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Subject:  Re: Roth IRA vs. TSP (Thrift Savings Plan0 Date:  5/19/2001  8:04 PM
Author:  Mark0Young Number:  29787 of 87978

If I only have enough money to invest in one or the other--Which is the best option? Roth or TSP?

The Thrift Savings Plan is funded with pre-tax dollars, isn't it? (If not, go with the Roth.)

If you expect your retirement marginal income tax rate to be higher than your present marginal income tax rate, this would suggest the Roth as being a better fit.

If you expect your retirement marginal income tax rate to be lower than your present marginal income tax rate, or if you expect the bulk of your retirement money to come from your own investments (instead of pensions, social security and the like), this would tend to favor the TSP.

If you expect your retirement marginal income tax rate to be about the same as your present marginal income tax rate, and if you can pick a decent long-term investment, this would tend to favor the Roth IRA because: you can pretty much pick your investment and go with a Roth IRA custodian that offers that investment (e.g., with a discount broker if you invest in individual stocks, or with a fund family if you wish to invest primarily in funds offered by that fund family, such as with Vanguard if investing in the Vanguard Total Stock Market Fund), often one can find better investments and lower expenses outside of an employer-provided plan, you can take your regular contributions out without tax nor penalty if you need to (though generally you get best investment returns by staying fully invested) and, if you so wish, one can use up to $10,000 for a first-time home purchase under certain circumstances.

Both the TSP and Roth IRA are best viewed as retirement accounts; if you need money before retirement, you would want additional savings or investments in regular (taxable) accounts.

But for retirement, having a pre-tax / tax deferred account (TSP) or an after-tax / tax free account (Roth IRA) would generally be better than a regular (taxable) account. If one has enough to invest for retiring and it is more than what you can put in the Roth, it would make sense to contribute what you can to the Roth and contribute the extra to the TSP; and likewise if you decide to maximize the TSP and have more to invest for retiring than you can put in the TSP, it would make sense to put the etra in the Roth.

Another consideration is to consider what you can invest via the TSP and then where the TSP is weak, use the Roth IRA to help balance your retirement portfolio. (I am doing that with my 403(b) and Roth: my 403(b) provider is weak in small and mid caps, so my Roth IRA is overweighted in small and aggressive to help balance my overall retirement portfolio.)

Some people view the use of a pre-tax qualified plan and the use of Roth IRA together as a way of "diversifying tax treatments" because no one really knows how congress will change the tax laws in the next decade or two or three.

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