Below is the link to the Roth-Traditional Comparison that we discussed in January 2013.
https://groups.yahoo.com/neo/groups/TSP_Strategy/conversations/topics/24742
The major take-away for me was that - IF you invest the extra money you have with a traditional TSP due to not paying taxes, you will end up with more.
In the thread, Sarah had a good summary.
If your tax rate is the same or lower when you retire, a traditional TSP
would likely be most beneficial. If your tax rate is considerably
higher when you retire, the Roth would likely be most beneficial
Non-Roth earnings are taxable when you withdraw them.
Roth earnings are taxable prior to investing them.
If you don't need the money now, you invest it now.
With a non-Roth, you can invest more now than you could with a Roth, and
consequently, should have more when you retire.
Sarah's example, using the Roth TSP calculator.
Allen Green followed up my April 2014 reposting of this info with additional resources:
https://groups.yahoo.com/neo/
The major take-away for me was that - IF you invest the extra money you have with a traditional TSP due to not paying taxes, you will end up with more.
In the thread, Sarah had a good summary.
If your tax rate is the same or lower when you retire, a traditional TSP
would likely be most beneficial. If your tax rate is considerably
higher when you retire, the Roth would likely be most beneficial
Non-Roth earnings are taxable when you withdraw them.
Roth earnings are taxable prior to investing them.
If you don't need the money now, you invest it now.
With a non-Roth, you can invest more now than you could with a Roth, and
consequently, should have more when you retire.
Sarah's example, using the Roth TSP calculator.
Let's say you'll retire in 30 years,
and expect to spend 20 years in retirement.
Let's say you contribute 20% of your salary and your current household
tax rate is 22%.
Let's say you expect a 7% return per year and expect your retirement tax
rate to be 22%.
and expect to spend 20 years in retirement.
Let's say you contribute 20% of your salary and your current household
tax rate is 22%.
Let's say you expect a 7% return per year and expect your retirement tax
rate to be 22%.
Under the Roth, you'll accumulate about $800,000.
Under the Traditional, you'll accumulate about $1,000,000.
Under the Traditional, you'll accumulate about $1,000,000.
--
I did the following analysis:
I've made an assumption that a person with a $60K salary would contribute $3K (5%) under the Roth option and contribute $3.6K (6%) under the Traditional option (thus contributing the money the Roth person uses for 20% taxes now). I used the TSP.gov calculator and unchecked equal paycheck impact.
I used the TSP Center calculator, as I needed the Indiv and Govt contributions totals - to be able to estimate the total tax obligation. I entered a hire age of 30 and retirement age of 70. I left the default of a 2.5% raise in salary each year (not realistic in these times). Even though tax brackets would increase thru the 40 years, I calculated taxes at 3 levels (15%, 20%, 25%) for the entire indiv contribution, govt contribution, and gain for each scenario and assumed tax rate was the same pre- and post-retirement.
In my scenario, the Roth person has accumulated $1,169,229 and the Traditional person has accumulated $1,286,152, so the Traditional person has approximately $78K more (after paying the 20% tax on the extra accumulation).
Under all three tax levels, the Traditional person ends up paying more taxes on their accumulation than the difference in the accumulations. Using 20% tax as the example, the traditional person pays approx $257K tax whereas the Roth person pays approx $84K tax.
Trad Trad Tax Roth Roth Tax
Indiv Contrib $252,315 $50,463 $210,265 $42,053
Govt Contrib $210,265 $42,053 $210,265 $42,053
Gain $823,672 $164,714.40 $748,699 $0
Total $462,576 $257,230.40 $420,524 $84,106
Contrib Tax Contrib Tax
Accumulation $1,286,152 $1,169,229
Accum - Tax $1,028,922 $1,085,123
Roth has $56,201.40 more after taxes
Sara Wetherbee followed up with a correction:
One possible miscalculation in the example could be in the amount of the contribution. With contribution numbers chosen, the traditional saver is taxed on income of $56,400 while the Roth saver is taxed on income of $60,000. The traditional saver would have 20% of $3,600, or $720 more dollars to invest annually; rather than the $360, (.036*60000) - (.03*60000), that was assumed and plugged in. If $360 annually ($30 monthly) is compounded at 7% for 40 years the traditional investor gets an additional $78,744.40.
---
So, if you get 7% on that extra money, the trad person has approx $22.5k more.
If only 5%, the two are likely very close, but the traditional person has more control of their money early (good) and pays more taxes during retirement (could be good or bad).
Sara, my use of $3,600 was to make the two equivalent. The Roth person pays $600 on the $3,000 contribution at 20%.
It's hard to make them equal - due to tax differences. As you indicate, that $600 is really worth $720 in savings to the trad person - plus the difference in state taxes, assuming the state uses federal taxable.
I'm still concerned that eventually the laws will change, but that's nothing anyone can control.
Allen Green followed up my April 2014 reposting of this info with additional resources:
One good resource to use for your taxes is the IRS withholding
calculator on the IRS website.
http://apps.irs.gov/app/withholdingcalculator/
Also, below is the info for the saver's credit. It can only be used to
offset taxes due, but it is still a great tool to cut down on taxes.
http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-Retirement-Savings-Contributions-Credit-%28Saver%E2%80%99s-Credit%29
calculator on the IRS website.
http://apps.irs.gov/app/
Also, below is the info for the saver's credit. It can only be used to
offset taxes due, but it is still a great tool to cut down on taxes.
http://www.irs.gov/Retirement-
-- Cindy King
On Mon, Feb 27, 2017 at 9:15 PM, 69kram@cox.net [TSP_Strategy] <TSP_Strategy@yahoogroups.com> wrote:
Here is an interesting look at it http://www.financialsamurai.
com/disadvantages-of-the-roth- ira-not-all-is-what-it-seems/
__._,_.___
Posted by: Cindy King <cindy.kingde@gmail.com>
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