Stop TSP, Start Roth?

[cstewart]

Hi all-
I am looking for advice. I'm a 19 year old, active duty in the Marine Corps. I have no dependents or debt. I set up the Thrift Savings Program a couple years ago because it seemed like a good idea and I had no idea what a Roth IRA was.

I am interested in starting a Roth IRA, I just need some advice. Should I continue contributing to my TSP until I exit active duty (3 years from now) and then convert it to a Roth? Or should I start the Roth now and stop contributing to the TSP? Or should I try and contribute to both now?

Thanks for the help

 

[aaronc879]

I would contribute the max to the ROTH($5000/yr) then add as much as possible to the TSP.

 

[martyb]

If it were me, I'd (depending on your income & what you need to live on) I'd try to contribute first to the TSP, because it's tax-deferred. Since you're only 19 and a young Marine, you probably can't max out both the TSP and a Roth, but if you could, I'd say do it in that order. TSP first, then Roth IRA.

Ummm... I just remembered that active duty military don't get any matching money for their TSP contributions, so I guess this fact might change my thoughts somewhat. Still, I do like to invest tax-deferred. Are you considering going to work for the Federal Government in any capacity once you separate from the Marines? If so, I still say go as deep into the TSP as you can, funding Roth also as much as possible. Ideally, you'd max both someday. Then you're really cookin'!

 

[Nords]

Welcome to the board, CS!

By asking this question so early in your career, and at your age, you're about a decade ahead of most of this board's servicemembers & veterans. You'll have enough compounding time on your side to really make a difference, whether you choose the TSP or a Roth IRA.

I am interested in starting a Roth IRA, I just need some advice. Should I continue contributing to my TSP until I exit active duty (3 years from now) and then convert it to a Roth? Or should I start the Roth now and stop contributing to the TSP? Or should I try and contribute to both now?

Conventional wisdom is to max out the TSP because it has lower expense ratios than any other index fund-- at 0.03%, it's even lower than Vanguard.
https://www.tsp.gov/investmentfunds/fundsoverview/expenseRatio.shtml

Over the decades those tiny little basis points can add up to a substantial difference.

Some servicemembers are reluctant to invest in the TSP out of a concern that they "can't get" the money when they want it. As you've mentioned, however, you can always roll out of the TSP to a conventional IRA and then start a 72(t) withdrawal, even before age 59.5. What you'll probably want to do, however, is keep your TSP account after you leave active duty and just let it compound.

Beyond the decades of low expenses, keeping your TSP makes it a lot easier to resume contributions if you decide to re-enlist or to join the Reserves. In addition, the TSP is offering a Roth TSP option. The legislation was enacted a couple years ago and the announcement came out last week: https://www.tsp.gov/PDF/formspubs/oc06-5.pdf (Implementation may lag into 2012, however.) This means that you could put your Roth IRA contributions into the world's largest index mutual funds at the same 0.03% expense ratio.

When this feature is in effect I'm going to roll my spouse's entire Roth IRA over to her TSP account. Now I'm really regretting that I was kicked out of the TSP when I retired from active duty.

Here are some other points to consider on where you invest your money:
Where to put your savings while you’re in the military | Military Retirement & Financial Independence
Tailor your investments to your military pay and your pension | Military Retirement & Financial Independence
Start saving early | Military Retirement & Financial Independence

 

[HawkeyeNFO]

I would try putting money into both of them, if possible.

 

[cstewart]

Thanks for all the advice, this helps. I'm a little confused about maxing out my TSP though. What do I need to do to max it out? I'm currently only at 5% of my pay going towards TSP. Thanks again!

Also, I am considering working for the federal government or contractor in DC once I get out. My MOS should help me obtain a job out there.

 

[aaronc879]

I'm a little confused about maxing out my TSP though. What do I need to do to max it out? I'm currently only at 5% of my pay going towards TSP.

"Maxing it out" refers to the maximum amount someone your age can put in on an annual basis. Currently that stands at $16,500/yr. Maxing out a ROTH would be $5000/yr in after tax dollars. No one would expect a 19 year old at the bottom end of the pay scale to max it out.

 

[HawkeyeNFO]

Also note that in any year that you go to a combat zone, You will be allowed to put more than that into your TSP. I believe the limit then goes to $49,000. I doubt many people hit that limit! Take a good look at your next LES, and decide what percentage of your base pay that you can comfortably set aside for your TSP, and then go to mypay.gov and set it up accordingly. It's pretty simple.

I've been putting 25% of my base pay into the C and S funds, which maxes me out at $16.5 in October. At that point I find other places to stash my savings. And before then, I try to put money into my Roth IRA and college accounts for my 3 kids. If I can't invest it by October because my spending is too high in the previous months, I know that I'll have extra money (because TSP won't take it) in October, November, and December, and that will take care of my IRA and college accounts.

