Not affiliated with The United States Office of Personnel Management or any government agency

Not affiliated with The United States Office of Personnel Management or any government agency

Thrift Savings Plan (TSP)

The Roth TSP by Todd Carmack

Todd Carmack talks about the Roth TSP

banner_3 Todd Carmack discusses TSP options.

Having the privilege of helping so many federal employees, it amazes me just how few people are taking advantage of the Roth Thrift Savings Plan, a simply fantastic opportunity.

The Roth Thrift Savings Plan was made available to federal employees in 2012. It differs from the Traditional TSP in that contributions to the Roth TSP are made with after-tax dollars instead of pre-tax dollars. The money grows tax-deferred, similar to a Traditional TSP; however, withdrawals from the Roth TSP come out tax-free. Distributions from a Traditional TSP are taxed as income.

We are currently in a low tax rate era based on tax rates over the last one hundred years. In my opinion, the low-tax era is unlikely to last. In the 1970’s, the highest marginal tax bracket was 70%. In 2013, the highest marginal tax bracket was 39.6%.

As a result of the staggering U.S. debt and increases to the budget for Medicare, Social Security taxes may have to increase to keep pace. In the United States, someone is turning 65 years old every seven minutes, the expenses that Medicare and Social Security must absorb will increase dramatically.

Some Tax experts like Ed Slott (CPA and author) and David Walker (former Comptroller General of the United States) predict that the tax rates will have to double or our country will go bankrupt.

What does all this mean? It means that saving now, in a Roth IRA or Roth TSP, along with using other instruments like Indexed Universal Life Insurance, which could provide for tax-free loans and withdrawals in the future, is probably a financially intelligent way to produce a tax-free income for the future. You will need to wait five years from the start date of your Roth TSP to qualify for the tax-free status for distributions but considering these are your retirement dollars it would be inappropriate to use these types of accounts for short-term liquidity needs.

There are always risks (taxes are a risk, as well as the risk of putting money away in an account that has a long-term objective) but if you are interested in having a more comfortable retirement you may want to do what you can to lower your future tax bill. You may want to consider a Roth TSP as part of that equation.

*Source: Kitchen, B. & Kap, E. (2015), Wealth Beyond Wall Street.

Other Todd Carmack Articles

Social Security for FERS Employees by Todd Carmack

Understanding The Thrift Savings Plan, By Todd Carmack

Is The Pension ‘Survivor Benefit’ Best For You? by Todd Carmack

Understanding Your FEGLI Coverage, by Todd Carmack

 

Disclosure: BWM Advisory, LLC reserves the right to edit blog entries and delete those that contain offensive or inappropriate language. Content will also be deleted that potentially violates securities laws and regulations. Different types of investments involve higher and lower levels of risk. There is no guarantee that a specific investment or strategy will be suitable or profitable for an investor’s portfolio. All investment strategies have the potential for profit or loss. Hyperlinks on this website are provided as a convenience. We cannot be held responsible for information, services or products found on websites linked to ours. BWM Advisory, LLC is registered as an investment adviser with the SEC and only conducts business in states where it is properly registered or is excluded from registration requirements. Registration is not an endorsement of the firm by securities regulators and does not mean the adviser has achieved a specific level of skill or ability.

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