TSP Roth - Contributions & Tax consequences

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ndnboy
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Joined: Tue Apr 17, 2018 5:16 am

TSP Roth - Contributions & Tax consequences

Post by ndnboy » Wed Nov 21, 2018 4:50 am

Im a retired Fed with a wife currently still with the Govt, both age 50.

We are thinking of placing all her TSP contributions ($19K Elective / $6K Catch Up = $25K) into the TSP Roth, taking advantage of tax free growth. That said, we need to know what that means for us and taxes, since we would be going from a pre-tax contribution to now an after-tax contribution. I can not make contributions to my TSP or convert to Roth but my wife still can.

Retired in 2015 and never took advantage of TSP Roth. Recent changes in our AA has us at a TSP break down of 40% F, 40% C, 20% S, giving us 20% of total portfolio in bonds.

We are high earners and will place us in the new 24% bracket.

How hard would the tax consequence be today for the tax free growth benefit in the future?

Is it a no brainer to take the tax hit today, on the $25K.......

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

https://www.tsp.gov/PlanParticipation/E ... imits.html

Happy Thanksgiving
Thanks

ndnboy
Posts: 85
Joined: Tue Apr 17, 2018 5:16 am

Re: TSP Roth - Contributions & Tax consequences

Post by ndnboy » Wed Nov 21, 2018 6:37 am

Found this on RMD;s : (

Roth TSP and Required Minimum Distributions (RMDs).
The year after you turn age 70½, the IRS requires you to begin receiving a minimum amount of money from your account (unless you are still working). This is your RMD, and it is calculated based on your account balance and IRS life expectancy tables. IRS requirements for RMDs apply to employer-sponsored retire-ment plans like the TSP with no exceptions; therefore, RMDs will apply to Roth money in your TSP account, even though they do not apply to Roth IRAs

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: TSP Roth - Contributions & Tax consequences

Post by rkhusky » Wed Nov 21, 2018 7:40 am

See https://www.bogleheads.org/wiki/Traditional_versus_Roth

In a nutshell, the whole question comes down to a comparison between what tax rate you will pay on Roth contributions now versus what tax rate you will pay on Traditional withdrawals in retirement.

If the rates are the same, then there is no advantage to the Roth (caveat: if you are maxing all tax-advantaged accounts then there is a small advantage to Roth when tax rates are the same). If the tax rate on withdrawals in retirement is higher, Roth has the advantage. If the tax rate on withdrawals in retirement is lower, Traditional has the advantage (see caveat above, where the Roth advantage is on the order of 5% in the tax rate).

You say that you will be taxed 24% on Roth contributions. What will you be taxed on withdrawals in retirement?

I note that you are fairly young. When does your wife plan to retire? If it is soon, you may be in a low tax bracket for a number of years where you can do Roth conversions. That is, you save 24% on Traditional contributions now. Then, when you are both retired, you convert your Traditional holdings to Roth holdings, paying just 12%. This, of course, depends on having sufficient head room in the 12% tax bracket. If your living expense needs put you in the 22% tax bracket, then there isn't much advantage.

Currently, you cannot just move just your Roth TSP to a Roth IRA, all withdrawals are taken pro rata from both Traditional and Roth (note that employer contributions are always Traditional). However, the TSP has indicated that within a year or so, you will be able to separately withdraw Roth.

ndnboy
Posts: 85
Joined: Tue Apr 17, 2018 5:16 am

Re: TSP Roth - Contributions & Tax consequences

Post by ndnboy » Wed Nov 21, 2018 8:35 am

rkhusky wrote:
Wed Nov 21, 2018 7:40 am
See https://www.bogleheads.org/wiki/Traditional_versus_Roth

In a nutshell, the whole question comes down to a comparison between what tax rate you will pay on Roth contributions now versus what tax rate you will pay on Traditional withdrawals in retirement.

If the rates are the same, then there is no advantage to the Roth (caveat: if you are maxing all tax-advantaged accounts then there is a small advantage to Roth when tax rates are the same). If the tax rate on withdrawals in retirement is higher, Roth has the advantage. If the tax rate on withdrawals in retirement is lower, Traditional has the advantage (see caveat above, where the Roth advantage is on the order of 5% in the tax rate).

