ROTH TSP vs Traditional TSP - Which is Better?

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The over-simplified explanation I have always received for why you should choose to invest in either traditional or ROTH accounts has always been if you have a high marginal tax rate now and will have a low marginal tax rate in the future: go traditional. If you have a low marginal tax rate now and will have a high marginal tax rate in the future: go ROTH.

I never liked this explanation and did the math in this video to control for as many retirement variables as I could to fully understand the mathematical difference between the two accounts.

My conclusion comes down pretty hard against the traditional TSP. With all things held constant, ROTH encourages people to save more and it guarantees tax free income after the age of 60. There is no downside. Anyone who earns less than $50,000 a year shouldn't be paying more than 11% in federal income tax. If they succeed in growing a TSP retirement account in to the millions, then they will even with a conservative withdraw rate will be paying a marginal tax rate on that income in the 20% range.

In addition, wise and active planners/investors in their retirement SHOULD have multiple streams of income to allow them to retire in comfort (and hopefully as a millionaire). In retirement people could have a brokerage account, traditional or ROTH individual retirement accounts (IRAs), social security, rental income off owned properties, a part-time job or own a small business. Guaranteeing your government TSP as tax-free income in retirement should be a no-brainer.

There are a couple reasons why I could see someone wanting to invest in traditional now. They might be a high income earner now (over $100,000) and they want the tax savings so they can be more aggressive in their investing in other areas (brokerage account or real estate). Another reason is if someone is in a lot of debt or experiencing financial hardship and they need the tax savings today to better gain control over their finances.

The last reason why people might prefer traditional is that they do not expect to have a lot of money in retirement. They plan to have no other accounts, investments, or income sources beyond their TSP and Social Security and they know with their minimal withdrawals their annual income will never exceed $50,000 a year and they can stay in that low 11% tax income bracket. This feels like a bad retirement plan, but this is honestly what a majority of Americans do.

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#ROTHTSP #TraditionalTSP #ROTHvsTraditionalTSP
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Видео ROTH TSP vs Traditional TSP - Which is Better? канала Jake Broe