Not sure what to do?

[FIREoneDay]

Hi,

I am starting a new job and I will have access to Thrift Savings Account.  I am not sure which one to pick: Traditional or Roth TSP?  I would like to retire in 10 years but I heard that you can not take out the funds until 59 1/2?  I am having a hard time figuring out which is better?  Any advise would be appreciated.

-FIREoneDay

[Jenn]

1- you can draw out the IRA over your life expectancy if you need it for retirement prior to 59.5

2- you gotta guess if your tax rate putting into the IRA will be higher or lower than taking out of it. I am not certain for us- if our retirement savings expands a great deal or if taxes rise we might have a higher tax rate when withdrawing than when putting in to our IRAs. So we are aiming for about half and half, and any time our tax rate is a lot lower (out of work most of that year etc.) we definitely do Roth and Roth conversions since still not at 50-50. Also told my daughter at new job to do Roth- this year she starts income in August so lowest rate she'll have for a few years- maybe change from Roth when her income rises and tax rate as well.

[jfoxcpacfp]

FIREoneDay wrote:

Hi,

I am starting a new job and I will have access to Thrift Savings Account.  I am not sure which one to pick: Traditional or Roth TSP?  I would like to retire in 10 years but I heard that you can not take out the funds until 59 1/2?  I am having a hard time figuring out which is better?  Any advise would be appreciated.

-FIREoneDay

Click to expand...

Jenn is correct - you can arrange no-penalty distributions from your retirement account using what is called a Series of Substantially Equal Payments, or SEPP, under IRS code section 72t. Regarding her point 2, there is no way to know with any certainty based upon taxes whether to contribute pre- or post-tax to your TSP. Having a financial plan that incorporates not only taxes but real goals is the way to solve this problem.

If you are expecting to retire in 10 years and don't know whether to go Roth or pre-tax, strongly suggest you consider talking to a fee-only financial planner. You should be getting a lot more advice than what this question entails.

In the event you prefer to DIY, I recommend you read The One Page Financial Plan by Carl Richards.

[FIREoneDay]

Thank you for the responses!  They were both helpful!  I will check out the book 'The One Page Financial Plan'  What I am trying to figure out is, just say I did retire in 10 years, if I had a traditional TSP, would it be taxed on what my tax bracket was when I was earning or when I retire?  For a doctor who wants to retire earlier, is Roth or Traditional a better option?  I am trying to make sense of how Roth and Traditional TSP works.

[jfoxcpacfp]

FIREoneDay wrote:

Thank you for the responses!  They were both helpful!  I will check out the book ‘The One Page Financial Plan’  What I am trying to figure out is, just say I did retire in 10 years, if I had a traditional TSP, would it be taxed on what my tax bracket was when I was earning or when I retire?  For a doctor who wants to retire earlier, is Roth or Traditional a better option?  I am trying to make sense of how Roth and Traditional TSP works.

Click to expand...

You will be taxed on the TSP as you withdraw it, i.e. at your marginal tax bracket in the year you withdraw.

I cannot comment on the preferability of one over the other as it truly does depend upon your short- and long-term goals, along with your other resources, family plans, etc.

A Roth IRA is a personal retirement account. A TSP is an employee retirement account. The contribution limits of each are not impacted by what you contribute to the other.

[RetiredERdoc]

One option is to do some of both. I retired with a mix of taxable, tax deferred and tax free accounts, and that gives me many options on how to fund my expenses. That way, you have tax diversification. Also, if you are in a lower tax bracket, you could do roth conversions on some of the money before you start collecting social security.

[PhysicianOnFIRE]

FIREoneDay wrote:

Hi,

I am starting a new job and I will have access to Thrift Savings Account.  I am not sure which one to pick: Traditional or Roth TSP?  I would like to retire in 10 years but I heard that you can not take out the funds until 59 1/2?  I am having a hard time figuring out which is better?  Any advise would be appreciated.

-FIREoneDay

Click to expand...

If you are planning to retire in 10 years, and are currently in a high marginal tax bracket, you will almost certainly be in a lower marginal tax bracket as an early retiree. Your goal should be to defer as much tax as possible. Fill up all the tax-deferred space available. The only Roth should be a backdoor Roth.

It's quite possible to have six figures in spending money while paying ZERO federal income tax. And yes, you can access your retirement funds early. A Roth conversion ladder could be a possibility if you haven't saved up a large taxable account to draw from.

Best,

Physician on FIRE