TSP Advice - Retiring Soon

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eb1
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TSP Advice - Retiring Soon

Post by eb1 » Sun Jun 03, 2018 10:25 am

I'm a federal civil servant who is retiring with full retirement next year; have accumulated $750K + in the tax deferred (traditional) TSP.
I don't need investment or growth advice at this moment, but I do need withdrawal strategies at retirement.

As background info: I am keeping my tax obligations down and retiring to a state to help with that: South Dakota.

Q: Is it wiser to take the money out completely at retirement, pay the federal taxes all at once, and move to Vanguard or Fidelity Roth? I may have about $500K after that...

Or, should I stick with monthly withdrawals from the TSP, not knowing what the fed tax rate will be in the future decades?

Any help with this conversation going in my head with be greatly appreciated.

Thanks and have a great day.

mhalley
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Re: TSP Advice - Retiring Soon

Post by mhalley » Sun Jun 03, 2018 11:58 am

Certainly you should not withdraw and pay taxes on it all at once. I believe they have improved the withdrawal options on the tsp. They used to be restrictive, so rolling it to an Ira was a good option to maximize withdrawal flexibility. A strategy that might work would be to transfer part of the tsp to an Ira and leave some in the tsp to keep access to the G fund. This would also allow for some Roth conversions in the Ira if desired, gradually, not all at once which would create a huge tax bill. The tsp requires rmds on Roth portion, so partial rollover with gradual Roth conversions seems ideal.
Check out the wiki on the new tsp withdrawal rules.
https://www.bogleheads.org/wiki/TSP_withdrawals
Last edited by mhalley on Sun Jun 03, 2018 12:34 pm, edited 1 time in total.

delamer
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Re: TSP Advice - Retiring Soon

Post by delamer » Sun Jun 03, 2018 12:20 pm

If you decide you want to convert your TSP account to a Roth, do not do so in one year. With $750,000, your marginal tax rate would be 37%.

Develop a plan to convert over several years, so that you can keep the tax rate down to the 22% or 24% marginal rate.

The other option is to withdraw money over a period of years and move it into a taxable account (or spend it) rather than converting it to a Roth. You’ll pay taxes on the withdrawal in that case too, of course.

As you implied, it would be a lot easier to make this decision if we knew what future tax rates were going to be.

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dual
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Re: TSP Advice - Retiring Soon

Post by dual » Sun Jun 03, 2018 12:53 pm

If you decide to continue monthly withdrawals, consider rolling the TSP to an IRA with a broker like Schwab, Etrade, etc.

*You get a lot more and better investment options
*The administration will be easier and less error prone.
*you can earn a nice transfer bonus (see the thread here on BH or
My sad experience. My brother passed away recently with a TSP account. He said he submitted a beneficiary designation for a family member but when we contacted TSP, first it was hard to get anyone there who knew anything, then they said they never received it. TSP would not budge and refused to rollover the TSP to an inherited IRA. They paid the whole amount to his estate, which had to be distributed to his benficiary, and income tax paid in one year.

He had IRAs with regular commercial brokers and there was no problem with his beneficiary designations and rolling them over to inherited IRAs.

2cents2
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Re: TSP Advice - Retiring Soon

Post by 2cents2 » Sun Jun 03, 2018 8:21 pm

eb1 wrote:
Sun Jun 03, 2018 10:25 am

Q: Is it wiser to take the money out completely at retirement, pay the federal taxes all at once, and move to Vanguard or Fidelity Roth? I may have about $500K after that...
We don't very much about your tax situation. Are you married filing joint? How soon before you have to pay for medicare part B? What is your expected tax bracket after you retire? Are you going to need to use the money for anything? But, the short answer is, No--don't do it.

Current tax law sunsets at at the end of 2025 unless there is congressional action. That gives you at least 7 years to spread out your distributions. The 22/24 brackets give you a lot to work with. If you don't need the money right away, maybe you could do conversions to Roth? After you pay the taxes on the conversions, you don't pay any more income tax on the money. You don't have to take Required Minimum Distributions (RMDs) on Roths.

