Someone brought up a good point to me the other day and I'd never really considered it before. Maybe some of you more seasoned investors can shed some light on it.

I was asked to explain why the TSP is a good investment choice when the income is pre-tax and not matched like a 401. To be totally honest, I couldn't really come up with a good answer. The more I thought about it, the more I started to question why I'm dropping 15% a month in it. I'm going to get raped on the taxes when I take it out. About the only thing I could come up with was "I should be in a much lower tax bracket come time to withdraw it."

So, my question: I have 25K in cash to stash some place. I have a ROTH that I make the max contribution into every year. On top of that I put 15% into the TSP. On top of that, I still have about another $1500/month to invest after I've met my monthly obligations.

I talk to investment advisors and they tell me to go into another "target" fund. Fidelity told me, "Get rid of your TSP, transfer your ROTH to us and we'll put you in a 2035 Target fund pulling 12%." Well, that's great, however, the TSP "L" funds are pulling better than yours is!

I already have a target fund with the TSP, why would I want another? I have my ROTH with USAA. They tell me to pay for a finacial advisor at like $400/yr, or use their online software that comes up with the same three mediocre fund recommendations for my portfolio. Not to mention, some of their funds have been called "duds" by some of the more reputable "ratings companies." Wouldn't you know, one of the three funds they recommend is the same "dud" I read about online.

What's a good idea here? I'm not looking for particular stocks picks...what's the consensus for a "strategy"?

I've got 10 years left in the military, followed by a 30-year W4 retirement check, and God willing, another 20 years at a civilian job. I have an adequate emergency fund, no bills and my kids college educations are paid for. No credit card bills, no car note...my boat and truck are paid for. I'm divorced so I have no mortgage. I would imagine I will eventually have a mortgage but there are no plans in the immediate future.

My real goal is to retire for good by the time I'm 60. If I happen to amass $3 million by 55, so be it. Of course I want max return but I'm not out to be a multi-millionaire. I'd say I'm aggressive but not stupid.

a) Would you stop the TSP contributions and go elsewhere with the money?

b) If I do stop the TSP contributions, where do I go with $2000/month (other than property) to invest and my ROTH contribution is already covered? You can't have more than one ROTH, can you? If you have a ROTH, why would you want a Traditional IRA?

c) Outside of the obvious answer (property), Where's a good place to invest 25k for 25-30 years. I just want to pull a Ronco - Set it and forget it.

I'm looking long term, aggressive growth and average to above average risk. Sure, "target funds" are easy but are they GOOD in the long run?

This looks like good questions for some on the retired folks who've already had to deal with this. I appreciate the advice ahead of time. Just looking for some ideas. I realize I'm going to probably have to pay for an advisor. Just wanted to see what 'yens are doing?

quote:

I'm going to get raped on the taxes when I take it out.

Therein lies one of the problems people have with TSP. People automatically think they've going to carry a heavy burden in taxes in their retired years. Yes, the money will be taxable. And it will be offset as we age with greater tax credits for a mortgage, business ownership expenses, health and dental costs, volunteer opportunities, and other tax reductions.

Too many people look at a taxable income as a bad thing. Taxes are manageable. Putting four times as much money in a tax-deferred account results in four times as much money. And I'd rather wind up with a taxable $1,000,000 then a tax-free $250,000.

You're teaching the wrong stuff here Brian. Why in the world would someone want to defer taxes today when they are paying virtually none!

You seem to ridicule people for automatically thinking they are going to have a heavier tax burden in retirement than today, but then infer older people will have a greater tax credit...and then say taxes are manageable. Should people look at their taxes today and prognosticate what their taxes will be in the future, or should they not?

And your second paragraph made no sense. Of course putting 4 times as much money into ANY account will give you more money. And I would rather wind up with a tax free $1,000,000 than a taxable $1,000,000.

Bottom line is TSP makes no sense for most enlisted. You may save a few hundred bucks this year by investing in TSP, but it will cost you thousands in retirement. Investing this money in ROTH may cost you a few hundred bucks in taxes this year, but will save you THOUSANDS in retirement.

I thought the whole idea behind TSP and/or ROTH was to save for retirement?

This message has been edited. Last edited by: mlbdriver,

Ridicule? I've read and reread my post several times. Sounds like you're reading something that simply isn't there.

