Author: Joel Schofer, MD, MBA, CPE
Step 5 to Crush the TSP – Roth vs Traditional
We’ve talked about steps 1-4 to crush the Thrift Savings Plan (TSP). Now we’re on to step 5, deciding between the Roth vs traditional TSP. Let’s take a look at the difference between the two and help you to decide which is the right choice for you.
The Traditional TSP
The traditional TSP is the first of two potential tax treatments for your TSP contributions. If you elect it, you defer paying taxes on your contributions and their earnings until you withdraw them. This is the only option for any money you get as a result of the 5% government match in the new Blended Retirement System (BRS).
If you are in a combat zone making tax-free contributions, your contributions will be tax-free at withdrawal but your earnings will be subject to tax.
The Roth TSP
The Roth TSP is the second of two potential tax treatments for your TSP contributions. If you contribute to it, you pay taxes on your contributions now and your earnings are tax-free at withdrawal.
The Roth TSP is similar to a Roth 401(k) that a civilian would have, not a Roth IRA. There are no income limits for Roth TSP contributions. You can contribute to both your Roth TSP and a Roth IRA without contributions to one affecting how much you can contribute to the other. For example, in 2019 you can contribute the full $19,000 to your Roth TSP and $6,000 to your Roth IRA.
Which One is Best for You?
Here’s a table that compares the two options from the TSP website:
| The Treatment of… | Traditional TSP | Roth TSP |
|---|---|---|
| Contributions | Pre-tax | After-tax1 |
| Your Paycheck | Taxes are deferred*, so less money is taken out of your paycheck. | Taxes are paid up front*, so more money comes out of your paycheck. |
| Transfers In | Transfers allowed from eligible employer plans and traditional IRAs | Transfers allowed from Roth 401(k)s, Roth 403(b)s, and Roth 457(b)s |
| Transfers Out | Transfers allowed to eligible employer plans, traditional IRAs, and Roth IRAs2 | Transfers allowed to Roth 401(k)s, Roth 403(b)s, Roth 457(b)s, and Roth IRAs3 |
| Withdrawals | Taxable when withdrawn | Tax-free earnings if five years have passed since January 1 of the year you made your first Roth contribution, AND you are age 59½ or older, permanently disabled, or deceased |
* If you are a member of the uniformed services receiving tax-exempt pay (i.e., pay that is subject to the combat zone tax exclusion), your contributions from that pay will also be tax-exempt.
1. Roth contributions are subject to Federal (and, where applicable, state and local) income taxes, while traditional contributions are not taxed until withdrawn. However, both Roth contributions and traditional contributions are included in the amount of wages used to calculate payroll taxes (e.g., Social Security taxes).
2. You would have to pay taxes on any pre-tax amount transferred to a Roth IRA.
3. Transfers to a Roth IRA from a Roth TSP are not subject to the income restrictions that apply to Roth IRA contributions.
The issue of whether Roth is a good option for you was discussed in this TSP Highlights called Is Roth For You?
If you are more of a visual learner, you might enjoy this video from the TSP called “Is Roth Right for Me?”
If you like interactive calculators, this one from Betterment is pretty good.
If you don’t trust anything I say and want to read what someone else thinks, I don’t blame you. Here’s a good article from Money.
The decision really boils down to whether you’d like to pay taxes now (Roth) or later (traditional) and how your current tax rate compares to your likely future tax rate during retirement. While predicting the future is not easy, if you are young or early in your career, your earnings and tax rate are likely to rise in the future, so you should probably lean toward the Roth option. If you are in your peak earning years and you expect your tax rate to fall in retirement, you should probably lean toward the traditional and defer taxes to a future date.
If you are not sure which option to choose, many people recommend you diversify your retirement accounts and simply split the Roth and traditional 50/50. That way in the future you’ll have options depending on how future tax rates and your financial situation changes.
What do I do? I can afford the taxes now and want as much tax-free money available to me as I can get, so I put all the money in the Roth TSP that I can. That said, the first part of my career I didn’t have a Roth option, so a large percentage of my TSP balance is in the traditional TSP as well, so I’m about 50/50 split between the two options.
Some Rules to Be Aware Of
The TSP keeps your traditional and Roth money in separate “buckets” in your TSP account.
You cannot convert any portion of your existing traditional TSP balance to a Roth balance.
You can make both traditional and Roth contributions if you want. You can contribute in any percentages or amounts you choose and can change your election at any time.
