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Saturday, March 17, 2012

Roth TSP or Roth IRA

Now that the official announcement is out regarding the ROTH TSP accounts, it's time to evaluate the options. First, review the details.

ROTH TSP:
  • Contributions are post-tax
  • No income limitations for ROTH TSP contributions
  • Contribution limits are $17,000 for taxpayers younger than 50 years (plus $5,500 catch up if older than 50)
  • Earnings are tax free if account is held open 5 or more year and the taxpayer is over age 59 1/2 at the time of the distributions
  • You can take out TSP loans up to 50% of your balance, up to a limit of $50,000
ROTH IRA:
  • Contributions are post-tax
  • Income limitation to contribute to a ROTH IRA: Single $110,000, (with decreasing eligible contributions up to $125,000; Married $173,000 (with decreasing eligible contributions up to $183,000.)
  • Contribution limit is $5,000/$6,000 for those 50+
  • Earnings are tax free if account is held open 5 or more year and the taxpayer is over age 59 1/2 at the time of the distribution
  • Contributions can be withdrawn at anytime without penalty
  • You cannot borrow against your ROTH IRA
So, while the ROTH TSP option allows all of us to contribute up to the limit regardless of income, the ROTH IRA gives you some added flexibility, particularly the ability to make withdrawals of contributions.

So, now to the decision, should you contribute to one or the other or neither. For those who are in the 15% tax bracket (single taxpayers earning 8,700 – $35,350 or married filing jointly (MFJ) earning $17,400 – $70,700) you're best bet is likely to fully fund the ROTH IRA, then begin contributing to the ROTH TSP. For those in the 25% bracket (single $35,350 – $85,650 or MFJ $70,700 – $142,700) you can fully fund your deductible conventional TSP and have tax savings of enough to almost fully fund a ROTH IRA ($17,000 * 25% = $4250 tax savings). It's also likely that you'll be in a lower bracket at retirement.
In the end, the ROTH IRA remains our top choice for flexibility and tax free growth. The ROTH TSP is a great option for lower income military members, and for those who have large amounts of tax free earnings from deployments. For higher income military members we recommend a combination of deductible TSP and ROTH IRA for tax savings and flexibility.

- Thanks to http://www.taxbrackets2012.com/ for the bracket breakdowns.

6 comments:

Brian said...

I believe you meant to write "deductible TSP" not "deductable[sic] IRA"

"For those in the 25% bracket (single $35,350 – $85,650 or MFJ $70,700 – $142,700) you can fully fund your deductable IRA and have tax savings of enough to almost fully fund a ROTH IRA ($17,000 * 25% = $4250 tax savings)."

Lee said...

Nice catch Brian. The key factor was the distinction between the conventional TSP and traditional IRA. Of course the contribution limit for a traditional, deductible IRA is $5,000($6,000 for 50yrs+) subject to income limitations. The conventional TSP has the higher contribution limit. I appreciate your attention to details.

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me said...
This comment has been removed by the author.
me said...

Hey, note to commenters, you realize that those of us reading it can tell that your comment is bogus because you're only commenting so you can post a link to promote your agenda, right?

Author, please consider deleting useless comments because they are piggybacking off your expertise and other people may mistake the comment for your endorsement for those links.

Thank you for a great article, btw, it helped me understand something that was previously confusing. (Reposted to fix typo.)