Re: [TSP_Strategy] Re: S fund

 

Neither one is better than the other - it all depends on the person. If the tax rates do not change, and your income does not change, and the market returns the exact same percentage each year, then the end result is a wash. You can prove this yourself in Excel. If you don't pay the taxes up front, the taxes you would have paid compounds and you make more off those compounding gains (but pay it back later). Pay the taxes up front and you make less in the compounding gains.

The traditional is advantageous if you believe you'll make less in retirement, retire in a state with lower taxes, or if you think the tax rate will decrease. In a non-TSP Roth, the biggest advantage is being able to take your contributions (not gains) out early without penalty. However, that's not the case for the Roth TSP.

If you look at the federal tax rate, it has actually decreased since WWII (the top bracket was 94% during the war). There is also the uncertainty of additional taxes being placed on Roth withdrawals in the future. There are no plans for this, but I wouldn't rule it out as a possibility.

I chose the traditional TSP because the combined income of my wife and I places us in a high tax bracket, and I'd rather reap the benefits of a tax deduction now, and pay at a lower bracket in our retirement.

On Mon, Feb 27, 2017 at 3:45 PM, diane.seery@yahoo.com [TSP_Strategy] <TSP_Strategy@yahoogroups.com> wrote:

 

Hi Folks,  I'm having a hard time wrapping my head around how the traditional tax deferred approach is better than the Roth tax upfront approach.  For instance, suppose I invest $5,000 in the TSP now.  Assuming it grows 10x to around $50,000, isn't it better to pay tax on the original $5,000, than to pay tax on $50,000-- no matter what the tax rate?

Thanks for the input!

Diane

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Posted by: Nick Goldberg <nsgoldberg@gmail.com>

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