We get questions about the Roth TSP, Roth IRAs, Roth conversions, etc. on a regular basis. There are some big pot holes federal employees should avoid. Thiago Glieger, financial advisor for federal employees, discusses some of these main reasons and how to avoid the big mistakes.
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5 Reasons to AVOID the Roth TSP (and Roth Conversions)
When it comes to retirement planning and investment options, the Roth TSP and Roth conversions may appear enticing at first glance. However, it is crucial to thoroughly assess these options before committing to them. Here are five reasons to avoid the Roth TSP and Roth conversions:
1. Tax implications: The primary allure of the Roth option is that contributions are made after-tax, meaning withdrawals in retirement are tax-free. However, this benefit can be misleading. The tax savings realized by contributing pre-tax to a traditional TSP or IRA can often outweigh the potential tax-free withdrawals.
2. Higher tax brackets in retirement: Many individuals assume that they will be in a lower tax bracket during retirement, making the Roth option advantageous. However, this assumption may not always hold true. Lifestyle changes, unexpected expenses, or inflation can increase income needs, potentially placing retirees in a higher tax bracket than anticipated. Consequently, withdrawals from a traditional TSP or IRA may be taxed at a lower rate during retirement.
3. Loss of tax deductions: By contributing pre-tax to a traditional TSP or IRA, individuals benefit from immediate tax deductions. This reduces taxable income in the present and can lead to significant savings, especially for higher earners. Choosing the Roth option eliminates these valuable tax deductions, reducing immediate tax benefits.
4. Limited eligibility for Roth conversions: Higher-income earners are often limited in their eligibility to contribute directly to a Roth IRA. Similarly, limits on income for Roth conversions make it inaccessible for many individuals. The availability of these options may vary depending on an individual’s income and tax filing status, further limiting their benefits.
5. Uncertain future tax laws: It is impossible to predict future tax rates and laws with certainty. While the Roth option may seem appealing now, tax laws can change significantly over the long term. Political, economic, or social shifts might result in higher or additional taxes on Roth accounts, eroding their potential advantages.
Ultimately, the decision to opt for the Roth TSP or Roth conversions rests on individual circumstances, income levels, and retirement goals. It is essential to consult with a financial advisor or tax professional to evaluate the potential benefits and drawbacks based on personal circumstances.
In conclusion, while the Roth TSP and Roth conversions may have initial appeal, individuals should consider the tax implications, potential loss of deductions, higher future tax brackets, limited eligibility, and unpredictable tax laws. Taking a comprehensive approach to retirement planning ensures that individuals make informed decisions best suited to their individual needs and goals.
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Becoming a millionaire through a Roth IRA or a 401(k) involves different strategies for maximizing profits. A Roth IRA offers tax-free withdrawals in retirement, which can be advantageous if you expect to be in a higher tax bracket later in life. On the other hand, a 401(k) provides tax-deferred growth and potential employer contributions, boosting your savings. The optimal choice depends on factors like your current and future tax situation, employer match, and investment options. Consulting a financial advisor can help tailor a strategy that aligns with your financial goals and circumstances.
We are at the lowest taxed times of our generation, including even the top tax rate. 95+% of feds are in 24% tax bracket or lower and they'll end up in higher brackets after they retire due to social security, pensions and RMDs if they chose regular RMD. Your advice is suitable for a very small subset
Is the host saying that Roth rules for TSP accounts do not follow all other Roth accounts?
The inheritance example here is not how inherited Roth funds work ANYWHERE ELSE! There are NO TAXES DUE WHEN ROTH ACCOUNTS ARE INHERITED! None, zip, zilch, nada, NONE! Only pretax accounts pay income taxes upon inheritance over a ten year period!
WOW! This is one of the most MISLEADING WHOPPERS I’VE EVER SEEN!
No, most people's taxes do not go down when they retire, and we will likely be taxed at a much higher rate when we with draw from our regular TSP. Pay the lower rate now, while I'm still working, and get the Roth or wait till my income is lower and pay the higher tax rate that is coming with 100% certainty. No brainer.
Are you implying that an inherited Roth is fully tax?
I can’t find the Roth TSP average rates of return anywhere.
Very helpful, thank you.
Please note before comparing Roth to Regular TSP you should know EXACTLY how the state you work in now taxes the pension of a federal civil servant. Approx. 9 states that normally have income taxes (e.g. NY) consider the TSP "part of" their civil servants pension and DO NOT tax it on withdrawal in retirement. This is significant because if you work in one of these states (and assuming you will retire there) and contribute to the regular TSP – you can escape state taxes altogether (which are not insignificant in states like NY) by contributing to the regular TSP. As unbelievable as it seems the money is not state taxed going into the regular TSP AND it is not state taxed when withdrawn as it is considered "part of" the civil servants pension in these states. However – if you contribute to the Roth TSP – you will pay state taxes on the money going in. Everything else being equal – you are actually losing money by contributing to the Roth TSP instead of the regular TSP in a state like NY.