Your argument is based on a couple of assumptions. One, that military members pay "virtually" no taxes. Any data to back up that statement? Another is that TSP makes no sense for "most" enlisteds. Are you talking about seamen and firemen, or are you including those wearing anchors. (Are you saying that senior enlisteds don't pay taxes? I'm sure some folks might disagree, especially at this time of the year.)

Along those lines, I just ran into a petty officer who got a bonus of roughly $70,000. He'll be pleasantly surprised to hear that he'll be paying virtually no taxes.

Here's my thinking:

A Coastie can shelter up to $15,500 in a TSP account, and up to $45,000 in some situations.) The Roth IRA limit this year for most Coasties is $4,000. Again, I'd rather shelter nearly four times as much money, get an immediate tax break, allow my money to grow tax-deferred for decades, and deal with the taxes in the future.

While a tax-free pension is a wonderful thing, the TSP also provides tax savings NOW, as well. That's more money in the pocket TODAY. That money (however small you may think) is the member's to spend, save, invest, or blow.

Again, I'm not afraid of paying taxes. The need to avoid taxes isn't enough to make me reduce my retirement options by 75%. We control how much we withdraw that incurs a tax liability. We also control how we structure our finances. A lot of things will come into play...mortgage, health costs, operating a business, volunteering, etc. Some people even include tax rates in where they choose to retire. (Some states tax retired income, some don't. Some offer military retirees property tax breaks.) And as retirees, we get a further tax exemption for hitting 65 years of age.

In addition, TSP is easy to administer, has super low admin fees, can be continued after separation or retirement, can have other pre-tax retirement dollars added to it, and provides an easy way for even our most junior members to enroll. Most funds require a $25 or $50 minimum payment. TSP starts at 1% of base pay.

A Roth IRA has its place in a financial portfolio. But to borrow a broad brush from the Bosun Locker and use it to say that TSP makes no sense for most enlisteds is simply wrong.

"Therein lies one of the problems people have with TSP. People automatically think they've going to carry a heavy burden in taxes in their retired years."
-Your right, ridicule was the wrong word.

I'll stand by that "most" enlisted pay "virtually" no taxes. I just did a 1040 for a hypothetical E-5 w/6 years, stay at home wife with 2 kid. Makes $30,228 a year base pay. Standard deduction is 10,300. Itemized deduction is 13,200. Earned income credit is 1,321. This gives them a tax of $543. Oh, but wait, they qualify for the child tax credit....THEY WIND UP PAYING NO FEDERAL INCOME TAX! At all! None, zip, nada. That's pretty close to "virtually" none, oh wait..it is "literally" none!

So why would this person want to defer his taxation until he is in retirement, where I GUARANTEE he can't have a lower tax rate than today??

I realize this example does not cover everyone. I had wife not working, and had them with two kids. If wife works, or they have less kids, they will likely pay some taxes. But again, with the EIC they won't be paying very much. If you get a $70,000 bonus, you should take $500 of that and get financially educated (ie: hire an independent financial planner for a couple of hours) and find out how to shelter as much as you can...TSP is pretty good for sheltering. However, most enlisted don't need any additional tax savings now. Much of our income is already tax free (BAH) They will need tax savings later in life.


You talk about the amounts. I know very, very few enlisted who are saving over a thousand dollars a month toward retirement (the max of $15,500 annual into TSP). And the ones who are are senior enlisted who should probably be looking at tax breaks.

For MOST enlisted members saving for retirement, the first $4K should go into a ROTH. IF they are investing more than that for retirement, then TSP is certainly not a bad idea. YOU may be able to invest almost $16K a year for retirmenet, but that's far and away out of reach for most enlisted.

And TSP is easy to administer, has low fees, and can be continued into sep or retirement. But so is ROTH. With a $250 initial deposit many companies will open a ROTH with a small monthly direct deposit. Some of these companies' (Vanguard) fees are the same or less than what you're paying for TSP.

I'll stand by what I said. For MOST enlisted, TSP makes no sense for retirement planning. MOST enlisted pay little or no income tax, so there is absolutely no need to defer paying this tax until retirement. And MOST enlisted are not looking to put more than $4K a year into retirement savings. However for those who do want to invest more than that, they should first max out their ROTH, and then look into TSP.

