Convert TSP to roth on retirement?

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mortal
Posts: 445
Joined: Mon Sep 15, 2008 11:15 pm

Convert TSP to roth on retirement?

Post by mortal » Wed Aug 15, 2018 6:46 pm

Howdy folks,

I have a tsp account, and use it (and the G fund) for the bond portion of my portfolio. When I retire, I've given some thought to rolling it over to a traditional IRA, and converting it in chunks to a roth IRA and paying taxes on it. I don't want to get into a political debate here, but I think it's reasonable to assume that tax rates are historically low now, and will be higher in the future, given that the debt / deficit has to be reigned in at some point in the future right?

For those of you who aren't familiar with the TSP, and the G fund, it has very low expenses (.033%?), and relatively high risk free returns (esp in a rising interest rate environment). It's a very good deal. Thus, I'm conflicted. Should I convert to a roth? What do you think?

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Convert TSP to roth on retirement?

Post by retiredjg » Wed Aug 15, 2018 6:55 pm

It is not possible to answer this question reliably with only the information given.

Things like how much of your portfolio is tax deferred, what other accounts you have, your tax bracket when you do the conversions, your age when you retire, your marital status, the size of your TSP, and probably some other things will affect the answer.

In general, it can be a good idea to convert some tax-deferred assets to Roth if you retire early enough and are in a lower tax bracket. This may be more true for people without a pension than for people with a pension. Whether you should do Roth conversions or not is hard to gauge at this point.

mhalley
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Joined: Tue Nov 20, 2007 6:02 am

Re: Convert TSP to roth on retirement?

Post by mhalley » Wed Aug 15, 2018 7:13 pm

The TSP has some quirks regarding withdrawals compared to other retirements plans. It has changed for the better recently, but transferring part of it out might make sense.

https://www.tsp.gov/PlanParticipation/L ... index.html

mortal
Posts: 445
Joined: Mon Sep 15, 2008 11:15 pm

Re: Convert TSP to roth on retirement?

Post by mortal » Wed Aug 15, 2018 7:26 pm

retiredjg wrote:
Wed Aug 15, 2018 6:55 pm
It is not possible to answer this question reliably with only the information given.

Things like how much of your portfolio is tax deferred, what other accounts you have, your tax bracket when you do the conversions, your age when you retire, your marital status, the size of your TSP, and probably some other things will affect the answer.

In general, it can be a good idea to convert some tax-deferred assets to Roth if you retire early enough and are in a lower tax bracket. This may be more true for people without a pension than for people with a pension. Whether you should do Roth conversions or not is hard to gauge at this point.
I'd say the tsp makes up ~ 40% of my portfolio. I also have a Roth IRA (15%?) and a taxable account with the remainder. I'm 35, retirement is 5-10 years out. Currently in 28% tax bracket, but if i convert, I expect to be in the 15% tax bracket. I should have enough existing roth contributions available to fund expenses if I do decide to convert.

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Watty
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Re: Convert TSP to roth on retirement?

Post by Watty » Wed Aug 15, 2018 7:29 pm

The TSP also has some "quirks" with different inheritance rules than an IRA or 401k.

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

There was a poster a while back that had run into this situation.

1) Dad had large TSP account, he dies and leave it to his wife.
2) Wife left the money in the TSP and then died a few years later and left it to their kid.
3) The kid could not keep the money in the TSP or roll it out to an inherited IRA so was stuck with withdrawing all the money and paying taxes on it in a very high tax bracket.

If either the Mom or Dad had rolled the money into an IRA then the kid could have saved what sounded like a six figure tax bill.

I would be cautious with leaving the money in the TSP after you retire.

mortal
Posts: 445
Joined: Mon Sep 15, 2008 11:15 pm

Re: Convert TSP to roth on retirement?

Post by mortal » Wed Aug 15, 2018 7:31 pm

I
Watty wrote:
Wed Aug 15, 2018 7:29 pm
The TSP also has some "quirks" with different inheritance rules than an IRA or 401k.

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

There was a poster a while back that had run into this situation.

1) Dad had large TSP account, he dies and leave it to his wife.
2) Wife left the money in the TSP and then died a few years later and left it to their kid.
3) The kid could not keep the money in the TSP or roll it out to an inherited IRA so was stuck with withdrawing all the money and paying taxes on it in a very high tax bracket.

If either the Mom or Dad had rolled the money into an IRA then the kid could have saved what sounded like a six figure tax bill.

I would be cautious with leaving the money in the TSP after you retire.
I don't have kids, but this is good to know.

retiredjg
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Joined: Thu Jan 10, 2008 12:56 pm

Re: Convert TSP to roth on retirement?

Post by retiredjg » Wed Aug 15, 2018 7:49 pm

mortal wrote:
Wed Aug 15, 2018 7:26 pm
I'd say the tsp makes up ~ 40% of my portfolio. I also have a Roth IRA (15%?) and a taxable account with the remainder. I'm 35, retirement is 5-10 years out. Currently in 28% tax bracket, but if i convert, I expect to be in the 15% tax bracket. I should have enough existing roth contributions available to fund expenses if I do decide to convert.
So it appears your TSP is an old account. And you are trying to plan for what you will do with it in 5 to 10 years.

I'd wait 5 to 10 years to make that decision. Things will be very different then. By that time you should have other tax-deferred money that could convert to Roth IRA even without touching the TSP.

If you do end up in a low tax bracket, Roth conversions make a lot of sense.

mortal
Posts: 445
Joined: Mon Sep 15, 2008 11:15 pm

Re: Convert TSP to roth on retirement?

Post by mortal » Thu Aug 16, 2018 5:43 pm

I'd wait 5 to 10 years to make that decision.
Hah! You don't know who you're talking to! It takes me 5 minutes to pick a candy bar out of the vending machine. It took me 3 years to settle on the last car I bought. :wink:

More seriously, If I do decide to do this, it could weigh on where I live in retirement. A neighboring state with no income tax moves higher up on the list, and I've been mulling it over for a little while. I wish I knew enough that I could mathematically quantify the pros and cons around this.

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