The TSP Two-Step
by Ann Vanderslice |
Things You’ll Need for Texas Two-step:
- Wide Belt
- Cowboy Boots
- Western Shirt
- Cowboy Hat
- Lone Star Beer (optional)
Things You’ll Need for TSP Two-step:
- Recent Leave and Earnings Statement
- 2011 Tax Return
- Lone Star Beer (optional)
The Roth TSP two-step is a bit of a dance maneuver, something like its sibling, the Texas two-step. It requires a little skill, some coordination, and a desire to master the event.
You’ve received bulletins, emails, and highlights on the upcoming rollout of the Roth TSP. The issue that has been danced around, however, is how to determine whether it makes sense for you. There’s a two-step (aha!) process to help you determine if you should participate in the Roth TSP, and if so, to what extent. The questions you’re looking to have answered include:
- Do I expect to be in a lower or higher tax bracket when I retire? (if it’s lower, the Roth TSP may not be right for you.)
- How much room do I have in my current tax bracket before any income adjustment would put me into a higher tax bracket?
- If I contribute more to the Roth TSP and less to the regular TSP, how will that affect my paycheck?
The first step is to determine your taxable income which appears on Line 27 of your 1040 tax return. Do you expect any significant changes to this income, such as retirement, a promotion, a lump sum annual leave payout for 2012? Make any adjustments as necessary and then compare this number to the 2012 tax brackets (see tax brackets in the document below).
Where does your income fall within your current bracket? If you were to contribute the full $17,000 to the Roth instead of the traditional TSP, that would increase your taxable income by $17,000. Does that leave you in the same bracket?
Example: Your taxable income from line 27 on your married, filing jointly return is $137,000. You are considering putting your entire $17,000 contribution into the Roth TSP. This adds $17,000 to your $137,000 giving you a taxable income of $154,000.
Within your current 25% bracket, the upper limit is $142,700, meaning that $11,300 of your income will be taxed at the 28% rate rather than the 25% rate. You might be fine with that, or you might want to contribute only $5,700 to the Roth TSP which would take you to the top of the 25% bracket.
Keep in mind that your highest tax bracket rate is not the same as your effective tax rate which is the average of taxes paid within each bracket.
Now that you’ve determined how much you might be willing to contribute to the Roth TSP within tax limitations, it’s time to calculate the effect that contribution will have on your net pay. This is where your leave and earnings statement comes in.
You can use one of the many online paycheck calculators (e.g., www.paycheckcity.com/calculators/standard.htm) to compare your current net pay with the impact of changing your TSP contribution to an after-tax contribution. This takes a little effort, because you’ll have to enter each line item deducted from your gross pay. Rather than making your TSP contribution pre-tax as it appears on your leave and earnings statement, you’ll make it an after-tax contribution which affects the bottom line of your paycheck.
Once you’ve entered your potential Roth TSP contribution on the paycheck calculator, along with your other deductions, your net pay will appear. If you think you can get by on the lower amount, you may want to go ahead with the Roth TSP contribution. Your final decision is whether you can live on the lower amount…and still afford the occasional Lone Star Beer.
If you’d like to participate in a 30-minute webinar to learn all the details of the new Roth TSP, send an email to firstname.lastname@example.org and the webinar info will be forwarded to you.
© 2013 Ann Vanderslice. All rights reserved. This article may not be reproduced without express written consent from Ann Vanderslice.