If you are getting government contributions (perhaps because you are in the Blended Retirement System), they are deposited into your traditional TSP. You can put your portion in the Roth, but the government’s portion must go in the traditional.
The Bottom Line
Use the resources above to decide if you want to invest in the traditional TSP, the Roth TSP, or some combination of the two. If you’re not sure what to do, I’d just split it 50/50 so you have options in the future.
Keep your eye out for the last step to crush the TSP, rebalancing.
Finance Friday Articles
Here are this week’s articles:
4 Unique Side Income Opportunities Using Your Medical Degree
5 Things You Can Do Today to Become Financially Independent
5 ways to get an advanced education while minimizing debt
10 Ways to Pay Off a Mortgage Quickly
All troops will now get free credit monitoring service
Are Side Hustles the Best Kind of Asset Protection?
Educational Debt and Physician Employment
Explaining the Stock Market to Big Cat
Investing: Where to Put Your Money Now
Maximize Your Dead Time For a New Approach To Life
Questions and Answers about Changes to TSP Withdrawal Options
You Need to Know About Present Value
Right Turn – Shopping for Auto Insurance
Saving For College: Understanding 529s and Other Options
Should You Invest In Variable Annuities and Non-Deductible IRAs?
SIX PERCENT IS THE NEW FOUR PERCENT
Tax-smart charitable giving strategies
Throwback Thursday Classic Post – Normal Promotion Timeline and the Jobs/Achievements That Get You There
The typical career progression for a Medical Corps officer if promoted on time (the first time they are in-zone) is:
- 5 years – selected for promotion to LCDR
- 6 years – promoted to LCDR
- 11 years – selected for promotion to CDR
- 12 years – promoted to CDR
- 17 years – selected for promotion to CAPT
- 18 years – promoted to CAPT
For example, I’m a 15 year CDR, so I’ll be in-zone in 2 years at year 17. If I’m selected the first time I’m in-zone, I’ll be promoted to CAPT in year 18. (This just happened!)
There are 5 general career paths in the Navy that lead to promotion, and I firmly believe that all can lead to promotion to CAPT. They are:
- Academic
- Administrative
- Clinical
- Operational
- Research
One of my favorite things about the Navy is that you don’t have to stay within the same career path as you progress in your career. I have happily jumped around and managed to promote to LCDR and CDR on time. During my first tour at USNH Okinawa, I was largely clinical. After that I was academic but transitioned to more of an administrative role, culminating with my time as a Detailer at PERS. In my current role as Commander of a Joint Medical Group and Joint Task Force Surgeon, I’m both administrative and operational. My next tour will return me to an academic setting where I hope to score a major administrative role (I became the Director for Healthcare Business) at the command but once again “be academic.”
As you progress down your chosen career path, one of the major determinants of whether you will promote is whether you get the jobs that will allow you to progress to the next rank. The following lists include many, but certainly not all, of the collateral duties, positions, and achievements you should strive for once you reach each rank. If you can get some of these positions and do well in them, it should allow you to break out on your FITREPs and increase the chances you will promote. Of note, in each rank appropriate list there are positions from all 5 general career paths.
LTs or LCDRs looking to promote should focus on achieving these milestones or positions:
- Getting board certified, which is pretty much a requirement to promote
- Completing a fellowship, but trying to avoid being a fellow in the years right before they are in zone so that the non-observed FITREPs you often get don’t hurt your chances at promotion
- Completing a deployment, but again trying to avoid doing it right before you are in zone due to the small competitive groups you often get on your FITREPs
- Assistant/Associate Residency Director
- Department Head (DH) is a small/medium military treatment facility (MTF)
- Assistant Professor at USUHS, which is very easy to get if you just apply. See my promo prep document for the info on how to do this.
- Publishing professional publications
- Research, preferably defense-related
- Departmental collateral duties
- Hospital committee member or chair
- Executive Committee of the Medical Staff (ECOMS) member
- Civilian leadership positions, like in your specialty society’s state chapter, for example
- Senior Medical Officer (SMO) or Medical Director in your department at a large MTF
CDRs looking to promote should focus on:
- Residency Director
- DH of your department in a large MTF
- Associate Professor at USUHS
- Director position (Director of Medical Services, Director of Clinical Support Services, etc.)
