Should Federal Employees Invest in a Roth IRA?

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By on August 17, 2017 in Retirement with 0 Comments
World map showing what countries the I Fund invests in

With so many acronyms and account types out there, it can be a good idea to check with a certified financial planner if you are trying to figure out the best way to manage your finances.

That being said, there are some pros and cons to investing in a Roth IRA that are worth looking at.

Thrift Savings Plan First

Especially if you qualify for agency matching, adding money to your TSP before anything else is a no-brainer.

The TSP has among the lowest investment fees in the world, has a reasonably diverse set of investments, is tax-advantaged, is protected from creditors in the event of bankruptcy, and overall is a rock-solid place to put retirement money.

With a decent income and some discipline, it’s even possible to become a i-on-deduction-if-you-are-covered-by-a-retirement-plan-at-work” target=”_blank” rel=”noopener noreferrer”>according to the IRS.

Roth IRAs, however, are invested with after-tax income and grow tax-free, and you can invest the full annual amount as long as your income is below $133,000 as a single filer or $186,000 as a couple. If you make a bit more than that, as some senior employees do, then you may still be able to contribute because your TSP contributions reduce your modified adjusted gross income (MAGI), and may put you under the threshold.

Some of the main advantages of a Roth IRA are:

  • Unlimited investment diversification and choices
  • Penalty-free withdraw of principle at any time
  • No age limit where you have to start withdrawing any funds
  • Totally employer-independent

A Look at International Diversification

The Federal Retirement Thrift Investment Board is currently reviewing the possibility of broadening the I Fund to include a broader geographic mix.

Right now, the I Fund follows the MSCI EAFE index, which is heavily concentrated into just Japan and Europe, and lacks Canadian exposure and emerging markets entirely. Here’s how limited the I Fund’s international exposure is:

alt=”Line graph showing the 10 year performance from 2007-2017 of the FTSE Emerging Markets ETF” width=”600″ height=”290″ />

From a contrarian point of view, that makes those markets worth a look these days, even after this recent great year for them.

The average price-to-earnings ratio of emerging markets is currently about 15, and the price-to-book ratio is about 1.7. They are cheap compared to most other markets around the world, including the United States, Europe, and Japan. There’s a solid chance that they’ll do quite well over the next decade from this point, but one can never know for sure.

Star Capital has a great map of valuations across the world, showing which countries’ markets are expensive or cheap based on a variety of metrics. Red is expensive, blue is cheap:

World map showing the valuations of countries

Source: Star Capital

Wrapping it Up

I have no real idea which countries will outperform others over the next decade, although history tells us that low-valued markets tend to outperform markets that are already highly-valued over the long term.

All I know is that for me, I wouldn’t want to be entirely devoid of emerging market exposure from this point, or to have all my eggs in the U.S. basket. I’m invested globally.

Between the TSP and inexpensive Roth IRA options from Vanguard and other providers, there are countless ways for federal investors to get broad equity and bond exposure. It’s as good a time as any to review your investments and ensure that you have market exposure that meets your individual preferences and retirement goals.

© 2020 Lyn Alden. All rights reserved. This article may not be reproduced without express written consent from Lyn Alden.

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About the Author

Lyn Alden is an investment researcher with a background that blends engineering and finance. Her work has been featured on Forbes, Business Insider, Kiplinger, and other media. She has a master’s in engineering management with a focus on engineering economics.

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