TSP looks to allow in-plan conversion

[wldlndfirefghtr]

Thought this was news worthy if folks haven't seen/heard about it yet;

https://www.tsp.gov/whatsnew/plan/planNews.shtml#inplan

"TSP examines in-plan conversion option — The President approved the American Taxpayer Relief Act of 2012, on January 2, 2013. This law allows the TSP and other qualified plans to give participants the option to convert their traditional account balances to a Roth balance. The amount converted would be taxable to the participant. We are currently waiting for tax reporting guidance from the IRS and will be studying the actions required to offer a conversion option. After that review, we will make decisions on whether to proceed."

Not knowing what the future holds, would this be beneifical to those that have the Traditional TSP and want to convert to ROTH that are in the lower tax bracket and have years left to grow tax free?

Hope it's of interest to folks

Thanks

[VictoriaF]

It's of huge interest. Hope the conversion is allowed and implemented soon.

Victoria

[hoppy08520]

It is intriguing. One drawback remains, however, which is the TSP's proportional distribution rule: when you eventually take distributions they must come out in proportion to your Traditional and Roth balances, which might not be everyone's preference.

[tarnation]

It is intriguing. One drawback remains, however, which is the TSP's proportional distribution rule: when you eventually take distributions they must come out in proportion to your Traditional and Roth balances, which might not be everyone's preference.

I imagine most participants would rollover their Roth TSP to Roth IRA before taking substantial distributions.

[VictoriaF]

It is intriguing. One drawback remains, however, which is the TSP's proportional distribution rule: when you eventually take distributions they must come out in proportion to your Traditional and Roth balances, which might not be everyone's preference.

I imagine most participants would rollover their Roth TSP to Roth IRA before taking substantial distributions.

It depends. I was going to roll over TSP to IRA so that I could convert traditional IRA to Roth IRA. If I can do conversions within TSP, the need for roll over to IRA diminishes. By the time I need to tap into this money, TSP may allow less draconian withdrawal options.

My main interest in TSP is the G Fund, so that I can ignore all the commotion about fixed income .

Victoria

[hoppy08520]

It is intriguing. One drawback remains, however, which is the TSP's proportional distribution rule: when you eventually take distributions they must come out in proportion to your Traditional and Roth balances, which might not be everyone's preference.

I imagine most participants would rollover their Roth TSP to Roth IRA before taking substantial distributions.

That might make sense, and its probably the smart thing to do, but you just have to do it right and carefully since you get just a single partial withdrawal.

[FedGuy]

I was going to roll over TSP to IRA so that I could convert traditional IRA to Roth IRA.

I'm not sure I understand why you need to do this. Are you worried about the pro rata rule? I thought that only got you if you have another traditional IRA floating around that you don't want to convert. You don't need to worry about 401(k)s or the TSP. Or are you talking about converting funds from the TSP to a traditional IRA to a Roth IRA, such that if you could convert from the TSP to a Roth TSP, you don't need to bother with IRAs?

In any case, I'm hoping they go forward with this. I no longer work for the government but still have my TSP. My long-term plan has been to get rid of all my other 401(k)s, past and future; money I want in a traditional retirement account gets put into the TSP, while money I want as a Roth gets converted (when convenient for tax purposes) to a Roth IRA. If you could directly convert traditional TSP balances to a Roth TSP, and assuming you could do it in a series of partial steps and also assuming that they allow the Roth TSP to accept Roth IRA money, I might not need the Roth IRAs anymore. Well, I guess they'd be helpful for assets that the TSP doesn't really allow, like emerging market stocks, but I imagine that a good chunk of my Roth money would end up in a Roth TSP eventually.

[dan23]

Does anyone know how this will impact state taxes in states that do not tax TSP withdrawals. Would your conversion not be subject to state tax in those states?

[tarnation]

I was going to roll over TSP to IRA so that I could convert traditional IRA to Roth IRA.

