money.

[Birchtree]

Rolo,

If I were younger - you can check my profile - it's all there - I would put my investing programs on auto pilot and concentrate on dividend reinvestments. One reason I need a deferred compensation program like TSP is to offset my current dividend income to keep taxes lower. A margin account can conceivably help do the same thing - the charge is deductable against passive income. Opening a Roth for me has no advantage - I need shelter today. There are however many advantages for some folks starting out - you can borrow from it with no penalties, you can set up automatic deduction plans from your checking account, and the dividends are reinvested for free in most accounts. When one is older you can draw from the plan tax free for a year and end up with no tax bracket - you know what that means? That is when you start the transfer process from a traditional IRA into a Roth IRA. It's all about not having an AGI. (Adjusted Gross Income) The AGI will rule your life in retirement - and all means should lead to reducing AGI. Take care.

[Rolo]

Duh! Profile...heh...forgot about those.

A few of us (including me) kept thinking that the limit for 2006 was $5k for youngins.

Balance between taxes and time....like the wind...

[Birchtree]

Rolo,

Allow me to expand on the virtues of the TSP and how it helps my particular situation. Aside from the deferred compensation component having the ability to put away $20K/year on a dollar cost averaging basis adds up real quick. Also the $15K is actually indexed to inflation starting in 2007. I already have built a power account that provides me opportunities that others have to earn to achieve - there really is no easy way to get to where I am. You have to work and save and learn how to invest. There are many TSP participants who have accounts that match mine - but instead of using that power they fear loosing - I'm here to tell them that a loss is only temporary. The selections that TSP provides are ample and diversified enough to enable anyonewho is diligent to make exceptional gains. One has to remember that the TSP is a supplemental program - not a defined benefits retirement program.

I particularly like the C fund from this point going forward - and there are numerous reasons for that. Because it is cheaper than the other funds I managed to buy more shares, so even if it doesn't outperform the other funds immediately I still make good money because I own more shares and am constantly dollar cost averaging at the current price when the contributions hit the account. I plan to make a great deal of money in this account over the next 20 years- I have the power to purchase multi-thousands of shares - tens of thousands I should say. And I know I'm not alone - there are many others that just need to learn the game to be successful. This web site can help me and many others. My question is: if a participant has $400,000 why be satisfied with 40,000 shares of the G fund and collecting a copper when silver is readilly available? Use the power for better gains while the opportunity is here. Unfortunately bull markets don't last forever - but I think this one has years to run.

Dennis

[Mike]

The tax advantage I'm gaining through TSP investment at this stage isn't all that significant - simply due to the fact I'm not in a very high tax bracket. The nice thing about the Roth - aside from the ability to pull out the contribution money whenever I wish - is the fact I don't have to worry about what the future tax rates will be with that account... and I'd say it's highly unlikely I will be in this low of a tax bracket at age 60.

Since it involves the future, yes, it's all guesswork. But given what information I have at this point in time, I believe I'm making the right decision. If anyone wishes to try to prove me wrong on this, feel free. My mind is open (and 2006 is still 3 months away). :P

In any event, I cannot afford to max out the contribution at my payrate. I only take home 60% of my gross as it is. I can't imagine what that would drop to with 30% TSP witholding. :shock:

[Pete1]

Mike - for a young person like yourself in a low tax bracket,you are probably right. Hopefully, it works out the way you anticipate.



Dennis - why limitthe choices toeither C or G?

[Birchtree]

Pete 1,

I currently have some small-cap funds and international fund in other places - I'm covered. I'm using my TSP to leverage 100% in the C fund because it is presently undervalued and I have a substantial position. Going 100% in a particular fund allows me to catch as much risk as possible - I want the leverage, not diversification. With the assumption of risk comes opportunity - and possibly a greater gain.

Dennis

[Pete1]

Dennis,

Do you plan to stay the course if stocks (C fund) drop for a prolonged period and continue withdollar cost averaging or do you have a point in mind where you would pull the ripcord?