- Officer-in-Charge of a clinic
- Chief Medical Officer
- Major committee chair
- ECOMS member, Vice-President/President-Elect, or President
- Senior operational leadership position
- Division Surgeon
- Group Surgeon
- Wing Surgeon
- Commander, Amphibious Task Force (CATF) Surgeon
- SMO on an amphibious platform
- Staff position at BUMED
- Specialty leader
- Deployment requiring an O-5 or higher
- Detailer
As a LT or LCDR, I was able to get board certified, complete a fellowship at the right time, deploy twice, become an Assistant Professor at USUHS, publish numerous publications, do some research, obtain numerous departmental collateral duties, chair a hospital committee and be an ECOMS member at USNH Okinawa, become a SMO in the Navy’s largest emergency department, be an Associate Director at a large MTF, and hold numerous civilian leadership positions.
As a CDR so far I have promoted to Associate Professor, been a major committee chair and member of ECOMS, and served a tour as a Detailer. Currently I’m a specialty leader and am deployed in a senior operational role that required a CDR or CAPT.
All of this took a lot of work, but made it easy for my leadership to fight for and justify early promote (EP) FITREPs that allowed me to promote to LCDR and CDR on time. Will it work for CAPT? We’ll have to wait on that (it worked), but the more of these things you can achieve, the easier it will be for your leadership to do the same thing for you. You need competitive EPs to promote, and doing these things, giving your leadership the ammunition to justify EP FITREPs, is the path to getting them.
How to Sign Up for AMDOC While Website is Down
For those who want to take or are trying to apply for AMDOC (see the leadership course catalog for FY 20 for dates), the website for application is currently down. To apply, please fill out these forms and send to Ms. Edna Smith (contact info is in the global address book):
Step 4 to Crush the TSP – Invest
You’ve read steps 1, 2, and 3 to crush the Thrift Savings Plan (TSP), and now you’re ready for step 4 and to start investing. In step 3 you came up with your desired asset allocation, so make sure you have that. You’re going to need it for the rest of the post. Just to make life a little easier, we’re going to use an example asset allocation of 80% stocks and 20% bonds.
Bond…James Bond
For the bond portion of your asset allocation, you only have two investment choices:
- G Fund – US government bonds (specially issued to the TSP)
- F Fund – US government, corporate, and mortgage-backed bonds
Both of these are US bond options, which is just fine. There are no international bonds available in the TSP.
We could have an intellectual discussion about the subtle differences between these two bond funds, but we’re not going to. It isn’t necessary. They’re both fine bond funds, so just split the difference, diversify, and put half of your bond allocation in the G fund and half in the F fund.
To illustrate, in the example allocation of 80% stocks and 20% bonds, we’d put 10% in the G fund and 10% in the F fund.
That’s it. The bonds are done.
The Stock Allocation
This is a little more complicated. The largest decision you have to make is how you’re going to divide your stocks between the three options. Here are your choices:
- C Fund – stocks of large and medium-sized US companies
- S Fund – stocks of small to medium-sized US companies (not included in the C Fund)
- I Fund – international stocks of more than 20 developed countries
The first question is what percentage of your stock allocation should go to the I fund. There are a few schools of thought on this.
John Bogle, the founder of Vanguard, is famous for believing that you don’t need to invest any of your stocks in international stocks. His long held belief was that the US companies are doing business globally, so they are already worldwide diversified. For example, Coca-Cola is clearly selling Coke products all over the globe. He would say you should put 0% of your stocks in the I fund.
At the other end of the spectrum are people who believe that you should invest proportionally. If you look at the worldwide value of stocks, it is about a 50/50 split between the US and the rest of the world. These people would say you should put 50% of your allocation in international stocks.
Both of these opinions are reasonable, so anything between 0% and 50% allocated to the I fund is fine. What do I do?
I rely on the research done by Vanguard, an institution managing over $5 trillion. I figure they have more money and resources to research this stuff than I do. What does Vanguard do?
If you look at their Target Retirement Funds, which are meant to be a “one stop shop” kind of investment fund, you’ll notice that they split their stock allocation so that 60% is US and 40% is international. They used to do it 70% US and 30% international, but their research showed 60/40 to be a better split so they moved to it a few years ago.
You’ll notice that a 40% international allocation is between the 0% Bogle viewpoint and the 50% global weighting viewpoint, so it seems fine to me and that is what I do.
