Roth TSP: Here’s Why You Should Do It

The TSP C Fund is a very low cost S&P 500 index fund.

The S&P 500 index is essentially the largest 500 publicly traded companies in the United States.

Largest means market capitalization. Does not mean revenue, sales, number of employees or anything like that. Simply means you take the number of shares outstanding times that by the current share price and VOILA, that is your market capitalization.

The 500 largest market capitalization stocks in the US are in the SP 500.

So, now that you know what the C Fund is how do you incorporate it into YOUR portfolio?

Well, in my opinion, the C Fund should be the foundation of ALL portfolios where the investor won’t need the money for 5 years or more.

If you can withstand some serious market chaos, and by serious I mean a 50% decline like we saw from Oct 2007 to Mar 2009, a 25% decline every 4 years or so and on average a 14% decline EACH YEAR, you could make a lot of money in the C Fund.

In fact, since inception the C Fund has averaged 10.53% a year. That means you’ve doubled your money every 7 years. Put $100k in there in 1988 and that is worth $2 million now.

Put $100k in there in 1988 and have added $5k a year and you’re worth $3 million today!

That’s a lot of money. But how many people actually did that? Not many. Why? Because the markets go up….and then they go down.

WHen they go down people get real nervous and bail. Can’t do that.

So before you buy into the C Fund you’ve got to make a deal with yourself that you will not touch the money for 5 years. If you can convince yourself to stay pat for 5 years running. You’re probably going to do okay.

No guarantees of course. But what are the alternatives? A Bond Fund paying 2.85% and that’s BEFORE taxes and inflation… YIKES!

If you are a Federal employee you NEED to be investing your contributions into the Roth TSP. Why?

Because you’re going to get a pension from the Feds, most likely. Plus Social Security. So, right there alone, you’re going to have sizable taxable income at retirement.

If you have a pension of say $3k a month, you’re already above the first threshold for taxation of your Social Security benefit. All you need in Social Security income is $16k for you to begin to have 85% of your benefits taxable.

Add required distributions and your’re triple taxed. RMDs, pension and Social Security. Oh, think it’s bad now. Wait to you or your spouse dies. It’s going to get much worse at that point.

So, pay a bit more tax now, take advantage of your deductions and exemptions if you have some. Your deferrals go into the Roth. The employer deferrals go to the Traditional side.

Invest your Roth side into GROWTH investments, like the C, I or S Funds, or the lifecycle funds. If you are a nervous investor, put the traditional side of the TSP into the G or F funds but take advantage of the tax free GROWTH potential of the Roth.

To take advantage of Tax Free Growth though, what do you need?

You got it, growth! Bonds don’t grow. Only stocks can grow, but yes indeed, it’s going to be a scary time on occasion. That’s the nature of the equity market. When you own something it’s more at risk. When you loan something it’s less so.

A bond is a loan. A stock is to own. You can lose all in a stock. Which is why you don’t put everything in one stock. You diversify. The C, S, I or Lifecyle funds do just that for you.
Take advantage of the fact they have WAY LOW fees! I’ve never seen fees as low as on the TSP. Use it to your advantage.

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