[michelleunit]

i've been budgeting for this for two years...so i'll be ready. i just have a nagging thought that when i go to retire i'll be in a higher tax bracket. since my crystal ball isn't working, i'd rather lower my tax bracket now and then worry about that tax rate later. the good thing is with there being no more tsp open season, you're not locked in. i guess being in a high tax bracket in retirement is preferable to having to work during retirement.

i've asked coworkers if they're ready to up their contributions and all i get is 'are you kidding? i can't even afford to max out at 15%'....some don't contribute AT ALL....i dunno how they think they can lose when they don't even put in 5% to get the company match! those people will be working clear into their 70s...unless they hit the lottery (yeah, right!).

michelleunit

[Pete1]

mitchellunit,

You should only max the Roth before TSP if you are very certain that you will be in a higher tax bracket later. If it looks like your bracket will be the same or lower based on current tax law and your personal earnings projections, don't do it. I would avoid the temptation to speculate that tax rates will be higher overall later. Not a sound reason to max a Roth before TSP in my opinion.

[michelleunit]

yeah--that's the other thing. :?

we've got an ira (traditional) not making hardly anything :Xacquired it through state farm and need to do something with that, any suggestions? i actually thought about rolling that over into the tsp (form 61?) but it's joint iraand i don't know if that can be done..from joint ira to my tsp...

i've been wanting to do a roth. but don't know which one...anysuggestions? then, of course, i'd like to max that out and do the tsp (i'm thinking the tax savings on the tsp will free up the money to do that..i read that on another post)

thanks for the advice-

michelleunit

[Birchtree]

Pete 1,

Chicken Little would have to fall from the sky and land directly on my head inorder to get my attention - then I would ask where he came from and he was up to. I plan to hold the C fund for a price of $17.00. That may conceivably take a few years - it's hard to know what the future will bring - but I seldom get emotional to the point of cutting and running - that's how mistakes are made. The S&P had a peak of 1527.46 back in 3/2000, if we approach that level I probably will begin to gently pull back to the G fund but only in 5% increments and continue to let my allocations dollar cost average. And when the cycle starts again it may not be the C fund but rather one of the others - one has to stay current - this site will help in that endevor. Take care.

Michelleunit,

Try not to waste your time putting any money in the G fund - you are in accumulation mode and should be collecting shares of the stock funds. 70C 30I would be good.

[michelleunit]

i totally agree...i'm a c-30%/ s-30%/ i-40% girl. i'm only 37, so i have plenty of time. been maxin' out the tsp since i was eligible ('96) and have 66k right now

hubby (he's 42)has 38k in his 401k at work, and rolls his eyes-he thinks i'm putting away too much and i think he's putting away too little!!

so i hope between the two of us to have a nice amount in there when i'm eligible to retire at 56.5... i don't know that i'll retire then (my family gets very old 90s-100s)

does anyone know if the tsp calculator - projecting account balance- include the 5% company match? i put 15% in the calculator, but this guy at work posed the question, and now he has me wondering. i just assumed their calculator would account for it.



thanks

michelleunit

[smine]

This was an interesting question Pyriel posed.....I had to think about the answer and get out the calculator! As a "catch-up" old person, in the old system I can and do put in $3000 (just for being over 50). My contributions were never matched but we old folks are up to what 11% this year? Something like that....which already has me puttingin at least $13,500 yearly. If 15K is the max then that's not a much further stretch so I voted yes. Bottom line for all, old and young is to diversify, with Roth's, money markets and/or some type of tax deferred savings. Savings is the operative word here.

