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Stupid questions about Financing/Investing

Tycho_Brohe

Well-Known Member
pilot
Contributor
Check out the Motley Fool (fool.com). Here's their Investing 101 section.
Or if you're more of a bookish type, look into Stocks for the Long Run by Jeremy Siegel. I have the fourth edition, but I guess he released the fifth recently.

Definitely second Spekkio's advice about the TSP. I'd recommend the Roth starting out, since you should be in a fairly low tax bracket, especially if you're considering serving 20 and getting retirement pay, because that pension will be taxable. So if in retirement you're drawing that pension, Social Security benefits, AND getting distributions from a traditional TSP/IRA, that's a pretty hefty tax bill. Plus with a traditional, they require you to start taking distributions at 70 1/2. With a Roth, you can leave it in there to continue to grow tax-free for as long as you like.
 

Spekkio

He bowls overhand.
Another thing to consider in the Roth vs. Traditional is state income tax, or the fact that you are probably exempt from it in your state while active duty. Many states also exempt government pensions from income tax. Roth TSP is exempt from federal and state income tax, while they will not exempt your traditional TSP/401k withdrawals.
 

OscarMyers

Well-Known Member
None
Thanks for the leads! I've been contributing to the traditional TSP since 2001, so I that going for me. I don't know if it would be worth at this point to start contributing to the Roth. I'm interested in a little more risky investments since I already have that nest egg rolling and I'm still fairly young in terms of earning potential.
 

Spekkio

He bowls overhand.
I don't know if it would be worth at this point to start contributing to the Roth.
Roth vs. Traditional won't change your ROI, it simply changes when you pay taxes (pre- or post-contribution). In other words, if you gain X% you gain X%, regardless of whether the fund is in a Roth or traditional.

If it's beneficial tax-wise to do Roth, then switch your future contributions to Roth.

I'm interested in a little more risky investments since I already have that nest egg rolling and I'm still fairly young in terms of earning potential.
I think you're buying into a fallacy thinking that you have to take a huge risk with a no-name company to net a large return.

Other more recent top performers: Priceline, Amazon, Netflix, and Apple...and if you bought Ford in Q4 '08, you'd have a 1600-2000% ROI.
 

OscarMyers

Well-Known Member
None
Roth vs. Traditional won't change your ROI, it simply changes when you pay taxes (pre- or post-contribution). In other words, if you gain X% you gain X%, regardless of whether the fund is in a Roth or traditional.

If it's beneficial tax-wise to do Roth, then switch your future contributions to Roth.

I think you're buying into a fallacy thinking that you have to take a huge risk with a no-name company to net a large return.

Other more recent top performers: Priceline, Amazon, Netflix, and Apple...and if you bought Ford in Q4 '08, you'd have a 1600-2000% ROI.

Good to know. I definitely have a lot to learn.
 

Tycho_Brohe

Well-Known Member
pilot
Contributor
Thanks for the leads! I've been contributing to the traditional TSP since 2001, so I that going for me. I don't know if it would be worth at this point to start contributing to the Roth. I'm interested in a little more risky investments since I already have that nest egg rolling and I'm still fairly young in terms of earning potential.
Another point for Roth vs. Traditional is that a significant amount of your income right now is tax-free: BAH and BAS. That's a big plus for the Roth, which comes from after-tax contributions. You're not going to get as much benefit from deducting contributions to a traditional IRA as a civilian whose entire paycheck is taxable.

Also worth mentioning, when you serve in a designated combat zone, your basic pay is also tax-free (Combat Zone Tax Exclusion). For officers, it's limited to the pay of the highest enlisted servicemember (MCPON), which is about $5,500 per month. Using this, you can contribute more than the annual deferral limit of $18,000 (for 2015), but any contributions above that 18k MUST go into your traditional TSP, up to the annual addition limit of $53,000.
Probably more info than is needed, but bottom line: if you serve six months in a combat zone, more than half the money you make that year will be tax-free, so if you contribute as much as possible to a Roth TSP or IRA in that time ($18k plus the 5,500 for an IRA = $23,500 max), you won't be taxed on its earnings, and you won't be taxed on it when you withdraw it in retirement.
 

Tycho_Brohe

Well-Known Member
pilot
Contributor
I think you're buying into a fallacy thinking that you have to take a huge risk with a no-name company to net a large return.

Other more recent top performers: Priceline, Amazon, Netflix, and Apple...and if you bought Ford in Q4 '08, you'd have a 1600-2000% ROI.
Hindsight's 20/20 (insert MEPS pun here). If you bought GM in that same time period, your ROI would have been -100%. There's a reason Ford traded down to $2 a share, because it was just as likely to go bankrupt. They had to mortgage everything, down to the Big Blue Oval, to remain solvent. That said, I did make some money on Ford after it was clear that they weren't going under. Certainly not 1600%, but some money.

I still like index funds over individual stocks nowadays though. You can get riskier while still staying diversified. Small cap growth funds, emerging market funds, even microcap funds. You'll miss out on Ford gains, but you'll still avoid GM losses.
 

Spekkio

He bowls overhand.
Hindsight's 20/20 (insert MEPS pun here). If you bought GM in that same time period, your ROI would have been -100%. There's a reason Ford traded down to $2 a share, because it was just as likely to go bankrupt. They had to mortgage everything, down to the Big Blue Oval, to remain solvent. That said, I did make some money on Ford after it was clear that they weren't going under. Certainly not 1600%, but some money.
I don't own or trade individual stocks. I stick to index funds because the common theme of all those heavy-hitters is being able to recognize when a company is about to explode into an untapped market. I was simply pointing out that you don't have to invest in penny stocks or startups in order to make a big ROI.

I still like index funds over individual stocks nowadays though. You can get riskier while still staying diversified. Small cap growth funds, emerging market funds, even microcap funds. You'll miss out on Ford gains, but you'll still avoid GM losses.
Something else to point out: It generally takes a lot of capital if you are going to properly diversify beyond index funds, otherwise you end up getting nickeled and dimed with fees.

Another point for Roth vs. Traditional is that a significant amount of your income right now is tax-free: BAH and BAS. That's a big plus for the Roth, which comes from after-tax contributions. You're not going to get as much benefit from deducting contributions to a traditional IRA as a civilian whose entire paycheck is taxable.
This is also a good point. My federal liability + SS/medicare last year was somewhere around 10% of gross earnings.
 

bert

Enjoying the real world
pilot
Contributor
For retirees, don't forget there is an income limit for contributions to Roth IRAs that you can hit pretty easily (183k for married filing joint) once you are away from the tax-sheltered military income. It isn't that hard to fix once you've accidentally done it, but it would be a problem if you don't catch it when you do your taxes and you have to withdraw any earnings on the mistaken contribution as well. The company you are investing with can help you do it.
 
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