Traditional v. Roth...
This is the age old question that one must ask themselves when setting up a retirement account. And while this is focused on the Thrift Savings Plan (TSP), this post will assist in answering the question for an Individual Retirement Account (IRA).
And why the hell are there two types to begin with? Well, it's simple -- taxes. It's all about taxes.
Traditional
Simply: Money goes in untaxed, but is taxed when you withdraw it at retirement.
Roth
Simply: Money goes in after taxes are taken out, but can be withdrawn tax-free at retirement.
Which one do I need?
Well, that can be a difficult decision because we must be able to forecast the future...and man, as a Meteorologist, I know this can be quite hard. What do I mean?
The forecasting we need to do is based on what we think our tax bracket will be when we are in retirement.
Will I be in a Higher Tax Bracket in Retirement than I am now? Yes? Then you want a Roth.
Will I be in a Lower Tax Bracket in Retirement than I am now? Yes? Then you want a Traditional.
What Ranks Need to Worry About, Which Type?
Disclaimer: This is not financial advice; please discuss with a tax professional. These are heavily assumed, averaged, and ballpark figures.
One of the large assumptions is based on your Marginal Tax Rate. The general advice is if you are under a 25% Marginal Tax Rate -- Roth. If you are in between 25-30%, then a mixture. If you are over 30%, then Traditional. The Marginal Tax Rate is also composed of multiple variables. I am going to go with the worst-case scenario here and assume a single member with zero kids (marriage and kiddos can give tax benefits).
Keep in mind that, for the TSP, it will open both a Traditional and a Roth for every account. Your match will go into the Traditional since it goes in pre-tax, and what you contribute should go into whatever, based on the tables below. If you need to contribute to both Traditional and Roth, and say you contribute 5% total to TSP, 2.5% will go to Traditional and 2.5% will go to Roth. You set up those allocations in myPay.
Officers
rank | Roth | traditional |
|---|---|---|
O-1 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
O-2 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
O-3 | Only Focus on Roth TSP/IRA up until Year 8 | After Year 8, Contribute to both Traditional & Roth (50/50) |
O-4 | Only Focus on Roth TSP/IRA up until Year 3 | After Year 3, Contribute to both Traditional & Roth (50/50) |
O-5 | Contribute to both Traditional & Roth (50/50) | Contribute to both Traditional & Roth (50/50) |
O-6 | Contribute to both Traditional & Roth (50/50) up until Year 26 | Contribute to all Traditional after Year 26 |
O-7 | Contribute to both Traditional & Roth (50/50) up until Year 16 | Contribute to all Traditional after Year 16 |
O-8 | Contribute to both Traditional & Roth (50/50) up until Year 4 (whoever the fuck that is) | Contribute to all Traditional after Year 4 |
I hope you have it all figured out past O-6; if not, please reach out, and we will work through it!
Prior Enlisted Officers
rank | Roth | traditional |
|---|---|---|
O-1E | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
O-2E | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
O-3E | Only Focus on Roth TSP/IRA up until Year 6 | After Year 6, Contribute to both Traditional & Roth (50/50) |
Warrants
rank | Roth | traditional |
|---|---|---|
W-1 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
W-2 | Only Focus on Roth TSP/IRA up until Year 24 | After 24 Years, Contribute to both Traditional & Roth (50/50) |
W-3 | Only Focus on Roth TSP/IRA up until Year 16 | After Year 16, Contribute to both Traditional & Roth (50/50) |
W-4 | Only Focus on Roth TSP/IRA up until Year 12 | After Year 12, Contribute to both Traditional & Roth (50/50) |
W-5 | Contribute to both Traditional & Roth (50/50) | Contribute to both Traditional & Roth (50/50) |
Enlisted
rank | Roth | traditional |
|---|---|---|
E-1 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
E-2 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
E-3 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
E-4 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
E-5 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
E-6 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
E-7 | Only Focus on Contributing to Roth TSP/IRA | No Need for a Traditional at this Time |
E-8 | Only Focus on Roth TSP/IRA up until Year 26 | After Year 26, Contribute to both Traditional & Roth (50/50) |
E-9 | Only Focus on Roth TSP/IRA up until Year 18 | After Year 18, Contribute to both Traditional & Roth (50/50) |
I hope this gives you some clarity on the direction that you need to go with your retirement accounts. Again, everyone's situation is different, so this information here is very generalized. If you feel you do not fit the situation outlined, please speak to a tax professional!