If you want another opinion, you can look at the TSP Lifecycle funds. You’ll notice that they do about a 70% US and 30% international split, like Vanguard used to do. Again, that seems reasonable.
Ultimately, you can pick anywhere from 0% to 50% and find someone really smart who agrees with you. I’d encourage you to have some exposure to international, so I’d say you should pick at least 20%, but it really is up to you.
Not sure what to do? Go with 30% (the TSP Lifecycle approach) or 40% (the Vanguard approach) for the I fund and call it a day.
How to Split the C and S Funds
This is easier, or at least I think it is. The C fund is basically an S&P 500 index fund of large companies, with the S fund having the rest of the small and medium sized companies. If you want to mirror the US stock market, you want to put about 75% of your US stock allocation in the C fund and the other 25% in the S fund. You’ll notice that this is what the TSP Lifecycle funds do, further backing up my assertion.
So, I recommend that you split your C and S fund allocation 75/25, respectively.
Putting the Stock Portion All Together
For the stocks, here’s the math:
- (Your desired international stock %) X (your total stock allocation %) = % that goes in the I fund
- (Your total stock allocation %) – (% you are putting in the I fund) = % you must divide into the C and S funds
- (Your % you must divide into the C and S funds) X 0.75 = % that goes in the C fund
- (Your % you must divide into the C and S funds) X 0.25 = % that goes in the S fund
Let’s use the 80% stock and 20% bond example we started with to illustrate. Let’s assume we’re going with a 40% desired allocation to international (like I personally use):
- (Desired international stock = 40%) X (total stock allocation = 80%) = 32% goes in the I fund
- (Total stock allocation = 80%) – (32% that is going in the I fund) = 48% we must divide into the C and S funds
- (48% we must divide into the C and S funds) X 0.75 = 36% that goes in the C fund
- (48% we must divide into the C and S funds) X 0.25 = 12% that goes in the S fund
That gives us a stock allocation of 32% I fund, 36% C fund, and 12% S fund.
The Bottom Line
We split our bond allocation 50/50 between the G and F funds. We put the desired percentage for international stocks in the I fund. We split the remaining stock allocation 75/25 between the C and S funds, respectively.
For the 80% stock and 20% bond portfolio we are using as an example, this plays out:
- 10% in the G fund
- 10% in the F fund
- 32% in the I fund (based on a hypothetical 60/40 US/international stock split, which can vary as discussed above)
- 36% in the C fund
- 12% in the S fund
This can be tough to grasp in a blog post, so if there are questions or points that need clarification just put them in the comments section and we’ll straighten them out.
The next step you need to crush the TSP is to decide if you’re going to go Roth or traditional.
2020 Navy and Marine Corps Public Health Conference: Call for Poster Abstracts
The Navy and Marine Corps Public Health Center is pleased to announce that the Navy and Marine Corps Public Health Conference is preparing for 2020, pending approval.
The conference will be held in Tidewater (Virginia) March 17-19, 2020, with the specific venue to be determined.
The deadline for poster abstract submissions is 31 October 2019 by 2359 EST. No late submissions will be accepted. Selected posters will be announced December 2019.
Please submit an abstract with a title, author names and affiliations, and a body of no more than 250 words in a Word Document to Stephen.p.rossi.civ < at > mail.mil with the email subject: Poster Abstract – Last Name, First Name.
Poster subjects should be related to public health in the military. Topics may include:
- Supplements
- PrEP
- Changes in HPW
- Diabetes Education
- MHPPH Update
- Smoking Cessation
- HPW best practices
- Readiness
- Program Evaluation
- Women’s Health
- Process Improvement
- Analytic techniques
- Injury Prevention
- Fleet HPW Programs
- Suicide Prevention
- Navy Needs Assessment
- Semper Fit Update
- Cancer Epidemiology
- Hospital Acquired Infections
- Behavioral Health Surveillance
- Communicable Disease Surveillance
- Public Health Dashboards and Assessment Tools
- Injury surveillance
Our conference team is working hard to develop a solid readiness-focusedagenda that addresses force health protection strategies and solutions for current and future public health threats to Navy and Marine Corps mission readiness.
We look forward to your submissions.