There are speed bumps to consider such as the NIIT (Net Investment Income Tax) https://www.irs.gov/newsroom/net-invest ... tax-faqs-- MFJ it comes in at modified adjusted gross income above 250K. At that point, your interest, dividends, capital gains etc that put you above the threshold amount get an extra 3.8% tax. If you plan to sign up for part B medicare--Social Security does a 2 year look back (age 63) on your income and you pay higher premiums above certain income levels: https://medicare.com/about-medicare/med ... bles-2018/

Even if you could easily convert everything within the time frame within your targeted tax bracket, maybe you don't want to distribute/convert everything. For example, if you have favorite charities to which you contribute, you could use RMDs for your donations and not have to pay tax on it.

Or, should I stick with monthly withdrawals from the TSP, not knowing what the fed tax rate will be in the future decades?

Any help with this conversation going in my head with be greatly appreciated.

Thanks and have a great day.
There will be more withdrawal options starting soon (I think the new rules are in place in Sept) which will give you lots more flexibility.

Spirit Rider
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Re: TSP Advice - Retiring Soon

Post by Spirit Rider » Sun Jun 03, 2018 8:56 pm

2cents2 wrote:
Sun Jun 03, 2018 8:21 pm
There will be more withdrawal options starting soon (I think the new rules are in place in Sept) which will give you lots more flexibility.
The TSP Modernization Act gives the TSP until September 2019 to implement the withdrawal options. I think it is unlikely they will have them by September 2019.

2cents2
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Re: TSP Advice - Retiring Soon

Post by 2cents2 » Sun Jun 03, 2018 9:14 pm

Spirit Rider wrote:
Sun Jun 03, 2018 8:56 pm
2cents2 wrote:
Sun Jun 03, 2018 8:21 pm
There will be more withdrawal options starting soon (I think the new rules are in place in Sept) which will give you lots more flexibility.
The TSP Modernization Act gives the TSP until September 2019 to implement the withdrawal options. I think it is unlikely they will have them by September 2019.
Thanks for that clarification. In that case maybe the one time partial rollover to tIRA might work for the OP for the 2018/2019 conversion/distribution amounts while waiting for the new rules to come on line.

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Watty
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Re: TSP Advice - Retiring Soon

Post by Watty » Sun Jun 03, 2018 9:39 pm

dual wrote:
Sun Jun 03, 2018 12:53 pm

My sad experience. My brother passed away recently with a TSP account. He said he submitted a beneficiary designation for a family member but when we contacted TSP, first it was hard to get anyone there who knew anything, then they said they never received it. TSP would not budge and refused to rollover the TSP to an inherited IRA. They paid the whole amount to his estate, which had to be distributed to his benficiary, and income tax paid in one year.
Even without the problems get getting the beneficiary named the TSP has problems with having worse inheritance rules than an IRA.

https://www.bogleheads.org/wiki/TSP_estate_planning

There was a post awhile back where someone had run into this situation;

1) Dad has a large TSP and he dies leaving it to his wife.
2) This works OK for the wife as some sort of Beneficiary Participant account.
3) Wife dies a few years later and their only kid is named as the beneficiary.

The problem is that the TSP does not allow the kid to leave the money in the TSP or take it as an inherited IRA. They had to withdraw all the money and pay a very high tax rate since they were still working and already in a medium tax bracket. If either the father or mother had rolled the money out to an IRA then the kid could have had an inherited IRA and spread the withdrawls out over decades.

rkhusky
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Re: TSP Advice - Retiring Soon

Post by rkhusky » Sun Jun 03, 2018 9:47 pm

Rollover a portion of the TSP to a Traditional IRA and do Roth conversions to the top of the 12% or 24% bracket, depending on what you expect your marginal rate will be after age 70.

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Jerry55
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Re: TSP Advice - Retiring Soon

Post by Jerry55 » Sun Jun 03, 2018 11:36 pm

Unless you're in a hurry, and NEED to begin taking distributions from the TSP...may I suggest waiting until next year and see what changes they put into effect ???
You can read the data on what they have planned in their position papers put out regularly, but they seem to be excellent and address some of the short-comings as some above have described, including being able to separate withdrawals from the taxed (ROTH) vs non-taxed TSP pots of investments.
One thing as a poster above mentions....KEEP enough in the TSP so you have access to the G Fund !!! If they lower the rate to that of short-term T-Bills, then it's time to rethink that option, but nothing has changed so far. Certainly, you don't want to pay taxes and convert to a ROTH IRA in one fell $$$woop.