[pyriel]

Hmmm... And here I am thinking that you were only 28....;-)

[Pete1]

Dennis -great attitude. Sounds like you havebeen through many cycles. As you close in on retirement and the distribution phase, do you plan to move a significantchunk to fixed income or stay with stocks?

michellenut - tell your husband to get with the program! Regarding your IRA, honestly, not surethat you can rollover a jointIRA. Would be surprised if you can. Suggest that you call TSP directly. Regarding starting a Roth, recommend no load, low expense ratiocompanies like Vanguardor Fidelity. Probably would go withone of their aggressive target retirement funds (Vanguard 2045) until you hit about $30K, then split the account betweenmorespecialized asset classes (for example - international smalland emerging markets)to further diversify your TSP holdings. You would want to reduce your EAFE exposure in your TSP account to keep international at 40% if youfollowed the above plan. Also, you need to think of your husband and your asset allocations as one big account rather than separate accounts. What is the overallasset allocation ofboth of your accounts?

[Birchtree]

Pete 1,

My plan is to stay with stock funds and participate in the growth dynamics of this great economy - no reason to lay back because of retirement. I will develope a monthly withdrawal system to add funds to a traditional IRA - and then when my AGI is under control begin the process of rolling from the traditional IRA to a Roth. Inside the Roth will be stocks that pay dividendes that will be reinvested. I like the idea of automatic pilot dividend reinvestment - leave it up to lady chance to pick the best prices. My outside account is being designed to produce income from dividends - any capital gains is added frosting. All I have to do now is patiently wait for the offer to convert my defined benefits pension to a defined contribution plan. Then I will have good control of my AGI - that will really provide flexibility.

Dennis

[pyriel]

Dennis,

Agoal going under 15% AGI is great. Doing so will surely allow you to leave your big retirement account to your children. Is this your plan as well? And you do plan on switching them to Traditional IRA and/or ROTH right?

Rey

[michelleunit]

Pete1-

mine: c-30%/ s-30%/ i-40% (i don't mess w/ f or g or l funds)

his: 32.69% aggress grwth mgmt, 32.61% activ us sm cap mgmt, 19.67 verizon stock port & 15.03% vz co stk fund mgmt

he's w/ verizon and they have his 401k through fidelity.com. i never move his stuff around and i probably should, but i'm not clear about what he's got. i know he probably shouldn't have too much in company stock, but i don't know what those numbers should be...

thanks for your help and .02!!

michelleunit

[Birchtree]

Pyriel.

The Roth IRA money will eventually go to the gradchildren - using their RMD - should last a considerable period of time. My plan is to buy a summer lake place so I can escape the Florida summer heat. And eventually I will be self-employed and will likely set up a sole owner 401 (K). I plan to stay busy and in touch with TSPtalk.

Dennis

[Sr]

pyriel wrote:
Dennis,

Agoal going under 15% AGI is great. Doing so will surely allow you to leave your big retirement account to your children. Is this your plan as well? And you do plan on switching them to Traditional IRA and/or ROTH right?

Rey
BTW, This month's smart money has a piece on retirement savings. One nugget I was not aware says that for those who plan on working until 67 , or whatever is the full social secuirtyretirement age is, there is a provision in the 401k rules that allows one to roll over the money to IRA after age 59.5 and yet continue contributing in to the 401k plan and working at the same company.Don't know whether it applies to TSP (which is similar but not same as 401k plan). Those struggling under limited asset class option in 401k plan, this is godsend and not advertised that much for selfserving reasons.

[Mike]

If you desire better diversification (access to REITs, precious metals, commodities), you have to kick money into a Roth... otherwise, your only options are stocks, bonds, and gov't securities - which is certainly good, but it isn't necessarily ideal.

Once my Roth vs. overall portfolio balance ratio drops a bit, I'll set my TSP allocation and move the Roth money into commodities and leave it there.

[Pete1]

michellenut - find out what your husbands options are then read the following books: The Four Pillars of Investing and The Intelligent Asset Allocator both by William Bernstein. There is a ton of very practical asset allocation information in both of these books. You may wantto try to read the books together with your husband so you are both on the same page regarding allocating retirement assets.

[grandma]

Mike wrote:
If you desire better diversification (access to REITs, precious metals, commodities), you have to kick money into a Roth... ...why ?