Finance Friday Articles
Here are this week’s articles:
Attending Your Own Funeral: Thoughts on Finances and Legacies
A User’s Manual for Human Financial Behavior
Best Time to Buy a Car and How to Get the Best Deal
Financial Independence With Kids: How Procreation Impacts FIRE
Financial Mistakes for the Financially Literate
Giving Voice – Make Sure You Discuss Major Financial Moves with Your Spouse/Partner
I’m 100% Stocks and Happy with my Diversification
Investing Doesn’t Have To Be Complicated
Is It Ever Too Late To Start Investing In Real Estate?
“I Want To Lower My Taxes” Is a Stupid Goal
Michael Burry Trashes Index Funds – Are We Screwed?
The Best and Worst Case Scenarios for Bonds from Here
The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs
‘The Big Short’ Whiffs On Indexing
What The Bible Can Teach You About Money
What to Make of a Stock Market That Has Gone Nowhere for a Year-and-a-Half
Throwback Thursday Classic Post – Should You Send a Letter to the Promotion Board?
Assuming you are under consideration by a promotion board, the answer is yes if:
- You have letters of recommendation you want to send in, traditionally because you are above zone and were passed over at least once. In general, you should try to get letters of recommendation from the most senior members who know you well enough to discuss your contributions to the Navy and why you should get promoted. For example, it is probably better to get a letter from an O6 who knows you well than to get a letter from an O8 who does not. Your specialty leader is always a solid choice as a letter writer if you are unsure who to get one from.
- You are reporting to a new command before the FITREP cycle and your Commanding Officer is willing to write a positive letter about your contributions to your new command.
- You have issues in your record or career that require explanation or amplifying information. For example, you want to tell the promotion board how promotion to the next rank will allow you to do something you can’t do at your present rank, like screen for XO. If there are any gaps in your military service or any new information not on your FITREPs, these may need explanation as well.
- You have to make corrections/additions to your record (like missing or illegible FITREPs, awards, academic or professional achievements, etc.) but you either don’t have time to update them the standard way or your have tried without success.
THINGS TO REMEMBER
There are a few things to keep in mind:
- After the board is finished, anything you sent is discarded. You cannot permanently update your record by sending documentation to the board.
- By law, a letter to the board must be considered. In other words, if you don’t want the board to discuss a topic, don’t mention it in a letter. If there is adverse information in your record, sending a letter discussing it may help if you have amplifying information to add. Then again, if it is something they might not have noticed, sending a letter discussing it ensures that they will notice it!
- Your Commanding Officer usually should not write a letter if he/she has done a FITREP on you, as his/her opinion should be reflected in the FITREP.
- They are usually not recommended if you are in-zone unless there is a reason to send a letter listed above. Do not send one just for the fun of it.
- Keep the length of letters to a minimum – one page or less – as boards have to read everything that is sent to them.
- Do not send copies of publications.
- Only the service member can send the letter on his/her behalf. In other words, if you have a letter from an admiral, you need to send it to the board. Don’t have the admiral’s aide send it because it will just get shredded and will not be briefed to the board.
- Your letter must arrive no later than 10 calendar days before the board convenes.
I’M STILL NOT SURE IF I NEED TO WRITE A LETTER
Write the letter, but keep it brief. This way if you are not selected for promotion, you’ll at least know the board had all the info you wanted them to have.
HOW DO I WRITE/SEND THE LETTER?
See the following website for all the info you need, including a sample letter to a board:
http://www.public.navy.mil/BUPERS-NPC/BOARDS/ACTIVEDUTYOFFICER/Pages/default.aspx
If You Want to Improve Your Wellness and Reduce Burnout, Read This Article
Wellness.
Burnout.
The articles discussing these subjects are endless. If you want to address your own wellness/burnout or that of others, read this article and take it to heart:
Reaching Peak Wellness – Most of It Is Nonsense. Here’s What Actually Works.
Three Global Health Engagement Positions Available – O4-O6
Three GHE billets that are coming available in summer of 2020. Position descriptions and requirements are below:
- Director, Office of Global Health Engagement, BUMED: open to an O-6 from any Corps; duty station is Falls Church, VA.
- Deputy Director, Office of Global Health Engagement, BUMED: open to an O-4/O-5 from any Corps; duty station is Falls Church, VA.
- Chief, Lessons Learned, NATO: open to Medical Corps O-4/O-5/O-6; duty station is Budapest, Hungary.
Officers must be in their PCS window and have Detailer concurrence to apply.
Medical Corps applications are due to CDR Melissa Austin (contact info is in the global) NLT Oct 15, 2019.
Joel Schofer's Career Planning Blog 