I am going to be very clear in my statement today, you need to have a Roth TSP. While I cannot give you formal or specific investment advice for your personal situation I firmly believe that the Roth TSP is the best option for everyone and I will explain my reasoning in a minute.
Here is the 2014 Tax Bracket for a Married Couple Filing Jointly, I understand that some individuals will not be in this tax bracket but the concept can be applied to any individual’s personal tax situation.
Here is a theoretical example of 3 families that contribute the 2014 maximum amount of $17,500 to the Thrift Savings plan. I have staggered their incomes in order to give multiple scenarios. Please take note that I have considered all things equal and have not taken into account any other deductions that a family might receive.
|Family A||Family B||Family C|
|Adjusted Gross Income||$22,500||$62,500||$102,500|
|Original Tax Bill||$5,092||$11,712||$21,712|
|Adjusted Tax Bill||$2,467||$8,467||$17,337|
Please take note of how traditional TSP contributions affected the amount of money saved on taxes.
Now let’s take a look at a couple facts in regards to retirement.
- Poverty for Retirement Households is considered $15,730
- The Average Income for Retirement Households is $31,742
- The Median Household Income in the United States is $53,046
Now before I go any further sit back and ask yourself realistically, “how much money can I comfortably live off of in retirement?” I do not know your personal situation but I can assure you $15,000 a year isn’t going to cut it. Perhaps $32,000 will cut it in some parts of the country but not where I live.
Taking all of these factors into consideration I created the following table to illustrate the tax liability for three different retirement households.
|Retirement Poverty||Average Retirement Income||Median Household Income|
As you can see, the money you save by deducting your TSP contributions from your taxes is minuscule once you factor in the amount of taxes you will have to pay in retirement. Look at it this way, the couple in my example above who made $120,000 a year, and contributed the maximum amount to their TSP only saved approximately $4,400. However, in retirement if they were to only withdrawal $53,000/year from their retirement accounts (less than half of what they’re use to) then they would have to pay $7,000 in taxes. It just doesn’t make sense, you should accept the tax liability now in favor of having no tax liability in retirement.
I understand that a lot of people get Traditional IRAs and Roth IRAs mixed up with the Thrift Savings Plan but please understand they are completely different. You can only contribute to a Roth IRA if your household has a combined income of $181,000 or less but there are no income limitations for the Roth TSP and that is another reason why everyone should take advantage of this opportunity.
Still not convinced?
Think about this for a moment, then reconsider…
Most people simply assume that medicare will cover their medical expenses. When in reality a lot of retirees are hit with a huge wake up call when they realize medicare doesn’t pick up all of their medical expenses. There will always be deductions, prescription costs, and other medical expenses that will eat into your retirement savings if you haven’t planned properly. These costs are simply unavoidable, Fidelity Investments has been tracking retiree health care costs for over a decade and estimates that the average healthcare costs in retirement are an eye popping $240,000 for couples. It is important that you not only have a strategic plan for your finances in retirement but one for healthcare as well.
The point and argument I am making is you know how much money you make now and can plan accordingly, in fact you could encounter an unforeseen circumstance but still recover because you have an active income. However, nobody knows what their situation will be in retirement and without an active income it will be much harder to adjust to the curve balls that life throws our way. Therefore it is wiser to forego the tax deduction now in order to have no tax liability in retirement. Because the less you pay in retirement the better.
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