[Mike]

grandma wrote:
Mike wrote:
If you desire better diversification (access to REITs, precious metals, commodities), you have to kick money into a Roth... ...why ?
Since so many appear to be focused on kicking in the $15k maximum, that was the implied assumption of that post - meaning you couldn't do it via another IRA, since you are already maxing the TSP pretax contribution. Your only other options would be the Roth IRA or a brokerage account. If you haven't maxed the Roth, it makes no sense to do it via a brokerage account, since that would be funded with your net income (already taxed) and would be subjected to the capital gains tax.

[pyriel]

Mike wrote:
Since so many appear to be focused on kicking in the $15k maximum, that was the implied assumption of that post - meaning you couldn't do it via another IRA, since you are already maxing the TSP pretax contribution. Your only other options would be the Roth IRA or a brokerage account. If you haven't maxed the Roth, it makes no sense to do it via a brokerage account, since that would be funded with your net income (already taxed) and would be subjected to the capital gains tax.
You are absolutely correct. I didn't even think about that. There is another way to max out the 15k pretax contribution and via TSP is not the only option. Thanks for bringing that up Mike.

On the other hand, reading my comments and Birch's input I can easily seehow your way of thinking differs from ours. We are both family men thinking of what we are going to be leaving behind and you are a bachelor living the life...:D

[michelleunit]

Pete1-thanks for the names of those books...i'll check on ebay and the used book store here in town (it's HUGE!)...michelleunit

[Pete1]

michelleunit - you may also be able to find them at your local library - I like to check them out every now and again for a refresher.

[Mike]

pyriel wrote:
You are absolutely correct. I didn't even think about that. There is another way to max out the 15k pretax contribution and via TSP is not the only option. Thanks for bringing that up Mike.

On the other hand, reading my comments and Birch's input I can easily seehow your way of thinking differs from ours. We are both family men thinking of what we are going to be leaving behind and you are a bachelor living the life...:D

Our tax situations are also vastly different - I am *probably* in a lower tax bracket than the two of you. So, everybirchtree or Pyriel dollar that is getting kicked into TSP is generating greater tax savings than every Mike dollar. In 10-15 years, my tax advantage will probably have grown to the point where it no longer makes sense to fund the Roth before maxing out the pretax investment - especially given the fact that by that time, my Roth will be sufficiently large to provide a huge emergency reserve of funds.

As for your second point, my life is actually rather dull. I logged ~200 hours of OT last year and have logged another 200 this year so far. That doesn't leave a lot of time for other things... I'm basically living a 40 year old's life at 27 (sans the marriage, mortgage payment, wife, and kids). :P

[EW_ret]

I' am not contribution the max 15K because I am retiring in a few weeks. If I were not retiring I would try to contribute the Max but that would be a big jump from the 10% I now contribute.

My opinion is it isbest not to put all your eggs in one basket. You need all three 401K, Roth IRA, and taxable stock/mutual fund accounts. A balanced approach assures best for future regardless of the tax bracket your in. My hope is we'll keep the low tax rates on capital gains and stock dividends. If the rates go up my Roth IRA has advantage. If income tax rates go down, the 401K some advantage. The low 15% tax rate on capital gains and stock dividends is great for those with large taxable accounts. So, its good to have all three types of accounts in balance.

Mike, Your doing just great! For a young person its good if they canset aside 10%of gross income into savings. It sounds like you are over 20%. The amount one can set aside for retirement depends upon income, location,and family responsibilities. I did not start saving until I was 36 years old. I wish I could have started earlier but I had four children and responsibility. I really saved the most (20-30%) the past ten years (46-56 years) when the family responsibilities eased.

[cowboy]

Congradulations on your retirement coming up EWGUY!!! :^Here is a poem to help you celebrate. This lady is a Cowboy Poet and a very good one!

When you step through the open door
That memory leaves ajar,
Please bring your sense of humor
And together we'll go far.