For readers: Do you want an unbiased opinion? Call the USAA financial planners (if you're not already a member, you should be). They will talk with you about your personal situation and steer you in the right direction. However a word of caution. There are significantly better mutual funds (having better returns with less fees) out there than what they offer.

DO NOT GET ALL OF YOUR FINANCIAL ADVICE FROM HERE. And DON'T do the TSP just because it's EASY to do.

So....I'm maxing out my Roth, putting 15% in TSP and....I guess I'll invest this 25k in the Foreign Exchange, maybe some gold markets, and drop another $1500 into it each moneth and hope for the best.

mlbdriver...I hear what you're saying about the USAA advisors, however, in my opinion they are too fast to want to put you into their S&P 500 Funds, their Cornerstone Strategy fund and their Capital Growth fund. That's like their "IDEAL THREE". With all the info that is available on the internet, some of these funds are performing in the lower third of comparable funds.

Doing some Morningstar research, had you put $10K in the USAA Capital Growth fun in 2000, in 2006 you'd still have had $10 in that fund. Unless I can't read, that's an average return of ZERO over 6 years!!

I realize 9/11 had a a lot to do with that, as it did with the rest of the stock market, however, I have a heard time putting my money in a fund that has done pretty much nothing in the past 6 years. And guess what, I'm already in it.

Seems like you get the same "itchy trigger finger" from Fidelity and others. "Get rid of all you have and switch it over to us...stop the TSP contributions and get in our 2035 target fund." Doing some more research over the weekend, I found most ALL of Fidelity's target funds listed on the "dud list."

I guess you aren't going to get any REAL financial advise unless you pay for it. Gotta spend money to make money, I suppose.

Quarter: I agree. I LOVE USAA, but not their mutual funds. I use USAA for much of my banking and insurance, but not all of it. Two mortgages through other banks that gave me better rates, and I have a property they would not insure. I have a ROTH and other investments through two other companies. I do not invest in TSP because I pay my accountant more to DO my taxes than I pay Uncle Sam FOR my taxes.

However USAA's financial counselors are #1) Free, and #2) pretty good.

quote:

...I pay my accountant more to DO my taxes than I pay Uncle Sam FOR my taxes.

Sounds to me that you're saying your taxes are managable. Which is my point!

Brian: Well sure taxes are manageable...unless you're up against the AMT which very, very, very few enlisted face, and only if there is substantial outside income.

But using TSP is a horrible way for most enlisted to "manage" their tax burden.

Sounds like you have some "good" problems.

Good luck. I would likely keep all you're doing, and branch out into other investment vehicles as an addition to what you've already accomplished.

I'm not too familiar with them, but there are some tax-free bonds and such out there which may help. I would guess their return may not be as high as some other stock(s), but they might be a small option for diversity sake.

My best funds are with a company named Bridgeway. Too bad my account with them is a taxable account; my ROTH is elsewhere. You might take a look...

Let's not forget about capital-gains distributions and dividends. People are always talking about "taxed now, or taxed later"...but they almost never talk about all of the taxation that is saved over the decades of growth.

Sure a Roth is almost always a better bet than a TSP...but a TSP is sure better than a taxable account!

Dakotah

The idea of deferred taxes to later in life is rooted in the belief that you will be have less income at an older age, putting you in a lower tax bracket. I have been trying to read as much as I can about money for about a year now. And from my limited education. That pretty much is planning to be poor. I plan to have a higher income later. Through other investments. So If you plan to just work your 20, maybe do another job then retire. TSP all the way. But if you plan to make your money bring in more money by buying assets that are going to produce a profit. I would just buy more assets.

Forget any company like USAA or State Farm's mutual funds - there is a reason they are insurance companies first and I think it is a conflict of interest to sell your own investment company. Take your money and buy CWGIX, AEPGX, and CAIBX outright IF you are already maxed out on pre tax stuff OR just incorporate those in your ROTH. Taxes are inevitable for people who make money...

Dog: Your first part is right. Deferring taxes to later is the belief you will have less (taxable) income in older age than today. Most, if not all, junior enlisted are in the opposite situation. They make less today than when they retire.

But then you say "if you plan to just work 20, maybe do another job, then retire...TSP all the way." This is wrong! Why would you defer today's 0% tax bracket (that many junior enlisted are in), or nearly 0% tax bracket (that most of the rest of us enlisted are in) for tomorrow's higher tax bracket coming from military retirement, possible other pension from 2nd career, and then social security (if it's still around - it probably will be).