Read the info on beneficiaries (i.e. spousal) who can continue to keep the TSP in their name, and others beneficiaries (like children) who have to have it removed from the TSP. HOWEVER, they have the option of having the TSP roll that money into what's called an
"Inherited IRA" and begin withdrawals per their age based laws, per the IRS. If younger, they maybe able to spread it out over their lifetime, which will allow it to grow longer. They will only be taxed on it once it's distributed to them, not all at once in a single year, unless they FAIL to open an inherited IRA with Vanguard, Fidelity or whomever. Let the TSP transfer the cash, and don't let them be a middleman for that.

That being said, you may not even NEED to take cash out of the TSP depending on many variables.

I went 100% C fund from 10/2008 to 6/2009 and stayed there til 3/2016, where I split it to 50% C fund / 25% S and I fund and am still there now. I retired in 2012 @ age 57 and just turned 63. I'll let it ride in some fashion or another for maybe 4-6 more years, then examine the options available then. Don't do anything rash, read up on the new rules from TSP to come out next year and review Beneficiaries and related info for the TSP in the meantime.

Good Luck, enjoy retirement !!!
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

FedGuy
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Re: TSP Advice - Retiring Soon

Post by FedGuy » Mon Jun 04, 2018 6:26 am

dual wrote:
Sun Jun 03, 2018 12:53 pm
He said he submitted a beneficiary designation for a family member but when we contacted TSP, first it was hard to get anyone there who knew anything, then they said they never received it.
The TSP seems to have issues with receiving beneficiary designations. I have mailed in my TSP-3 (the form used to designate beneficiaries) twice, and TSP claims to have never received it. When I've contacted them to ask them what's going on, their response was to encourage me to try again. I plan to try faxing it and see if that gets routed more effectively.

donheff
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Re: TSP Advice - Retiring Soon

Post by donheff » Mon Jun 04, 2018 7:01 am

Watty wrote:
Sun Jun 03, 2018 9:39 pm

Even without the problems get getting the beneficiary named the TSP has problems with having worse inheritance rules than an IRA.

https://www.bogleheads.org/wiki/TSP_estate_planning

There was a post awhile back where someone had run into this situation;

1) Dad has a large TSP and he dies leaving it to his wife.
2) This works OK for the wife as some sort of Beneficiary Participant account.
3) Wife dies a few years later and their only kid is named as the beneficiary.

The problem is that the TSP does not allow the kid to leave the money in the TSP or take it as an inherited IRA. They had to withdraw all the money and pay a very high tax rate since they were still working and already in a medium tax bracket. If either the father or mother had rolled the money out to an IRA then the kid could have had an inherited IRA and spread the withdrawls out over decades.
As I understand it, in this situation the kid could roll over the lump sum into an inherited IRA. The spouse can continue in the TSP but others cannot. I like the TSP - a few decent choices with low costs. Hopefully, they will improve some of the withdrawal and administrative features soon. It is a small part of our overall portfolio so I keep it all in the G Fund to serve as a psuedo super cash holding I could tap in a prolonged downturn if I don't want to tap equities or regular bond funds in other accounts.

trueblueky
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Re: TSP Advice - Retiring Soon

Post by trueblueky » Mon Jun 04, 2018 7:05 am

rkhusky wrote:
Sun Jun 03, 2018 9:47 pm
Rollover a portion of the TSP to a Traditional IRA and do Roth conversions to the top of the 12% or 24% bracket, depending on what you expect your marginal rate will be after age 70.
+1
Exactly what I am doing. I moved a lump sum to tIRA and am converting to the top of 12% (was 15% when I started) each year until I hit age 70.5. The rest stays in TSP.

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Watty
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Re: TSP Advice - Retiring Soon

Post by Watty » Mon Jun 04, 2018 7:54 am

donheff wrote:
Mon Jun 04, 2018 7:01 am
As I understand it, in this situation the kid could roll over the lump sum into an inherited IRA.
Nope.

