Switched from Roth TSP to Traditional; noticed decrease in taxes

[Moleskin Moyer]

Hi all. I recently switched from Roth TSP to traditional TSP and noticed that deduction in federal taxes for the month dropped by $378.40. Is this the effect from reducing my current income and deferring the taxes to a later date?

 

[JDARNELL]

Yes

 

[PERSonalTime]

Yes

Agreed. The OP's taxable income is being reduced.


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[donheff]

Now you can afford to turn around and send that $378 back to the TSP as a Roth contribution. That is how you ER.

 

[Moleskin Moyer]

Now you can afford to turn around and send that $378 back to the TSP as a Roth contribution. That is how you ER.

Thanks for the responses, everybody. I have a Roth through Vanguard that I've already max'd out for 2016. So I cannot contribute more to anything Roth. Part of the $378 will go to taxable accounts invested in index funds.

 

[nash031]

This is a similar strategy that DW and I employ. We have traditional TSP/403bs and Roth IRAs. The TSP/403b deductions have kept us below the next highest tax bracket the past three years, and we anticipate taxes being where they are now or less in retirement. If we're wrong about that, we won the game anyway and will drink accordingly!


I've always thought that some mix of Roth and Traditional accounts was a smart way to keep more options open down the road as well.

 

[zinger1457]

Thanks for the responses, everybody. I have a Roth through Vanguard that I've already max'd out for 2016. So I cannot contribute more to anything Roth. Part of the $378 will go to taxable accounts invested in index funds.

The Roth TSP wasn't available when I worked for the feds but this is my understanding on how the TSP limits work. The combined (tTSP and Roth TSP) contribution limit is $18K (2016) and you could contribute 100% of it in the Roth TSP if you wanted to. Anything contributed to a Roth IRA should not impact how much you can contribute to the Roth TSP. Is this incorrect?

 

[Moleskin Moyer]

The Roth TSP wasn't available when I worked for the feds but this is my understanding on how the TSP limits work. The combined (tTSP and Roth TSP) contribution limit is $18K (2016) and you could contribute 100% of it in the Roth TSP if you wanted to. Anything contributed to a Roth IRA should not impact how much you can contribute to the Roth TSP. Is this incorrect?

Oh, yes, you are correct. I got the Roth and Roth TSP confused together. I need to clarify further that I don't want a Roth TSP anymore because I want to reduce my taxable income for this year. Hence the switch.

 

[UpAnchor]

Understanding the tax effect, both current and projected future, played against taxable vs. deferred is so very important to get right. And it sounds, MM, like you understand the basics.

It's for such reasons that I wish I'd known about this forum years earlier. I'm one of those who put too much emphasis on maxing out the tax-deferred and too little on the Roth/taxable. Now on the cusp of retirement, Roth conversions have become critical and will remain so for the foreseeable future. There's no do-over for failing to grasp the balance to which Nash031 refers.

 

[Pilot2013]

I struggle with this. I think now that my DW (due to family issues) may leave the workforce, i may take a look at Roth. I have always been excluded from Roth outside of Roth 401K due to limits, and along those lines, the tax relief was always in the forefront due to that income...