TSP, Roth IRAs, Conversion Advice mil member

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Scud
Posts: 1
Joined: Sat Mar 18, 2017 12:16 pm

TSP, Roth IRAs, Conversion Advice mil member

Postby Scud » Sat Mar 18, 2017 3:38 pm

Advice on what to do w/ TSP for military members with moderate assets and pension as nearing mil retirement but most likely starting second career. This advice may have applicability to many retiring mil officers.

Emer Funds: yes
Debt: 1 car loan $30K: 2.25% rate—no mortgage or any other debt
Tax status: Married, joint
Fed Tax rate: 25%
State of res: him- 0 income tax state, her – 4%
Age: 44, 41
Current Alloc: 85/15
Current International alloc: 15% stocks
Expected pension in 2 years: $60K
Insurance: approx. 250K coverage whole life on each of us + term on her of 400K thru age 60, 400K term on me due to active mil (will expire on separation w option to buy)

Current Assets
Taxable: $340K (mutual funds, stocks)

Tax deferred/Tax exempt IRAs
Hers
Roth $123K
TIRA $9K (plan on converting to Roth this year)
TSP TIRA $122K (note $43K of this is tax exempt from combat zone inputs)

His
Roth $132K
TSP Roth $90K
TSP TIRA $265K ($30K tax exempt from combat zone inputs)

Concerns
1) Most likely increased tax bracket in future due to pension w/ probable post military “2nd career” combination
2) RMD size based on current tax deferred assets at full retirement
3) Losing larger portion of Social Security (if it’s still there!) due to high RMDs or pension + taxable/deferred investments, etc.
4) too much in taxable assets currently. Seems like I should use some of that to get more into Roth.

Options / Plan / What I am thinking
1) 2017 will have reduced AGI due to deployment. Opportunity to convert nearly all of her TSP TIRA and cover tax bill w/ selling of approx. $30K taxable assets
2) Easy kill to convert her $9K TIRA to Roth ASAP.

Questions
1) Should I roll her TSP TIRA to her Fidelity Roth (tax exempt portion) and convert as much as possible from remaining Traditional TSP into the Roth this year to stay within 25% tax bracket.
- i.e. maximize input into Fidelity Roth ASAP so it’s tax exempt later and no RMD
2) This move appears to be a “backdoor” Roth from what I can tell from research. Thoughts on “losing out” on low cost of TSP and possible future changes to TSP rules vs. conversion now to Roth??
3) Have the opportunity to put more tax exempt combat pay into Traditional TSP beyond already max’ing out Roth TSP. Should I do so?
- for our situation, it seems as though loading as much into Roths is the best option to defeat higher taxes or high RMDs later. I’ve looked at deployed tax exempt pay into Traditional TSP as a vehicle to put more into a Roth IRA—however, with current rules, this seems to require withdrawal from TSP soon after leaving military. The proportionality rule of TSP Roth/Traditional hurts the power of TSP Roth IMO.

thanks in advance to the forum for providing expertise.

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FiveK
Posts: 2351
Joined: Sun Mar 16, 2014 2:43 pm

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby FiveK » Sat Mar 18, 2017 11:53 pm

See Most TSP Participants Should Switch To the Roth TSP and The Military Guide for some things you might consider.

In the end, take your best guess at your "tax bracket in future" and then use Traditional versus Roth - Bogleheads to aid your choice.

Fishing50
Posts: 136
Joined: Tue Sep 27, 2016 1:18 am

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby Fishing50 » Sun Mar 19, 2017 7:14 am

I've based our plan on tax efficient placement https://www.bogleheads.org/wiki/Tax-efficient_fund_placement

Scud wrote:Concerns
1) Most likely increased tax bracket in future due to pension w/ probable post military “2nd career” combination. You'll probably remain in the 25% tax bracket, but the tax bracket will not increase significantly. 28% tax bracket goes until $233K + deductions. Maximum Roth TSP contributions is your best choice.
2) RMD size based on current tax deferred assets at full retirement. Good to consider, not a problem now. When you retire from your 2nd career, you can convert large amounts from traditional to Roth before you take SS. We'll probably make withdrawals / conversions to the top of 25% between 60-70yrs old to reduce RMDs and delay SS.
3) Losing larger portion of Social Security (if it’s still there!) due to high RMDs or pension + taxable/deferred investments, etc. Not a bad problem to have a large tax burden at 70yrs old (pension + taxable dividends + SSx2 + RMDs). There's 30yrs of life changes before RMDs, so you don't need to solve everything now.
4) too much in taxable assets currently. Seems like I should use some of that to get more into Roth. Too much in taxable can fund early retirement! :D

Options / Plan / What I am thinking
1) 2017 will have reduced AGI due to deployment. Opportunity to convert nearly all of her TSP TIRA and cover tax bill w/ selling of approx. $30K taxable assets If she's still in-service / employed, I don't think it' possible. Here's thread another option during deployment https://www.bogleheads.org/forum/viewtopic.php?f=1&t=211985&p=3259810#p3259810
2) Easy kill to convert her $9K TIRA to Roth ASAP. Definitely, especially if you'll be in the 15% tax bracket.