Please set aside a little time
To just sit down, relax.
Disconnect the telephone,
And do turn off the fax.

Return with me to other times,
When life was much more simple.
When we saw joy in smiling eyes,
And noticed every dimple.

Carver Country Poetry
P.O. Box 115
Mesa, CO 81643-0115

Or if you would like to email her, you can do so at: NonaKelleyCarver@cdmsinc.net (mailto:NonaKelleyCarver@aol.com)

[michelleunit]

Pete1-i'll check ou the library, i'm guessing i don't need to buy the books when i can borrow them for free..saves me a few bucks!:)

thx-michelleunit

[Birchtree]

And just when everyone thought it was safe to go back in the.....comes the Roth 401(k).

One reason the Roth 401 (k) is expected to be most attractive to high-income workers is that it will mark the first time they have access to a savings account that offers tax-free withdrawals in retirement. Look for it to appear at your TSP plan in the not to distant future. The only other savings account that offers that benefit, the Roth IRA, carries strict income restrictions - it is off limits to single filers who earn more than $110,000 a year, and for joint filers who earn more than $160,000 a year. The Roth 401 (k) carries no such restrictions: Anyone can invest in one so long as the employer provides this option.

The other group that stands to benefit from Roth 401 (k) contributions are young people in low tax brackets who expect their income to climb and carry them into higher brackets in the future. The only drawback is that this group can rarely find enough spare cash to contribute to their standard 401(k), never mind a Roth.

[Pete1]

It is my understanding that ifparticipants are offered the option to contribute to a Roth TSP in lieu of a traditional TSP, the cap for all contributions is still $15K, this is not a new saving opportunity in terms of how muchparticipants can contribute. Also, the Roth TSP would be subject to RMDs at 70.5. Although not a huge consideration for me, it would be interesting to know if the RMD goes away if participants rollover a Roth TSP to a Roth IRA.

Upon reviewing our current tax situation, Iamconsidering maxing a Roth TSP for the following reasons:

1. Current tax bracket: I am currently in the 15% bracket and my wife is currently not working. If my wife goes back to work or I get a promotion, we would bump up to the 25% bracket. As a result, our bracket can only go up between now and retirement and willcertainly not be lower in retirement.

2. Future tax bracket:I do not have a crystal ball regarding futuretax brackets and so, as others have pointed out, hedging with a Roth TSP makes sense for me. Many current tax cuts and savings opportunities are set to expire in 2010 including Roth 401Ks.

3. Invesment Options and Expenses: The TSP funds are the cheapest that I know of in terms of expense ratio.Also, Congress isapplying pressure on the TSP Advisory Board to add more funds. As a result, for me personally, the scale tips in favor of a Roth TSP verses Roth IRA in terms of investment options.

4. RMD: RMDis not a huge deal for me as we plan to spend as much as possible before death (no kids to leave it to). Would still be interesting to know the rules on Roth TSP rollover to Roth IRA in terms of RMD.

I realize that this post is an about face from my previous posts on this topic and I reserve the right to change my mind between now and 1/2006. :)

As always, financial decisionsare personal decisions - everyonereading needs to assess their tax situation and do what they feel is best for themselves. If you are not sure, consult a professional (CFP, CPA, JD, etc.). The same applies for asset allocations decisions - if you are not sure how to distribute your assets, consult a professional.

Take care

[Birchtree]

Pete 1,

There is no Roth TSP available at the current time - this is only a future possibility. There would be no RMD on the Roth TSP because all the money contributed would be post tax, the IRS does not have a vested interest. I'm waiting for the opportunity to be presented that would allow me to convert my defined benefits pension to a defined contribution plan - this provides the capability to control your income while in retirement and therefore have a chance to control the tax bracket. Once retired, everything is impacted by AGI.