At 1:50, it seems like you are saying that a beneficiary has to pay taxes on an inherited Roth IRA. I read elsewhere that an inherited Roth needs to be emptied by the beneficiary in 10 years, but that the withdrawals are tax free. Am I missing something?
The main reason i am doing Roth is to qualify for cheap/free healthcare in early retirement, on top of being in a low tax bracket. Im still a few years out, but if 60+ % of my income is roth ill qualify for free or at least heavily subsidized healthcare.
Excellent video. First time seeing your content. I'm 56 (fed accountant) and retiring this year after 30.5 years of service. Very few financial advisors address your first point of the "cost" of investing in the roth tsp meaning less income now plus paying taxing now resulting in a lower standard of living now. I plan on converting my 7 figure traditional tsp to my non-government held roth ira starting this year but I am concerned about irrma costs at 65 if I'm still make roth conversions while staying in the 24% tax bracket (may revert to the 28% tax bracket in 2026). I may have a to schedule a consultation just to ensure I have appropriate guard rails in place in my financial plan.
Great video. My wife (66) and I (67) recently FERS retired (FEB and April 2023 respectively). I called TSP and customer rep told me that we can't directly transfer / rollover TSP to ROTH IRA. If I transfer my uniform and FERS TSP to traditional IRA it will be subject to at least 20% tax withhold. My wife and I are currently in a 24% tax tax bracket. Are we subject to tax distribution (1099-R) if and when we convert / rollover traditional IRA to ROTH IRA due to increased AGI? Should we transfer our TSP to IRA and then convert/rollover to ROTH? I'm not sure it makes sense in our situation.
Hi there Im 43 i just started with the
post office i signed to the tsp im putting 15% down should i do traditional or roth right now i have it in roth.
I just turned 62 and retiring in Sept. I plan on doing conversions over the next 10-12 years before RMDs are due. I will pay the taxes out of a brokerage account I have just as you suggested in this video. Thanks for the confirmation.
I've been doing Roth conv. for several years now. The quick study says if you can stay in the 12% bracket and pay for it out of a taxable account, its a safe play. You should do that forward looking tax plan (FLTP)and see if you should be converting in even the higher brackets or not at all. You should optimize on post taxed value of your accounts instead of just looking at minimizing your total tax payments because if you pay the same rate on your tax conversion vs just taking it out as RMD you just break even – even though you will on paper save potentially millions of dollars in tax payments and that is because you already owe the government a percentage of the tax deferred account and if you just wait, that percentage grows in value just like the percentages you own. You can do your own FLTP but it is the most complicated financial analysis that I've done for myself.
I do think Roth TSP / IRAs are worth it.
I feel like we have until 2025 to convert to Roth IRAs (especially since the market is down) and benefit from the slight decrease in certain individual tax rates. Starting in 2026, tax rates revert to the pre-2018 rates, I believe.
It isn't a big change for the higher tax brackets, but everything helps.
Thank you so much for these videos. They aren't long but long enough. The information is very helpful. I like how you explain the tax planning window, basically the time where FERS and SS are primary sources of income. And then explaining about Medicare part B implications for conversions. Since my wife was out of the work force for 20 years (raised and home schooled our children) and currently works part time, our situation may be a little different than other joint high wage earners. When she turns 62 next year, she could draw her SS when I retire FERS in 1 year 7 months (I'm counting). My FERS pension plus her SS to start and supplement as needed. Later, when I'm older, I can draw SS at a much higher amount (this benefits my wife long term if I die before her). We have a lot of tax deferred retirement to draw from. I'm hesitant to do a lot of ROTH conversions, or maybe none at all. I really like keeping things simple even though it might not be the most tax efficient. Your videos help me understand all those various elements.
I used to think Roth was best for almost everyone. Lately not so sure, and your presentation has me leaning to traditional even more. I think HSA is in best interest. Paying off debt prior to retirement should be a focus. Uncertainty about future tax rules too—do they change Roth benefits? Maybe having some of each is a decent plan. I think most folks need financial and life advisers, thanks
I'm 33 this year. I opened an HSA this year. What would the best/optimal way.
Get 5% match, then max out roth ira on the side, then max out hsa, then come back to tsp?
Get 5% match, then max out hsa, then roth ira, then come back to tsp?
All tsp %'s will be roth tsp. My current salary is 56,327.