Thrift Savings Plan Discussion

[Arrian]

I can think of a couple of reasons:

1) If you believe that your marginal tax rate will be lower in retirement than currently
2) If you believe that the government might, in the future, weasel out of its obligations under Roth contributions and tax the returns

(2) is a huge concern to me, due to the fact that international roth recognition is actually very, very new, and doesn't feel particularly secure.

Ack, I hadn't really considered #2. I had considered #1, and ultimately we decided that my 401(k) contributions would continue going into a standard 401(k), but my wife would switch over to the Roth option, so we'd be hedged. Since she makes more, we will end up with more in her Roth than in my normal one, despite my early lead. If #2 comes to pass, we'll take a pretty significant hit.

-Arrian

[KrazyHorse]

(2) would be fairly drastic for US citizens who lived and worked in the US their whole lives. I might be in a slightly more precarious position under Roths, as I could easily end up paying taxes to the US government on contributions while withdrawing tax free in Canada, and this might well be targeted by future governments

Also, it should be noted that under almost NO circumstances should MOST of your money be in roths because, while your contributions are generally entirely at your marginal rate (since you only contribute a small fraction of your earnings), your disbursements (as they may well constitute most of your income in retirement) will NOT be entirely taxed at the marginal rate. As an example, let us take a simplified tax, returns and income stream (either with no inflation, or with all values indexed to inflation):

Your entire life (starting at 30, say) you earn 75k . The tax rates are 0% (up to 20k), 20% (20k-50k), 40% (50k+). You're willing to reduce your posttax income by 4800 to fund your retirement. The real rate of return on your investment is 5.5%. You will retire at 65 and draw down your assets over a 20 year period. Under regular IRA, at retirement you have 802k, and in the roth IRA you have 60% of this (481k)

From the regular IRA you can withdraw 67100$ per year (taxed as regular income) which leaves you with 54260 after taxes. From the roth IRA you can withdraw 40260 (untaxed)

So, while the roth is a nice garnish to have IF you think your marginal tax rates in retirement will rise, OR if you've got a lot of assets and want to play some tax avoidance games with your estate, it should NOT form the backbone of your income in retirement. You will be giving up the sneaky tax advantage of deducting your contributions at your marginal rate while paying on your disbursements at your EFFECTIVE rate that a standard IRA affords you

[KrazyHorse]

I would go so far as to say that for MOST people roths should generally be left alone. Stick with traditional IRAs. There's no harm to having some of your assets in a roth, but most should be left in traditional. The exceptions are some people who want to play complicated estate tax games, people who believe that they will be retiring VERY wealthy, and, for example, people who have strongly variable incomes (if your income goes from 0k to 200k on odd/even years then you would want to contribute to traditional IRAs during your 200k years and contribute to roths AND convert the traditionals to roths during the 0k years; instant 30+% return on your money!!!)

[Drake Tungsten]

I'm definitely leaning toward a traditional IRA and TSP now. The clincher was that I would get the tax advantage now, while there's no guarantee that I'll even live long enough to get the tax advantage on the Roth. Concerns about future tax policy toward Roth accounts just makes the case for traditionals stronger.

[Arrian]

Thanks for those posts, KH. You've given me something to think about.

Maybe in a couple of years we'll switch her contributions back to regular IRA, but put some of mine into Roth, and shoot for an overall 70/30 split between the two...

-Arrian

[KrazyHorse]

You should note that many (most?) "financial planners" and even some CPAs DO NOT understand the basic mathematics of the difference between Roths and traditional IRAs. Think the issue through yourself.

[Arrian]

It's too early yet for me to think it through myself. Brain not fully online yet.

If your math is right (and seriously, I'd be shocked if it wasn't), then a traditional 401(k) makes the most sense. When we made our decision, we based it on some vague idea of "oh, if taxes rise, and we have a bunch of income at that point..." instead of, you know, actually doing math. In retrospect, we should have gamed it out. But we still can. She's only be contributing to the roth version for a few years now, so it's not a huge deal.

-Arrian

[KrazyHorse]

No, not a huge deal. Mostly, roths and traditionals are interchangeable. The tax system is actually fairly flat through much of the reasonable income range. Some roth protection is nice in case you're very pessimistic as to where tax rates are headed.

But going into retirement with most of your income from roths is almost certainly going to mean that you left money on the table.

[KrazyHorse]

Oh, the other important distinction (and the one that argues for roths) is contribution limits, which are effectively 30% higher for roths than for traditionals. If you're bumping up against the ceiling for contributions then roths provide a helpful workaround.

[DanS]

The Traditional IRA/401(k)/Roths discussion is helpful and interesting. The contribution limits are a biggy, although the 401(k)s have pretty high contribution limits nowadays ($16,500). 401(k)s are an amazing racket.

I worry about the Roth IRA provisions being changed. Also, I worry about marginal tax rates being raised in the future. All told, my split is 80% 401(k) and 20% Roth IRA.

[Zkribbler]

...Some roth protection is nice in case you're very pessimistic as to where tax rates are headed.

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