Invest after-tax income now and pay ZERO taxes when you retire!  Sounds pretty enticing doesn't it?  For some of you it makes sense, for some of you it doesn't.  Fortunately, there are some Rules of Thumb...

• If your tax bracket is lower now than it will be in retirement, then chose the Roth
• If you are above the threshold to contribute to a Roth IRA contribute to Roth TSP
• If don't have a Roth Account you'll pay a huge hit on taxes in retirement...so take the Roth

I'm guessing that you're not Average, so why would you base a decision on a recommendation for the Average American?

Here's my rule

It isn't how much you pay in taxes..

it is how much money you keep 

Let's look at a specific case.  Suppose your employer offers matching on the first 5% of income contributed.  Let's also say you have $7,500 of discretionary income and $7,500 equals 5% of your income.  You can do one of two things with the $7,500

1. Invest $7,500 in TSP (401(k)).
2. Pay $1,875 in taxes (25% of $7,500) and contribute $5,625 to  a Roth account

Which should you do?  The rules of thumb above may lead you to the Roth TSP (401(k)).  But apply my rule and let's see what happens.

In scenario #1 you'll get $7,500 in matching funds.  If we assume around 7% return for 20 years your contribution plus matching will equal $52,432.  After you pay taxes (25%) on the $52,432 distribution you will have $39,324 in your pocket.

In scenario #2,  you'll get $5,625 in matching funds contributed to TSP (matching funds are non-Roth) if we keep all the assumptions the same, you will pay taxes of $4,951 (25% x value of employer's contributions) and have $34,408 in your pocket.

Last time I checked $39,324 (#1) is greater than $34,408 (#2)

O.K.  So it works if tax rates stay the same.  What if tax rates go up?  The rule of thumb says to go for the Roth.  If we keep the scenario the same and increase the tax rate at retirement to 39.6% here are the results.

Scenario #1:  $31,668

Scenario #2:  $31,537

Scenario #1 still puts more money in your pocket

As a reminder, 39.6% is currently the highest tax bracket.

So don't invest in the Roth TSP, right?  No, this is a very specific example.  My point is that Rules of Thumb generally don't apply to YOU.  It is worth it to get opinions/rules that account for your individual situation.   

College graduates are increasingly learning a new lesson: one in debt management. And many of them are failing.

Student debt is widely understood to be a serious and growing problem in the United States. According to the Department of Education, 10% of college graduates defaulted on their loan repayments within the first two years and nearly 15% after three years.(1) More than 35% of loans taken by those under 30 are delinquent.(2) Total student debt is nearing $1 trillion, at $966 billion as of the end of 2012. Today, the average student leaves college with a debt of over $24,000. 

And the news gets worse: While unemployment for recent college graduates was at 6.3% in 2012 -- significantly less than the national rate -- 48% of them are working in jobs that do not require a college diploma.(3)

What can you do to help contain costs for your college-ready child? Here are some tips.

• Start locally -- Attending a community college for one or two years could substantially reduce costs when compared with a four-year public or private school.

• Tap into federal loans first -- Find out more at the Federal Student Aid website, created by the Department of Education. Federal Student Aid provides more than $150 billion in federal grants, loans, and work-study funds each year. The site also provides information on repayment options for those with loans.

• Consider private loans as a last resort -- These loans are tricky, as graduates find themselves locked into loan terms that can make repayment difficult as they navigate the job market and struggle to find steady work.

Additionally, there are ways your college graduate can obtain loan forgiveness, including the following.

• Join the military (most of your already "Get" this). Each branch of the military has its own loan forgiveness program.

• Get a government, public service, or nonprofit job. Anyone who borrowed money under the William D. Ford Federal Direct Loan Program can apply to the Public Service Loan Forgiveness Program if they work in public service or for a nonprofit. The remainder of their outstanding debt will be forgiven after they successfully make 120 qualified loan payments.

• Investigate Income-Based Replacement (IBR). Available for federal student loans since 2009, IBR caps monthly payments at a manageable share of income and forgives any debt remaining after up to 25 years of payments, or as few as 10 years of payments for those working for public or nonprofit employers. The program adjusts workers' monthly loan payments to be no more than 15% of their "discretionary" income (the amount of money they make that falls above the federal poverty level).

• Become a teacher in a low-income area. The Teacher's Forgiveness Program will forgive up to $17,500 of federal Stafford loans or the entirety of Perkins loans if they work for at least five consecutive, full-time years as a teacher.

Source/Disclaimer:

1Source: U.S Department of Education, "Default Rates Continue to Rise for Student Loans," September 2013.

2Source: The Federal Reserve Bank of New York, Student Loan Debt by Age Group, March 2013.

3Source: The Center for College Affordability and Productivity, "Why Are Recent College Graduates Underemployed?" January 2013.

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