At 19, if you can put a good percentage of your money into the TSP, you are way ahead of your peers. Promotions should come quickly for you early in your career, and if you can save the extra money instead of spending it, you will be on your way to FI, and will likely get there before anyone else your age.

 

[travelover]

It seems like at age 19 maxing the Roth would be a better option. You are in a very low tax bracket (I assume), you have many years for that Roth to compound untaxed forever and if you really had to, you could take out your contributions penalty and tax free (don't do this!).

 

[virginia]

Also keep in mind...If you add money to your TSP while deployed- not only is that money not taxed going into the TSP, but it's not taxed when you take it out either - so you in effect are contributing to a traditional/roth IRA (get the best of both worlds).

 

[devans0]

Welcome cstewart. For myself, I like Roths. Flexibility and huge opportunities to grow tax free are big pluses. I never had the chance to TSP, and do not know much about the pitfalls, but I also expect that taxes will have to go up, inflation will have to go up, and services across the board will have to go down in the US because of the years of excessive spending by both parties. Deferring taxes with a TSP may mean a bigger bite from your wallet later and cost you. Inflation may mean it would be better to TSP and pay deferred taxes with inflated dollars. The moderate choice would be to split and do both.

 

[Nords]

It seems like at age 19 maxing the Roth would be a better option. You are in a very low tax bracket (I assume), you have many years for that Roth to compound untaxed forever and if you really had to, you could take out your contributions penalty and tax free (don't do this!).

Also keep in mind...If you add money to your TSP while deployed- not only is that money not taxed going into the TSP, but it's not taxed when you take it out either - so you in effect are contributing to a traditional/roth IRA (get the best of both worlds).

I think the TSP's lower expense ratios are a more significant factor than lower taxes. Part of the problem with this analysis is the widespread presumption that tax rates (later) will be higher than current tax rates. Any links to buttress your thoughts?

I'm not sure about the "not taxed when you take it out of the TSP either"... IIRC all TSP withdrawals are taxed as regular income. Could you clarify or offer a link on that, too?

 

[travelover]

I think the TSP's lower expense ratios are a more significant factor than lower taxes. Part of the problem with this analysis is the widespread presumption that tax rates (later) will be higher than current tax rates. Any links to buttress your thoughts?..........

I wasn't speculating on future tax rates other than to guess that at age 19 he is in a lower tax bracket than he will be at a later time when his earning potential goes up.

 

[cstewart]

Lots of good information and advice, thanks everyone. I think I'm going to start and max an IRA, as well as continue contributing to the TSP.

 

[Keyboard Ninja]

I've only been in 4 3/4 years, and have only put my money in TSP. Right now it is in a L2040 fund, with an additional 5% each in S and I. Why I did that I have no idea... obviously still learning but I started the contributions a little over 4 years ago.

My reason for going with the TSP before ROTH or Traditional IRA? TSP has the lowest fees, and it is tax deferred. My guess is that when I actually draw from the TSP I won't have a job. At that point I assume I will be at the bottom when it comes to owing taxes.

 

[PennStateCLJ]

I'm a 26 year old Federal Employee, but not on the military side. I was contributing $635 a check to TSP at one point. You should check out Bogleheads.org also, an investment community forum. A good book to start with would be The Bogleheads Guide to Investing.

Their accepted investment order would be-
1) free money (gov/employer match to your contributions in TSP/401k respectively)
2) tax free money (ROTH)
3) tax deferred accounts to the max (TSP again)
4) taxable

The reasoning is uncertainty in the tax laws 40 years from now when you hit retirement. If you have a pension that will be taxable. Social Security (if it is around) will also be taxable. Your tax breaks such as a mortgage deduction and dependents will no longer be usable as you pay the house off and your children grow up. You will be forced to take distributions from TSP by 70&1/2 regardless of your need to do so. Give yourself a little tax diversification by opening the ROTH. Remember tax-deferred doesn't mean tax free. It just means the tax you would owe today and get a break for just compounds the same as your investments do. A good place to find low expense, no load funds for your ROTH would be Vanguard or Fidelity. Average expense ratios there are in the .2-.3% range.

If the govt implements the ROTH TSP as they stated they will, it should be a no-brainer (because of your age) to then switch to the ROTH TSP and max it out as well as soon as that option becomes available.

 

[taemoo]

You may have to verify but I thought income while deployed is not taxed. So either you make tax free withdraws from a tsp or tax-free contributions to the roth. Since the roth is much more flexible, in my opinion, I would max out the roth.