See page 15 here;

https://www.tsp.gov/PDF/formspubs/tspbk33.pdf
Payment of Death Benefits From Your Account

Death benefit payments made from your beneficiary
participant account must be paid directly to your
beneficiary(ies). These payments are subject to certain
tax restrictions and cannot be transferred or rolled over
into an IRA or eligible employer plan. In addition, your
beneficiary(ies) will have to pay the full amount of taxes
on the taxable portions of the payment in the year it is
received

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Jerry55
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Re: TSP Advice - Retiring Soon

Post by Jerry55 » Mon Jun 04, 2018 9:57 am

There seems to be much dis-information out there pertaining to "Non-Spousal TSP beneficiary payment"...
If I were the OP, I would carefully look into this, however, suffice it to say that I Firmly believe it can be rolled over into an "Inherited IRA"

See Sec. II "Method of payment " pertaining to a spouse and a NON-Spouse beneficiary.

https://www.tsp.gov/PDF/bulletins/14-u-03.html

Non-Spousal Beneficiaries

Non-spouse beneficiaries have two options for receiving their death benefit, both of which are described below. The TSP has developed Form TSP-81, Death Benefits Election for a Beneficiary Other Than a Spouse, which will be sent to non-spouse beneficiaries prior to the payment of their death benefits.

Single Payment

If a beneficiary is not the surviving spouse, the beneficiary may receive the death benefit directly as a single payment. Like BPA withdrawals described in Part A3 above, all death benefit payments will be disbursed pro rata from any traditional (tax-deferred) and Roth balances in the participant’s account.
Inherited IRA

A non-spouse beneficiary can avoid withholding and tax liability by requesting that the TSP transfer all or part of the payment directly into an “inherited” IRA. Inherited IRAs may provide significant tax benefits because their required distributions can generally be spread across the lifetime of the beneficiary.

We strongly recommend that beneficiaries discuss this option with their tax or financial advisors or IRA providers before deciding on it. Inherited IRAs must be specifically titled as such

And again, enjoy your retirement. You've earned it.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

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Watty
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Re: TSP Advice - Retiring Soon

Post by Watty » Mon Jun 04, 2018 10:11 am

Jerry55 wrote:
Mon Jun 04, 2018 9:57 am
There seems to be much dis-information out there pertaining to "Non-Spousal TSP beneficiary payment"...
If I were the OP, I would carefully look into this, however, suffice it to say that I Firmly believe it can be rolled over into an "Inherited IRA"

See Sec. II "Method of payment " pertaining to a spouse and a NON-Spouse beneficiary.
I am not an expert or anything but my understanding is that in this situation the NON-Spouse beneficiary rules would apply ;

1) Mother dies first.
2) Father dies and leave TSP to kid

Then the kid would be a non-spouse beneficiary and would be ok and able to set up an inherited IRA.

That is different than my original example where the kid would be inheriting a Beneficiary Participate account from the mom which has different inheritance rules.

I agree that it is confusing and does not make a lot of sense so it would be good to research this more or get expert advice.

2cents2
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Re: TSP Advice - Retiring Soon

Post by 2cents2 » Mon Jun 04, 2018 10:49 am

I think what might get folks confused is the situation where a spouse beneficiary sets up a Beneficiary Participant Account (BPA) leaving the funds in the TSP and then dies. At first I thought the BPA would be a good thing allowing the surviving spouse to continue to get the benefits from the TSP.
But, the second death is what causes the distribution and tax consequences. Since most folks don't know when their expiration date is, I think the BPA could result in a real problem that could be easily avoided by setting up an inherited IRA or even "The beneficiary participant may transfer or roll over part or all of his or her BPA into an IRA or eligible employer plan. " if that is more beneficial to the spousal beneficiary.

"In the event of the death of a beneficiary participant, the funds in the BPA cannot remain in the TSP. The account will be distributed directly to the BPA participant’s beneficiary(ies) indicated on Form TSP-3. If no valid Form TSP-3 is on file, the account will be distributed according to the order of precedence as described in Section I above. Death benefit payments made from a BPA must be paid directly to beneficiary(ies). These payments are subject to certain tax restrictions and cannot be transferred or rolled over into an IRA or eligible employer plan. In addition, these payments will be fully taxable in the year the beneficiary(ies) receives them. "
Thrift Savings Plan Death Benefits: https://www.tsp.gov/PDF/bulletins/14-u-03.html

MnD
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Re: TSP Advice - Retiring Soon