Any time a company can get away from the legacy costs of a pension plan the better off they are, retirement can last a long time for some. That's a heavy burden on a company trying to make profits in a global competitive environment. Look what has happened in the steel industry and now airlines - they all go chapter 11 and give up their legacy costs back to the government. That's why we have had an explosion in the offerings of 401(k)s - the employee is responsible for accumulated retirement benefits. I think TSP is slowly moving in the direction to eventually allow a defined contribution - they are building the infrastructure to provide some flexibility.

Dennis

[Pete1]

Dennis - understood regarding the Roth TSP option. Hopefully, they will add the Roth TSP as an option for participants of the plan in 2006. If they do, I am leaning towards using it. RMDs will apply to Roth 401Ks. Do a search and you will see - it is the biggest difference between a Roth 401K and a Roth IRA that I was able to find.

[Birchtree]

Pete 1,

For some people a Roth 401(k) would certainly make life simpler - no need to roll to a traditional IRA and then to a Roth IRA. The RMD requirement may be because of the amounts that can be set aside in a Roth 401(k) verses a regular Roth IRA. But it stll leaves the owner in charge of the income - which is tempting to me. I'm thinking that if more of the working population is pressed into active investing - the demand alone should enhance any bull move that is in progress. The next ten years should be full of opportunity for an individual that is capable and willing to assume responsibility for the future. All the public has to do is not vote for the donkey party.

Dennis

[Show-me]

Hey Pete1,

I to have done an about face on this subject too. That’s the great thing about this MB. I have had my eye’s opened to different options and methods of saving (Mike). My new revised plan is to put 5% into my TSP for the matching funds and fully fund my and my wife's Roth IRA accounts. No one can predict the future but I have a aching feeling taxes will be higher in the future. If not great!

Changing your position is not a bad thing, it mean you are think about your future and doing something about it. Cool! Me too!

[pyriel]

Pete1 wrote:
4. RMD: RMDis not a huge deal for me as we plan to spend as much as possible before death (no kids to leave it to). Would still be interesting to know the rules on Roth TSP rollover to Roth IRA in terms of RMD.
Pete1, I've always wanted to have a father figure here in TSPTalk. Can you adopt me so you'll have someone to leave your vast retirement holdings when you are gone (whatever is left). I promise to not squander them for you...:DP

[pyriel]

Birch and Pete, On a serious note, how could there be an RMD for a post tax retirement system. RMD was set for Traditional IRA, TSP, and 401k because Uncle Sam wants to get paid. A post tax retirement system like ROTH IRA there is no RMD (unless you are leaving it to a beneficiary). I would think that it will be the same as ROTH 401k.

Additionally, If ROTH 401k is post tax, how much can we max? Is it 15k as well. 401k, TSP, and traditional IRA has a cap of 15k for next year according to the IRS because they are pretax which means that we are deferring payment on taxes to Uncle Sam till later down the years. But ROTH 401k is post tax so current regulation stipulated bythe IRS does not apply.

I would think that ROTH TSP will havea cap just like ROTH IRA. If this is the case, I will have to rethink and rebalance my portfolio and divert all my ROTH IRA contribution to ROTH TSP (for now) and then transfer them back to to ROTH IRA later down the years... Very interesting...

[Pete1]

Thanks, everyone. Pyriel - not quite a fortune but hopefully, will be enough to stay away from the cat food line. I have heard $15K will be the annual max. Could be all to tax deferred, a combination of both, or to a Roth 401K, just can't exceed $15K annually.

[Mike]

Call this a hunch:

All tax deferred accounts share a combined max contribution of $15k next year.

This leads me to conclude that if the government is following this logically, all post-tax (read: Roth) accounts would share the same maximum ($4k this year*) as well.

*= assumes you are not eligible to make catch-up contributions.

[Aggie76]

If my understanding is correct, I just realized something after reading these notes.

If I max out my TSP at $15k for 2006, that means I cannot put anything into a ROTH IRA. Is that correct? I was considering putting $15k into TSP(pre-tax) and $4k into ROTH IRA (post-tax). But it sounds as if I cannot do that but I am not sure.