I'm not sure I understand why you need to do this. Are you worried about the pro rata rule? I thought that only got you if you have another traditional IRA floating around that you don't want to convert. You don't need to worry about 401(k)s or the TSP. Or are you talking about converting funds from the TSP to a traditional IRA to a Roth IRA, such that if you could convert from the TSP to a Roth TSP, you don't need to bother with IRAs?

In any case, I'm hoping they go forward with this. I no longer work for the government but still have my TSP. My long-term plan has been to get rid of all my other 401(k)s, past and future; money I want in a traditional retirement account gets put into the TSP, while money I want as a Roth gets converted (when convenient for tax purposes) to a Roth IRA. If you could directly convert traditional TSP balances to a Roth TSP, and assuming you could do it in a series of partial steps and also assuming that they allow the Roth TSP to accept Roth IRA money, I might not need the Roth IRAs anymore. Well, I guess they'd be helpful for assets that the TSP doesn't really allow, like emerging market stocks, but I imagine that a good chunk of my Roth money would end up in a Roth TSP eventually.

IIRC, Roth TSP does not accept Roth IRA money.

[FedGuy]

IIRC, Roth TSP does not accept Roth IRA money.

I know, but I imagine this is something that they would consider changing as part of the "we're considering allowing in-plan conversions to Roth TSPs" situation. That's why I listed this as an assumption in my post above.

[VictoriaF]

I was going to roll over TSP to IRA so that I could convert traditional IRA to Roth IRA.

I'm not sure I understand why you need to do this.

I want to get rid of all traditional retirement accounts to avoid RMDs. If I could not convert within TSP I would do it within IRA.

Victoria

[House Blend]

I was going to roll over TSP to IRA so that I could convert traditional IRA to Roth IRA.

I'm not sure I understand why you need to do this.

I want to get rid of all traditional retirement accounts to avoid RMDs. If I could not convert within TSP I would do it within IRA.

FYI, a Roth 401k, and presumably a Roth TSP, is not exempt from RMDs.

So I would plan on eventually rolling Roth TSP holdings to a Roth IRA before age 70.5.

[VictoriaF]

I was going to roll over TSP to IRA so that I could convert traditional IRA to Roth IRA.

I'm not sure I understand why you need to do this.

I want to get rid of all traditional retirement accounts to avoid RMDs. If I could not convert within TSP I would do it within IRA.

FYI, a Roth 401k, and presumably a Roth TSP, is not exempt from RMDs.

So I would plan on eventually rolling Roth TSP holdings to a Roth IRA before age 70.5.

Do you mean that I will have to take distributions from Roth TSP even if they will not be taxable? If true, I will, in fact, roll the funds into Roth IRA, but it will happen much later than the beginning of my conversions.

Thank you,
Victoria

[hoppy08520]

From the TSP:

https://www.tsp.gov/planparticipation/e ... trix.shtml

The TSP will keep your traditional balance and your Roth balance in separate “buckets” in your TSP account for the purposes of tracking contributions and transfers into your account. However, you cannot just tap one or the other balance when you request transactions such as contribution allocation changes, interfund transfers, loans, and withdrawals. All transactions will include a proportional amount from each balance.

Also:

https://www.tsp.gov/planparticipation/w ... ount.shtml

Proportional Distributions
Withdrawals are paid proportionally from your traditional and Roth balances, and from each TSP fund in which you have investments. If you are a uniformed services member with tax-exempt contributions in your traditional balance, your withdrawal will contain a proportional amount of tax-exempt contributions as well.

I believe that the "proportional distribution" rule above does apply to the "Full Withdrawal as a Series of Monthly Payments" option.

This rule is why tarnation wrote earlier:

I imagine most participants would rollover their Roth TSP to Roth IRA before taking substantial distributions.

So, if you don't want to be forced to withdraw from your Roth TSP, then you could use your one lifetime partial withdrawal to withdraw all of your Roth TSP before you sign up for "Full Withdrawal as a Series of Monthly Payments". This would leave you with a Roth IRA containing what had been in your Roth TSP, and it would leave your TSP with only the Traditional balance that you can draw down in monthly payments as RMD.