You say that you will be taxed 24% on Roth contributions. What will you be taxed on withdrawals in retirement?

I note that you are fairly young. When does your wife plan to retire? If it is soon, you may be in a low tax bracket for a number of years where you can do Roth conversions. That is, you save 24% on Traditional contributions now. Then, when you are both retired, you convert your Traditional holdings to Roth holdings, paying just 12%. This, of course, depends on having sufficient head room in the 12% tax bracket. If your living expense needs put you in the 22% tax bracket, then there isn't much advantage.

Currently, you cannot just move just your Roth TSP to a Roth IRA, all withdrawals are taken pro rata from both Traditional and Roth (note that employer contributions are always Traditional). However, the TSP has indicated that within a year or so, you will be able to separately withdraw Roth.
We talk of possible FIRE in 6 yrs at age 56/57, leaving both careers, drawing only my pension, and bridging income with our taxable acts. With the current tax laws we expect to be in the 22% then, unsure but think at RMD age we would remain in the 22% bracket (or pushed into 24%). So its unclear if there is an advantage for us, if possible staying in same bracket.

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: TSP Roth - Contributions & Tax consequences

Post by rkhusky » Wed Nov 21, 2018 9:07 am

Are you also maxing Roth IRA's for each of you?

ndnboy
Posts: 85
Joined: Tue Apr 17, 2018 5:16 am

Re: TSP Roth - Contributions & Tax consequences

Post by ndnboy » Wed Nov 21, 2018 9:16 am

rkhusky wrote:
Wed Nov 21, 2018 9:07 am
Are you also maxing Roth IRA's for each of you?
We cant fund Roths due to income levels but we do both max out 401K/Thrift with catch ups currently.

rkhusky
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Joined: Thu Aug 18, 2011 8:09 pm

Re: TSP Roth - Contributions & Tax consequences

Post by rkhusky » Wed Nov 21, 2018 10:53 am

ndnboy wrote:
Wed Nov 21, 2018 9:16 am
rkhusky wrote:
Wed Nov 21, 2018 9:07 am
Are you also maxing Roth IRA's for each of you?
We cant fund Roths due to income levels but we do both max out 401K/Thrift with catch ups currently.
There is a perfectly-legal two-step process called the Backdoor Roth, where you can get money into a Roth IRA. Basically, you contribute to a Traditional IRA (but don't deduct the amount on your taxes) and then convert the Traditional IRA to Roth the next day. The only hiccup is if you already have a Traditional IRA. See https://www.bogleheads.org/wiki/Backdoor_Roth_IRA
ndnboy wrote:
Wed Nov 21, 2018 8:35 am
We talk of possible FIRE in 6 yrs at age 56/57, leaving both careers, drawing only my pension, and bridging income with our taxable acts. With the current tax laws we expect to be in the 22% then, unsure but think at RMD age we would remain in the 22% bracket (or pushed into 24%). So its unclear if there is an advantage for us, if possible staying in same bracket.
If this ends up being true, then Roth and Traditional are about the same for you. And, since it appears that you don't have any Roth holdings, it might be advisable to put your wife's TSP into Roth, for a few years at least.

If there was a larger gap between the two tax brackets (now at 22% vs 24%), it would provide more incentive to do a more careful analysis.

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grabiner
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Re: TSP Roth - Contributions & Tax consequences

Post by grabiner » Wed Nov 21, 2018 6:54 pm

ndnboy wrote:
Wed Nov 21, 2018 6:37 am
Found this on RMD;s : (

Roth TSP and Required Minimum Distributions (RMDs).
The year after you turn age 70½, the IRS requires you to begin receiving a minimum amount of money from your account (unless you are still working). This is your RMD, and it is calculated based on your account balance and IRS life expectancy tables. IRS requirements for RMDs apply to employer-sponsored retire-ment plans like the TSP with no exceptions; therefore, RMDs will apply to Roth money in your TSP account, even though they do not apply to Roth IRAs
However, you can roll your Roth TSP into a Roth IRA if you need to avoid RMDs from it. (Starting next year, it should be possible to withdraw traditional and Roth balances separately from the TSP.)
Wiki David Grabiner

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