maxing out tsp investments

THE THRIFT SAVINGS PLAN ALLOCATION GUIDE Forums Message Board maxing out tsp investments

This topic contains 6 replies, has 2 voices, and was last updated by  TS Paul 5 years, 2 months ago.

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  • #11968

    claude moore

    I believe the max contribution to the TSP is 17,500 for the year. Is it worth maxing out ones contributions if possible or would you recommend other investments, saving $$ for a house, etc.? Just curious.

    #11970

    TS Paul
    Keymaster

    I suppose that everyone’s situation is a little bit different, but I have been a big believer in maxing out tax advantaged accounts – whether that is your Thrift Savings Plan, or a traditional or Roth IRA.

    I can’t overstate the advantage of the tax advantaged accounts – either deferring taxes for decades into the future in the TSP or a traditional IRA, or having gains grow tax free forever in a Roth. But once a year is past, the opportunity to make those contributions is gone forever so I believe it is best to take full advantage as early as you can.

    Until I was maxed out in both my TSP and IRAs, I did not have any other types of investments. The reason for that is there was nothing I was saving for during that period besides the down payment for a house. (During that period, I only needed to put 5% down, so that was not going to be a great deal of money anyhow.)

    If your goal is to save for a house, remember that you can tap into those tax advantaged accounts fairly easily. You can borrow from your TSP and pay the interest to yourself, or you can make withdrawals from IRAs for the purchase of a home. (Rules for withdrawals vary depending on the type of IRA and whether or not you are a first time home buyer – a quick Google search will get you all those details).

    Thanks for the great question, and good luck.

    The TSP Allocation Guide www.TSPallocation.com

    #12154

    claude moore

    I had a follow up question. Can one contribute to both the TSP and a non-Roth IRA? I’m assuming not, b/c TSPs and IRAs are run through one’s employer, and as a Fed, the TSP is what you get.

    Second, after maxing out a TSP, you suggested investing through a Roth-IRA. This makes sense to me, but here’s my question–the Roth IRA limit is 5,500. Let’s say after maxing out my TSP, I still had more than 5,500 to invest. How would you allocate what to put in the Roth IRA? E.g., let’s suppose I’m thinking about buying a Vanguard bond index fund or an index fund that tracks the stock market–would it make more sense to put the bond fund in a Roth IRA as opposed to the stock fund or vice-versa or no difference?

    Thanks
    C

    #12330

    TS Paul
    Keymaster

    On the first issue, you may be confusing IRAs with 401Ks. In addition to your Thrift Savings Plan contributions, you may also contribute up to $5,500 to either a Traditional or Roth IRA each year (although depending on your income level, those contributions may not be tax deductible and/or you may have to jump through a few hoops).

    Assuming you currently have both stock and bond funds, which should be in a tax-advantaged account? It boils down to how far you are from retirement. Studies show that typically if you are 15 years or more from retiring, it might make more sense to hold stocks in your IRA. Whereas if you are relatively close to retiring, you are probably better off putting the bond funds in your IRA.

    Conventional wisdom is investors should hold bonds (except for municipal bonds) in tax-protected IRAs and stocks in their taxable accounts. Intuitively, that makes sense because the interest paid on bonds is taxed annually as ordinary income. Meanwhile, stocks typically generate much less income, and that dividend income is taxed at a much lower rate – generally 15%. Long-term capital gains from stocks typically will be taxed at that 15% rate as well.

    However, stocks generally produce higher returns than bonds, and due to the magic of compounding, the differences in performance really add up over an extended period time. As a result, the return from stocks can generate a much higher tax burden than bonds over the long term.

    All the typical disclaimers apply – I am not a tax expert (not even close), so this is just my understanding based on the limited research I have done on this subject.

    The TSP Allocation Guide www.TSPallocation.com

    #12349

    claude moore

    no worries on not being a tax expert; your thinking is always insightful. just curious–any recommendations for financial planners for a mid-career fed employee in the VA area?

    #12407

    TS Paul
    Keymaster

    Sorry, I don’t have anyone I can recommend. Surely one of the hundreds of folks who browse this page each week must have one they are happy with and will post their contact info for you though.

    The TSP Allocation Guide www.TSPallocation.com

    #12408

    TS Paul
    Keymaster

    Sorry, I don’t have anyone I can recommend. Surely one of the hundreds of folks who browse this page each week must have one they are happy with and will post their contact info for you though.

    The TSP Allocation Guide www.TSPallocation.com

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