Question about IRA/Roth/TSP contributions

Discussion in 'Business, Investing & Finance' started by BMF, May 2, 2019.

  1. BMF

    BMF Bad Mother....
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    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?).
    - 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).

    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?

    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
     
  2. Bushmaster

    Bushmaster Well-Known Member
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    • BMF

      BMF Bad Mother....
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      Thanks Bush.

      I'll exceed $123k, does the impact the TSP Roth or just the Roth (or both)?

      I'm in the same boat when I hit 60 (making more in retirement than from my primary source of income): I'll have a city, military, a fed government pension by then (I already collect the city pension now, will start collecting the military pension in Sept 2020....and the fed pension when I turn 60). So between 50 and 60 years old I'll be making over $200K (w/ the GS-14 job plus the two pensions....and possibly a VA disability). At that point I'll max out the regular TSP.

      Question 1: does my pension income count towards the $123K (it's a 1099 vs. a W2)?

      Question 2: with the $25K max contribution at >50, can I put $25K into the regular TSP and any additional into the TSP Roth?
       
    • Bushmaster

      Bushmaster Well-Known Member
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      1. Yes.

      2. No. Check to see if you have both a 401k and a 457 plan. You can max both of them at 19k each.
       
    • Bushmaster

      Bushmaster Well-Known Member
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      Let me caveat this with retirement plans are not my specialty.
       
    • bradgator2

      bradgator2 Internet Bully
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      Are you married? I think the income limits are much higher for married.
       
    • Bushmaster

      Bushmaster Well-Known Member
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      I think I posted the married rates.
       
    • BMF

      BMF Bad Mother....
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      I'm retired from the fire department now, so no more 457. The CG offers the TSP....and the Fed job offers TSP (w/ matching 5%) - but I won't go back to that job until next summer.

      Thanks for the inputs!
       
    • Politigator

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      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.

      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.

      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.

      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.
       
      • BMF

        BMF Bad Mother....
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        Thanks for taking the time to write all of that!

        Right now I don't have an employer match, but I willl eventually (after I retire from the military and go back to the government job). Is the $25K max just my contribution or does it include the 5% match from the government job?

        In 18 months, when I'm retired - collecting two pensions (about $85K/year), and working the government job my combined income will be ~$200K (not counting wife's income). So my plan is to do all deferred comp...plus I'll be up against the Roth limits (basically ineligible). Thanks again!
         
      • Bushmaster

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        The 25k is YOUR contribution limit.
         
      • Politigator

        Politigator L-boy's Cousin
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        this.
         
      • GatorInGeorgia

        GatorInGeorgia Senior Member
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        I know a little something about this subject. I’ll start with the $56k annual additions limit. This is the combined max that can be contributed into the plan on your behalf. Look at it like this...you have 3 buckets-1) employee deferrals of $19k (your pre-tax or Roth deduction from your paycheck 2) employer match & 3) employer profit sharing aka employer non-elective contributions. The total of these 3 buckets cannot exceed $56k. Your $6k catch up contribution brings the total to $62k. So if you’re making $250k per year and your employer does 5% match ($12.5k), you kick in $19k, you’re at $31.5k. Your employer is feeling generous and they do a 9.8% profit sharing contribution and consequently you get another $24.5k, bringing you to the $56k max. This is the gist of it, although there are a few exceptions I won’t bore you with, one of which is after tax contributions (NOT THE SAME AS ROTH TSP contributions), but you get the idea. Under your employee deferral bucket, you have 2 sub accounts...pre-tax and Roth. You can put your entire $19k into either bucket however you want (all pre-tax, all Roth, half & half, etc). That’s just the government law. There are no income caps on TSP/401k/403b Roth contributions. You could be making $1 million per year and still put the full $19k into the Roth bucket. Employer match and employer profit sharing always go in pre-tax, no getting around that. You can max out both the TSP and a Roth IRA assuming your income level doesn’t keep you out of the Roth IRA. As far as how much to put in pre-tax vs Roth TSP, my view is see what % of your current retirement account savings is pre-tax. If the vast majority is pre-tax (my guess for you is it is as Roth hasn’t been around nearly as long as pre-tax) then I’d say go with most, if not, all into the Roth. Your match will still be pre-tax that you get taxed on during retirement withdrawal so bulk up on the Roth side and diversify your revenue streams.
         
        #13 GatorInGeorgia, May 6, 2019
        Last edited: May 7, 2019
        • GatorInGeorgia

          GatorInGeorgia Senior Member
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          $25k is just your deferral. 5% ER match takes you above $25k but counts towards the $56k limit. $25k is the combined max of your pre-tax and Roth TSP contributions (I.e.- you can’t put $25k pre-tax and another $25k Roth TSP). Hope this helps.
           
          • BMF

            BMF Bad Mother....
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            Thanks GiG! Good info. The "TSP Roth" confused me because it allows over the $6K max that a regular Roth allows. I guess it's a nice problem to have (hitting the max), and I wish I had been doing it (or was able to do it) years ago. I work with a lot of younger military officers who have been maxing out since they got commissioned. The TSP didn't even exist when I joined! Good info, much appreciated!

            BTW, this new financial board has been enjoyable! Kudos to @divits for the idea....
             
            • Politigator

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              Simplistically it is broken down as follows:

              1. Employer Qualified plans - 401ks, TSPs etc
              2. Individual retirement accounts - nothing to do with employer.

              The rules, limits etc between 1 and 2 are (mostly) unrelated and different

              In either 1 or 2, there are 2 types of contributions.

              1. Traditional Pretax (tax deduction up front, income deferred until withdrawal)
              2. Roth - no up front deduction, all future earnings tax exempt

              Technically there is also 1b, traditional-non deductible (no upfront deduction, earnings deferred and taxed on withdrawal) which you would typically never do unless you wanted to convert it later to a Roth. Most people would never fool with 1b but there are instances where it makes sense to do it and convert to Roth.
               
            • 78

              78 Dazed and Confused
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              Most people wouldn't? What you just described is identical to a non-qualified annuity. Many people supplement their retirement with that and with no contribution limit.
               
            • Politigator

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              Non deductible iras don't have commissioned salesman pimping them for massive fees.

              compared to a straight up taxable equity investment, with capital gains and qualified dividends taxed at a lower rate, holding a non deductible IRA comparatively makes little sense....unless you use it as a place to park income generating investments like bonds or REITS, where the tax deferral has more value vs taxable.
               
            • 78

              78 Dazed and Confused
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              What does that have to do with the tea in China? Lol, I sure as hell wasn't promoting the idea of non-deductible IRAs, not when they're capped.

              Defined benefit plans are a thing of the past. Retirement savers need and want to add to their savings as well as their for-life income while their earnings are high. Deferred annuities can play a meaningful role.

              REITs are a tax shelter. Putting them under a deferred umbrella is redundant.
               
            • Politigator

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              The point is annuities are popular primarily because they are heavily pimped by high commission sales people and the investors don't know enough to know they are getting fleeced.

              There are lots of annuities and I'm not going to say they are all bad. Immediate annuities can make sense as a supplement although their returns are pretty meager.


              With the expansion of qualified plans, a lot of people have more than enough opportunities to save just between retirement plans and iras. And in most cases a taxable account mostly in equities gives you better tax and return outcomes, without all the commissions and fees.

              REITS spit off substantial yield/income. As such having them in tax advantaged vehicles makes sense, even more so than equities.
               

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