I'm really confused about my TSP contributions:
- We have a TSP and a TSP Roth option.
- I'm 48 years old (turning 49 this year), so I can put in $19K this year (next year, being the year I turn 50 I can put in an extra $6K = $25K total).
- A normal Roth you can put $6K/year...but in the TSP Roth you can put in more, up to the entire $19K (why?).
I'm not a TSP expert but apparently they are the federal government equivalent of a 401k. TSP/401ks etc are called "qualified plans" in that they qualify for tax deferral. They came about as essentially an alternative to employer pensions which have been phasing out for decades.
Qualified employer plans like TSP and 401ks are administered by employers. They can be "traditional", meaning tax deferral, or Roth, which means all future earnings tax exempt.
Contrast these to individual IRAs and Roth IRAs which have different laws and different limits and nothing to do with the employer.
- This link below talks about "Annual Additional Limit" of $56K. What the F is this? I thought all I could contribute was the $19K (deferred or not).
The limit any employee can contribute, and either get up front tax deferral, or set up as Roth, is $19k per year, plus another $6k if you are over 50 (I don't remember exact amounts). That maximum applies to all qualified plans combined for any individual during a year (if you had 2 employers)
However, a maximum of up to $56k per year can be contributed per qualified plan. The additional amounts over $19k/$25k could be either:
- employer contributions, such as an employer match or fixed employer percent contribution or profit sharing plan
- additional employee traditional contributions, over and above $19k/$25k, but those additional don't get up front deduction. They are often called "non deductible". Most of the time non deductible contributions are not a great deal, because no up front tax deduction, but all earnings are taxed at full ordinarily income rates upon withdrawal (unlike Roth which never taxed again). Technically non deductible contributions are considered a form of "Traditional" contributions, but they are not up front tax deductible.
The primary reason that a person may choose to do the non deductible traditional contribution is if the plan allows them convert it to a Roth IRA. That is typically dependent on the plan language. Many plans don't allow that for various reasons. If your plan does allow it, it is worth doing, if you have the liquidity to come up with $56k per year to fund a retirement plan. Obviously few people have that kind of money.
I have my own Roth IRA through USAA. Question on that: Can I contribute to that account if I put the max $19K in my TSP? Or can I put money into the Roth if I put $6K into the TSP Roth?
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What you put in a employer retirement plan is not affected (at least not directly) by what you put into a Roth individual IRA, nor vice versa. There are income limits to individual Roth IRAS. You can't contribute if you have AGI over just over $200k per year.
If you are on the bubble of $200k AGI you can lower your AGI by making traditional (tax deferred) Tsp/401k contributions that will lower your AGI and may make you eligible to contribute to an individual Roth IRA.
Lastly, thoughts on how much I should be putting into the TSP Roth vs. the regular TSP (which is deferred)?
2019 Thrift Savings Plan Contribution Limits & Rules | The Military Wallet
This is a fairly complicated subject, and dependent on a lot of individual assumptions and a lot of individual specifics. It really gets down to whether you marginal tax rate is greater now or greater when you take it out down the road.
Many people have the opinion it is best to do your employer qualified plan as traditional (deductible) and then contribute to an individual Roth IRA. Whatever you do it is probably a good idea to have both which gives you tax diversity, because ultimately we don't know what may happen to tax rates down the road.
If you are in a very high tax rate (35% or higher) most people prefer to get the tax break now of traditional-deductible. If you are in a lower tax break (10/12%) Roth can make a lot of sense. But still the decision is affected by individual specifics.