Welcome to Fall – an absolutely gorgeous time here in the Carolinas, full of Friends, Football, and Pumpkin Pie! October marks a great time of the year to slow down and take a trip to the mountains if you can. It’s also a good time for us to brew-up a hot cup of pumpkin spiced-latte (don’t tell anyone I drink those), dig into some delicious chocolate-chip-pumpkin cookies and throw on a layer of financial armor. This month we provide some valuable guidance on how differently your TSP may be taxed, depending on the type of account you have. Get after it and ensure that you are taking steps to plan for taxes!
But first get those Chocolate-Chip-Pumpkin Cookies in the oven:
(Courtesy of: Heather Moller)
Meanwhile, if you know other Federal Agents or Front-Liners that face financial pain points, feel free to pass this on – we’re all in the Battle for Financial Independence together!
CXO Question of the Month:
Tucker, CXO, Chief Experience Officer
Relax. Close your eyes. And ponder this…
What’s an easy way to think about the difference in taxes for a Traditional TSP vs. a Roth TSP?
Answer: I’ll show you by way of an example. Let’s say you are in the 24% income tax bracket. Assuming no early withdrawal penalties, what are the taxes owed or saved if you:
a. Contribute $2,000 to a Traditional TSP (or 401(k) plan)?
Generally speaking, if you contributed $2,000 to a Traditional TSP, the $2,000 would reduce the taxable income for the current year. Thus, you would save $480 ($2,000 x 24%) in taxes in the current year. All else being equal, the Traditional TSP would grow tax-deferred and then you would make withdrawals later in retirement. During that retirement, the withdrawals would be taxed at your ordinary income tax rates (same rates that apply to say, your paycheck). Now we always want to pay taxes…spoiler alert…when rates are lowest. So if you selected the Traditional TSP then you’re hoping that it is your future tax rate that is lower…because again, it will be in retirement that Uncle Sam comes knocking.
b. Contribute $2,000 to a Roth TSP
Generally speaking, if you contributed $2,000 to a Roth TSP, the $2,000 would be taxed in the current year. Thus, you would owe $480 ($2,000 x 24%) in taxes in the current year. All else being equal, the Roth TSP would grow tax-free and then you would make withdrawals later in retirement. During that retirement, the withdrawals would be tax-free for you. Again, the goal is to always pay taxes when our tax rates are the lowest. So if you selected the Roth TSP then you’re hoping that it is your current tax rate that is lower…because this is when Uncle Sam will want his money.
By educating yourself on the difference in how the TSP can be taxed, you’re building your financial armor such that you can make better money decisions today – You’ve got this!
In Other News:
Check out our new profiles, as we are very grateful to be in partnership with the following:
- Certified Financial Planner Board of Standards, Inc.: Profile
- XY Planning Network: Profile
- National Association of Personal Financial Advisors: Profile
This month we also introduce our new custodian – Charles Schwab. We’ve added them to the team – and it’s a win-win for all of us!
With our new partnership we are able to open and manage various investment accounts that are most needed by our Federal Agents and Front-Liners:
- Money Market Funds (for cash storage!)
- Taxable Brokerage accounts (for short or long term goals!)
- Traditional & Roth IRAs (retirement savings beyond your TSP!)
- Trust accounts (one of our favorites!)
May you have a safe, spooky and adventurous October with family and friends! Have some pumpkin-spiced lattes while building your financial armor and jump in a pile of leaves or two with the dog. Take some time to be grateful for your blessings and don’t hesitate to do a “10-4 check” on a friend. Cheers!