Bottom line: Each person needs to make an individual decision based on their finances. Financial planners can be huge helps in this. USAA offers free financial planning for members, however I do NOT recommend you buy into their investments. There are better and cheaper ones out there.

ChFA: Great advice on the conflict of interest. The rest if your advice is too narrow. Different people are in different places in their lives.

mlbdriver,

Are these people going to be "junior" enlisted the whole time that they're in the Coast Guard/Military? Or are they going to advance, get promoted, and accrue assets as they progress in the Military?

Everyone else,

I would use all available sources. Property is not the panacea that most people think; you'll do better in the stock market. The best advice I hear is talk with someone, a knowledgeable person, on your future and where you want to be.

If your looking at retirement at a poverty level then listen to some of these people, if you, like myself, want to be rich and do what you want, travel, play, and have fun; then you will pay taxes. Taxes are what rich people pay, the top 25% of wage earners pay 83% of the federal taxes, that’s people who after deductions make over $91,000.00 dollars a year. Take what you want from the figures, it’s all at the IRS web site.

At this point in your life enjoy the fruits of your labor and save, invest and above else plan, have a plan, because most don't see the future past the next paycheck. Because when it’s all said and done, our junior enlisted need a easy vehicle to amass wealth that after they have been in long enough that they can then, if they want can move that accumulated wealth to better vehicles for their wealth, because when it’s all put together it’s about the money and peace of mind you’ll have after your ready to retire.

Only you can decide your future. Preba Hao!!

Of course not. But they are often the ones who, being young, need accurate advice. Not the quick and easy "visit your YN and sign up for TSP."

However many senior enlisted would also receive better benefit from ROTH than TSP...all depends on their individual situation.

Just reading this post has helped answer a lot of questions I knew I had but didn't even know how to ask...... I think the best option for me as an E-5 married with two kids is to invest in my ROTH now and add a TSP later in my career when I will probably want a tax break...I pay 0 federal taxes on my returns now, so I could throw on a thousand more tax breaks and they would just hit the bottom of the barrel....seems to be a better option to use that when you need them help empty that barrel to begin with.

I've read all your comments and concur with most of what you all are saying. My concern for my junior personnel is getting them to start saving for later in life. Most can't afford to max out a IRA/Roth, or whatever during a FY. The few Roths/IRA's that I checked out prior to signing up for TSP wanted $500 to get it started, and frankly, back then I didn't have an extra $500 to get it started. TSP although not perfect, was rated the top 401K investment plan by I believe Newsweek back in April 2003???(I saw this in a Doctors office so memory is kind of sketchy). The ROTH that I started back in 2003/2004 hasn't done nearly as well as my TSP for growth in the last couple of years.
I agree that we need to educate our junior members, and that the sooner that start saving the better. I just wish that TSP had been around when I first started, and then my ex wouldn't have had such an easy time walking off with all my wonderful savings bonds. Just my 2 cents.

Konan: You're absolutely right, the most important thing is to START SAVING. Everyone should, AT FIRST, have a few months pay saved up in an emergency savings. This is not investing, this is a basic life skill that many folks don't have. This is the FIRST thing folks should do, BEFORE they start ANY investing.

Once they have a good emergency savings, then it will be no problem to take $500 from that to start a ROTH.

TSP rated as a top 401k investment by newsweek? The first question I have about that statement is what were the criteria for the rating?

Also, your ROTH not doing as well as your TSP has nothing to do with the type of account it is (ROTH vs TSP). It has EVERYTHING to do with expenses and the investment strategy within the account (Index, Large Cap, Small Cap, etc).

You can have two ROTH accounts with different companies with different investment strategies. One may skyrocket, the other may dump. This has nothing to do with the ROTH portion of the account.

And last, if you had your TSP in savings bonds the judge still could have made you give half to your ex.

Good luck!

This info is very interesting to me.


T.Rowe.Price's CAPITAL APPRECIATION mutual fund is the U.S.'s ONLY mutual fund to return for 16years running.

I'm seriously considering withdrawing all of my money from TSP and putting it into T.Rowe.Price mutual funds.

On some of their funds, HUUUUUUUUUUUUUUUGE return, minimum risk.