Mortgage Payoff – Traditional v. Roth

THE THRIFT SAVINGS PLAN ALLOCATION GUIDE Forums Message Board Mortgage Payoff – Traditional v. Roth

This topic contains 3 replies, has 3 voices, and was last updated by  Joe Warner 4 years ago.

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  • #15401

    tootnturk
    Participant

    I’m a 30-year employee who would like to retire in 5-years and have my mortgage paid off. To date I’ve only invested in traditional TSP but wonder whether it may be better to invest in Roth for 5-years, use the Roth funds to pay off the mortgage, and to not have to pay taxes upon withdrawl.

    #15449

    DanDan

    This is my opinion, I’m no TSPallocation guru, but I’m answering. Hey, it’s suppose to be a message board with conversation exchanging thoughts…..right?

    There are a few things to consider in my opinion. 1st and most important would be what age you will be because you will need to be at least 59½ to take a ONE time partial withdrawal. https://www.tsp.gov/PDF/formspubs/tspbk02.pdf
    “Partial Withdrawal
    You are eligible to make a one-time-only withdrawal of
    part of your TSP account so long as you did not make
    an age-based in-service withdrawal (at age 59½ or older)
    and your Roth balances differently. The allocation you
    choose when you request your interfund transfer will
    apply to both your traditional (non-Roth) and your Roth
    balances pro rata (i.e., proportionally ” (Pg 4……really 6 in PDF format)

    The next thing is to leave your money in TSP or not because TSP will take out Traditional and Roth proportionately. I personally believe I would rather pay taxes now (Roth) so you wouldn’t have to pay taxes later. I saw the math, it looked sound, so I plugged in some other numbers to convince myself and it seemed true, Roth and Traditional do end in the same result ceteris paribus. I believe the odds of taxes going up in the future are likely though and if I stick with Traditional only then I would be paying a higher rate. I do both Traditional and Roth though because I dunno about what tax bracket I’ll be in later in life; chances are it will not change. When I’m retired though, will I be making more money being retired with TSP withdrawals? Probably not, but I do like the peace of mind with Roth so I can take the money out tax free if I meet the requirements.

    This may be a question for a financial adviser though because only taking out the Roth portion you would need to swing it over in a Roth IRA (I think) since you can’t say “I only want Roth funds” on your one partial withdrawal. I’m sure there are some courses when you are close to retirement that can answer your questions with authority; they certainly have more knowledge than myself about the subject for sure.

    I may be crazy (No confirmation needed 😉 ), but I plan to take out my Roth portion when I reach 30 years in the govt. I believe this is my one time partial withdrawal, or maybe when I meet that 59½ age I will be allowed to take out the Roth portion? Wishful thinking??? Questions upon questions, it is my understanding you would need to transfer to an IRA, but if I transfer to an IRA am I allowed to immediately take a good portion/all of my money from the Roth IRA? Why would that fiscal institution allow the IRA to only have you take the money out for a payment? Are you required to leave that money alone “x” amount of years, maybe take x amount of money per year, or pay a fine? I assume they take 10% for allowing this maybe…a processing fee….or maybe they don’t allow the action? Or maybe if you already have a Roth IRA you can transfer to this existing IRA and take it out tax free with no hassle? Contact a financial adviser for this one, that is what I’ll do approximately 2-3 years before I retire……..that’s what I tell myself now because I despise financial advisers. Wrong or right they get paid because over the long haul they “should” be right. I am a hater, but I am more of a buy and hold kind of guy. I was drawn to this site because of these “indicators” being identified of when you need to pull out of risky investments. Maybe I can use this as an indicator when to jump ship? You always find an edge when you can…..isn’t that right Brady? Hate Hate Hate!!! Haters gonna Hate 😉

    #15580

    TS Paul
    Keymaster

    I can always count on DanDan to give my reading comprehension a solid workout. 🙂

    I am still so far from making withdrawals that I am definitely not an expert in those rules. I always go to Dan Jamison and his guide for an explanation on distributions.

    As far as tax consequences go, if you are planning to stop working when you retire, you are probably better off keeping it in the Traditional TSP. If you plan to land a big money private sector job which will move you into a higher tax bracket, the Roth TSP might be the way to go.

    The TSP Allocation Guide www.TSPallocation.com

    #17276

    Joe Warner

    I think the first question to answer is whether it is better to payoff the mortgage right away or keep it as is.

    If your mortgage rate after marginal tax considerations are calculated is above about 4.5% then you may want to payoff the mortgage as that give you a consistent equivalent return. If it below that you may like to keep the money invested and pay it off of the capital gains. Hopefully that will give you a good positive gain.

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