Questions
1) Should I roll her TSP TIRA to her Fidelity Roth (tax exempt portion) and convert as much as possible from remaining Traditional TSP into the Roth this year to stay within 25% tax bracket. Seems drastic. No hurry to pay 25% taxes. This would use the only opportunity for a partial withdrawal. After I retire, I plan a partial withdrawal (down to TSP minimum balance) as a trustee transfer to separate traditional, Roth, and tax exempt monies. Once separate, I'll transfer traditional balance into TSP G Fund.
- i.e. maximize input into Fidelity Roth ASAP so it’s tax exempt later and no RMD
2) This move appears to be a “backdoor” Roth from what I can tell from research. Thoughts on “losing out” on low cost of TSP and possible future changes to TSP rules vs. conversion now to Roth?? Can tax-exempt contributions be converted to Roth? My withdraw plan will get tax-exempt into taxable.
3) Have the opportunity to put more tax exempt combat pay into Traditional TSP beyond already max’ing out Roth TSP. Should I do so?
- for our situation, it seems as though loading as much into Roths is the best option to defeat higher taxes or high RMDs later. I’ve looked at deployed tax exempt pay into Traditional TSP as a vehicle to put more into a Roth IRA—however, with current rules, this seems to require withdrawal from TSP soon after leaving military. The proportionality rule of TSP Roth/Traditional hurts the power of TSP Roth IMO. Proportionality is reason I'll make my partial withdrawal after retirement and transfer traditional back into G Fund. G Fund will be slower growth, which reduces RMDs also.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

Fishing50
Posts: 136
Joined: Tue Sep 27, 2016 1:18 am

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby Fishing50 » Sun Mar 19, 2017 7:51 am

If you get your income real low during deployment, you can TGH your taxable account to make it more tax efficient. I hold only VFIAX Vanguard 500 Index in taxable with 100% qualified dividends.

https://www.kitces.com/blog/understanding-the-mechanics-of-the-0-long-term-capital-gains-tax-rate-how-to-harvest-capital-gains-for-a-free-step-up-in-basis/
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

earlgrey
Posts: 31
Joined: Sun Feb 21, 2016 10:32 am

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby earlgrey » Sun Mar 19, 2017 8:10 am

Can tax-exempt contributions be converted to Roth? My withdraw plan will get tax-exempt into taxable.


Yes, tax-exempt contributions to the TSP can be put into a Roth IRA. It takes a couple steps but otherwise it's not too complicated. I ended up doing this last year by filing the TSP-70 (full withdrawal) with the tax-deferred balance going to a Vanguard IRA. I left box 40 unchecked ("Check this box if tax-exempt balances are accepted into the account identified above"), so the TSP sent me a check for my tax exempt portion, which was used to do a 60-day rollover. First step was putting those funds into a different IRA than the rollover IRA used to accept the TSP tax-deferred portion, followed by immediately converting that IRA into a Roth account. At tax time, you file Form 8606 and the tax-exempt portion that was transferred via the 60-day rollover and then converted gets recorded on Line 2.

Note: I am not a tax professional and the actions described above is for information only. Complete your own due diligence and/or consult a tax professional to fully account for your tax situation before proceeding.

Fishing50
Posts: 136
Joined: Tue Sep 27, 2016 1:18 am

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby Fishing50 » Sun Mar 19, 2017 10:51 am

It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

earlgrey
Posts: 31
Joined: Sun Feb 21, 2016 10:32 am

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby earlgrey » Sun Mar 19, 2017 5:18 pm

Ah yes, meant to include the inspiration for my transfer approach was that article. WCI kept his military TSP account open to maintain access, particularly for the G Fund. I currently work for the Feds as a civilian so had no need to use the partial withdrawal method. Seems to be about the same number of steps so it really comes down to preference of what accounts need to stay open in the end.

pilot_error
Posts: 8
Joined: Sat Sep 17, 2016 12:10 pm

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby pilot_error » Sun Mar 19, 2017 6:26 pm

Fishing50, would you be willing to explain further why Roth is a better choice than traditional in this situation. From what I read it is a close call so I'm wondering if I am missing something. Thanks.

Fishing50
Posts: 136
Joined: Tue Sep 27, 2016 1:18 am

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby Fishing50 » Sun Mar 19, 2017 11:09 pm

Roth is best in the OP case because they are planning a bridge career which means they are probably in the lowest tax bracket of their career. Roth TSP is obviously best in the 15% tax bracket during deployments. When I retire to go fishing at 50yrs old with an officer pension, I'll be able to make Roth conversions in the 15% tax bracket. I'm doing traditional TSP.
It's perfectly legal, go ask the IRS, they'll say the same thing. I actually feel stupid telling you this, I'm sure you would've investigated the matter yourself. Andy Dufresne

pilot_error
Posts: 8
Joined: Sat Sep 17, 2016 12:10 pm

Re: TSP, Roth IRAs, Conversion Advice mil member

Postby pilot_error » Mon Mar 20, 2017 2:18 pm

Fishing50, seems obvious enough, thanks for the explanation.


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