[House Blend]

I was going to roll over TSP to IRA so that I could convert traditional IRA to Roth IRA.

I'm not sure I understand why you need to do this.

I want to get rid of all traditional retirement accounts to avoid RMDs. If I could not convert within TSP I would do it within IRA.

FYI, a Roth 401k, and presumably a Roth TSP, is not exempt from RMDs.

So I would plan on eventually rolling Roth TSP holdings to a Roth IRA before age 70.5.

Do you mean that I will have to take distributions from Roth TSP even if they will not be taxable?

Yes. See https://www.tsp.gov/planparticipation/rmd/rmd.shtml

If true, I will, in fact, roll the funds into Roth IRA, but it will happen much later than the beginning of my conversions.

As others have noted, watch out for the prorating issues--if you have a mix of trad and Roth holdings at TSP, you have to withdraw proportionally. This by itself is not fatal as it might be possible to roll the pre-tax part to a trad IRA and the Roth part to Roth IRA.

[VictoriaF]

If true, I will, in fact, roll the funds into Roth IRA, but it will happen much later than the beginning of my conversions.

As others have noted, watch out for the prorating issues--if you have a mix of trad and Roth holdings at TSP, you have to withdraw proportionally. This by itself is not fatal as it might be possible to roll the pre-tax part to a trad IRA and the Roth part to Roth IRA.

Thank you. I hope to get rid of the traditional account before the age of 70 so that prorating won't apply to me. I have plenty of time to think about it, and TSP and IRS have plenty of time to change their rules.

Victoria

[Sbashore]

My main interest in TSP is the G Fund, so that I can ignore all the commotion about fixed income .

Victoria

Or use that G Fund as a very powerful tool to tailor your fixed allocations' duration. That's what I do.

[grabiner]

The conversion is equivalent to the decision to invest in the Roth rather than the traditional TSP. Thus, government employees who are already maxing out the Roth TSP might consider converting if they can pay taxes from a taxable account and stay in the 28% tax bracket.

Another possible reason to convert is state tax issues. New Jersey, for example, doesn't allow a deduction for traditional TSP contributions, and thus converting from the traditional TSP to a Roth costs less in NJ taxes. (However, NJ employees should be moving all of this year's contributions to Roth before even considering a conversion, as putting this year's contribution in a Roth costs nothing in NJ taxes, while converting earlier contributions requires that taxes be paid on the matching contributions and gains.) Similarly, any employee who is in a no-tax state and expects to retire in a state which taxes TSP withdrawals gains by paying no state tax now to avoid paying state tax later.

[Blues]

The state tax issue is what I concern myself with primarily in making decisions regarding the TSP.

I retired under CSRS a few years back and moved to NC which does not tax either the federal pension or TSP withdrawals under the "Bailey Decision" as long as one meets the standard for length of service prior to (I believe) 1987 or 1989.

One of the benefits for NC residents who meet the "Bailey" requirements is that they can transfer their traditional IRA's into the TSP to avoid taxation by the state upon withdrawal.

As a result of the favorable tax treatment by NC on the the TSP I have been focusing on converting my wife's TIRA to Roth so that only our taxable account investments will be subject to state taxation when we make the decision to withdraw down the road.

[stan1]

The TSP evaluates lots of options, but seldom does anything. There's a very good chance they good look at this and decide not to do it because the IT system changes, administrative costs, and investor education costs would be too expensive. Their unwillingness to change and spend money is mostly a good thing for TSP participants since they say "no thanks" to bad ideas all the time originating from K Street lobbyists (examples: adding actively managed funds, sector funds, gold). The downside is it also means they say "no thanks" to good ideas, such as adding emerging markets and small cap to the I fund. We'll have to wait to see what they say but I won't hold my breath they'll say yes to in-plan conversions.