Post by MnD » Mon Jun 04, 2018 11:07 am

rkhusky wrote:
Sun Jun 03, 2018 9:47 pm
Rollover a portion of the TSP to a Traditional IRA and do Roth conversions to the top of the 12% or 24% bracket, depending on what you expect your marginal rate will be after age 70.
This advice should be taken with a grain of salt. It could result in paying far more in taxes than is necessary or advisable. Not to mention that is misses an entire tax bracket (22%) with 90K of space in it for MFJ. For example if your pension plus TSP needs for spending puts your taxable income just barely into the 22% bracket, converting to the top of the 22% bracket will result in voluntarily paying a much higher effective tax rate in early retirement.

Seems like many advice-givers on rolling out of TSP and aggressively beginning conversions have this set scenario of being rocketed into some super-high tax bracket at 70.5. But if you do the math for your specific situation, that is often not the case. The other long-standing bias seems to be the belief that tax bracket rates will be much higher in the future when in fact just the opposite has occurred.

Some years back I was advised to start doing conversions to the top of the 28% bracket. In a few months in retirement my TSP withdrawals will be taxed at a blend of 12% and 22%. So in retrospect that was terrible advice but talk is cheap.

I'm also certainly not taking TSP funds out and losing access to the G fund - arguably the perfect bond fund and one that could be a portfolio saver in a 1966-type situation of rising interest rates and mediocre stock returns. There is no equal substitute in IRA's for the G funds risk/return characteristics. The other funds properly combined are (imperfectly for international) the equity components of the 3-fund portfolio with an ER of 0.03. What other "great things" are in an IRA given the TSP has an incredible fixed option in G and total US stock in C and S and soon to be Total International stock in I and all at at 0.03 ER? And I can't speak for the OP but many people with a TSP account have no shortage of funds in other accounts to invest in these other great things without doing a rollover out of TSP.

I can live with the current rules on withdrawals, as a % of portfolio withdrawal updated annually is my plan regardless, and the soon to be implemented additional TSP flexibility is the icing on the cake. One does still have to be careful if your spouse continues in the TSP with a beneficiary TSP account after you check out, then passes away before rolling over that account into an IRA. It's my understanding that this is the exact situation where children cannot roll a TSP spousal beneficiary account into an inherited IRA.

With the big bucks involved with many TSP accounts and the often poor on-line advice, this is one area where you may want to consult a fiduciary fee-only adviser with extensive federal TSP experience before doing anything drastic.
Last edited by MnD on Mon Jun 04, 2018 12:05 pm, edited 1 time in total.

2cents2
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Re: TSP Advice - Retiring Soon

Post by 2cents2 » Mon Jun 04, 2018 11:56 am

Maybe this would be a good time to check beneficiary information....

Beneficiary information can be found online after logging into your account.

On the left hand column towards the bottom under "Personal Information " there is a link for "Beneficiaries"
You can see who your beneficiaries are. Once you get to the Beneficiary Page there is another link "Designate New Beneficiaries", but this is a head fake as you can't make online designations. But, if you follow the link you can pre-fill the form that you mail or fax to TSP:

"Although your request cannot be submitted online, your guided answers to the following questions will pre-fill your beneficiary designation (Form TSP-3). This will help you avoid mistakes that could cause the processing of your form to be delayed or the form to be rejected."

It is a good idea to review this periodically because:
"Keep Your Designations Current

It is a good idea to review how you have designated your beneficiaries from time to time—particularly when your life situation changes (e.g., through marriage, divorce, the birth or adoption of a child, or the death of a beneficiary). You should also review your beneficiaries' addresses periodically.

By law, the TSP must pay your properly designated beneficiary under all circumstances. For example, if you designate your spouse as a beneficiary of your TSP account, that spouse will be entitled to death benefits, even if you are separated or divorced from that spouse or have remarried. This is true even if the spouse you designated gave up all rights to your TSP account(s). Consequently, if your life situation changes, you may want to file a new Form TSP-3 that changes or cancels your current beneficiary designation.

The share of any primary beneficiary who dies before you do will be distributed proportionally among the surviving designated TSP beneficiaries. If none of your designated beneficiaries are alive at the time of your death, the statutory order of precedence will be followed. "

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