Just to keep thinkgs somewhat simple, I am not looking at catch-up for those of us over 50 in this example.

[Pete1]

From InvestorSolutions.com:



Coming Soon: The Roth 401(k)
Richard Feldman, CFP, MBA
08/02/2005 -





The Roth 401K may well be the best retirement vehicle to come along in the past 20 years. The Internal Revenue Service has recently released proposed regulations for retirement plans but is still soliciting comments. Individuals will want to make sure that they have enough information to choose from their existing 401K option or the new Roth 401K option.



Most individuals are not familiar with a Roth 401(k) option because they haven't been available in the past and will only become available on January 1st 2006. The Roth 401K option was included in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA).

Roth 401K

The Roth 401K will be very similar to the Roth IRA where your contributions go into the retirement vehicle on an after tax basis. This means the funds that an individual contributes to an account have already been taxed at the time of contribution. The contributions then accumulate with no taxes owed on the dividends, interest, or capital gains while inside the account or when the funds are finally distributed. There are some requirements that must be met in order to maintain tax free status. Withdrawals are tax free after age 59 ½ and if five years have elapsed from the date of the first contribution to the plan. Taxes and penalties are waived if a participant dies or is disabled. Required minimum distribution rules are the same as current 401K rules where a participant must start taking distributions by April 1st of the year after they turn 70 ½ . A Roth 401(k) can be rolled into a Roth IRA should a participant leave the company they work for. Roth IRAs do not have rules requiring minimum distributions so employees could effectively get around the Required Minimum Distribution rules by rolling their funds into a Roth IRA. This would allow individuals to maximize the time that funds are accumulating on a tax deferred basis.

Eligibility & Contribution Limits

Unlike a regular Roth IRA there are no income restrictions on contributing to a Roth 401(k). Individuals can contribute up to $15,000 for the 2006 tax year. Similar to a regular 401(k) participants that are over the age of 50 are allowed a catch up contribution of $5,000. This would bring the amount to $20,000 in total contributions if you are over the age of 50 that you could contribute to a Roth 401(k).

How long with the Roth 401(k) be available?

Sunset provisions on the Economic Growth and Tax Relief Act of 2001 (EGGTRA) are set to expire after the 2010 tax year. This could mean that the Roth 401(k) option could only be around for the next five years depending on what congress does.

Summary

There are still several issues that need to be addressed by the IRS in terms of compliance issues for the Roth 401(k). Employees should be vocal in trying to get there employers to add a Roth 401(k) option. Even if the Roth 401(k) were to last five years individuals that maxed out their Roth 401(k) contributions would be able to contribute $75,000 to their accounts. This money would grow on a tax deferred basis and never again be subject to federal income taxes. If you are over the age of 50 the amount would increase to $100,000 that you could contribute. Please see my next article for an actuarial comparison of the Roth 401(k) versus a regular 401(k)

To read Part II of this article click here (http://www.investorsolutions.com/lc-library.cfm?show=detail&articleID=458&ARTCATEGORY= 5)

[pyriel]

If I am reading this correctly, we should be able to do 15k for TSP, 4k for ROTH IRA, and 15k fo ROTH 401k (if they ever offer it for government employee).

15k for tsp is pre tax, 15k for ROTH IRA is post tax so the rules is not the same

4k ROTH IRA and 15k ROTH 401k are both post tax. IRS already have a rule in place with ROTH IRA. Rules for ROTH 401k is still being formalized but 15k seems to be the quota they are looking for.

So, there is a possibility to do all of them at the same time. Who in their right mind would do such a thing... Where do we sign up???

[Birchtree]

And please don't forget the over 50 catch up for both plans. $25K for both. This is a wonderful incentive of a silver thread to keep working and saving for investments. The total then would be $45K plus any match. I think I'll ask for a raise.

[Rolo]

Aggie76 wrote:
If I max out my TSP at $15k for 2006, that means I cannot put anything into a ROTH IRA. Is that correct?
Incorrect.You can do both.