Retirement Funds Questions

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SquawkIdent
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Retirement Funds Questions

Post by SquawkIdent » Sun Jul 07, 2019 10:45 am

I am retired from a federal job that I built up a TSP (401K) account. I am now taking a job in the private sector whose retirement plan is a Simple IRA (with a 3% match). I have read up on Simple IRA's and I am somewhat familiar with them. I do not know yet what investment choices, expenses, etc. there are in the new plan. I'll get that info very shortly. For the last several years I have also done a backdoor IRA. I don’t think I will need to access to any of these retirement funds until I am fully retired as my pension and my current working income will be sufficient. My question involves where do I go from here?

I do have a desire to rollover at least part of my TSP to Vanguard for more diverse funds and eventual withdrawal flexibility. I would leave some money in the TSP (G fund) to make sure I have funds to last me until age 59 1/2 (just a couple years). I don’t foresee myself needing those funds though but just in case I can access it without 72T, early withdrawal penalty, etc.

So my issue comes in because if I did the partial TSP rollover I would be dealing with 3 IRA accounts and the pro rata rules.

My question is should I keep doing the yearly backdoor Roth, start the Simple IRA and do the partial rollover or any combination of those choices. I am having a trouble figuring out if the pro rata rules are a big deal or not. I have read lots of articles about it (mostly stating to avoid the pro rata rules at all costs) and I have done several sample form 8606 and it makes it even more confusing as to whether it’s worth it. I’ve come up with 3 solutions to avoid the pro rata rules (and have just 1 IRA account) and they are listed below.

1. Contribute to the Simple IRA (at least to the match) - don’t do the yearly backdoor IRA - leave the TSP in the 401K

2. Do not contribute to the Simple IRA - do the yearly backdoor IRA - leave the TSP in the 401K

3. Do not contribute to the Simple IRA - don’t do the yearly backdoor IRA - transfer part of the TSP to Vanguard

Any help or thoughts would be greatly appreciated.

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teen persuasion
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Re: Retirement Funds Questions

Post by teen persuasion » Sun Jul 07, 2019 11:07 am

My employer is finally offering a SIMPLE IRA to us, we just signed up.


A SIMPLE IRA is an IRA, so any balance in it will trigger the pro rata issues, making a backdoor Roth IRA contribution complex. In the first 2 years you have a SIMPLE IRA, it can only be rolled to another SIMPLE IRA. After 2 years, it can be rolled to ANY IRA, SIMPLE or not.

Usually the way around the pro rata issue with existing IRA balances is to roll the IRA into an employer's 401k plan. This isn't possible with the SIMPLE IRA for at least 2 years.


How much did you anticipate contributing to retirement accounts for each year? If only $6k (or $7k if age 50+), you could do the backdoor Roth IRA and skip the SIMPLE. If $13k (or $16k if age 50+), you could contribute to the SIMPLE - this is pre-tax and gets the 3% match - and skip the backdoor Roth IRA.

02nz
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Re: Retirement Funds Questions

Post by 02nz » Sun Jul 07, 2019 11:18 am

SquawkIdent wrote:
Sun Jul 07, 2019 10:45 am
I do have a desire to rollover at least part of my TSP to Vanguard for more diverse funds and eventual withdrawal flexibility. I would leave some money in the TSP (G fund) to make sure I have funds to last me until age 59 1/2 (just a couple years). I don’t foresee myself needing those funds though but just in case I can access it without 72T, early withdrawal penalty, etc.

So my issue comes in because if I did the partial TSP rollover I would be dealing with 3 IRA accounts and the pro rata rules.

My question is should I keep doing the yearly backdoor Roth, start the Simple IRA and do the partial rollover or any combination of those choices. I am having a trouble figuring out if the pro rata rules are a big deal or not. I have read lots of articles about it (mostly stating to avoid the pro rata rules at all costs) and I have done several sample form 8606 and it makes it even more confusing as to whether it’s worth it. I’ve come up with 3 solutions to avoid the pro rata rules (and have just 1 IRA account) and they are listed below.

1. Contribute to the Simple IRA (at least to the match) - don’t do the yearly backdoor IRA - leave the TSP in the 401K

2. Do not contribute to the Simple IRA - do the yearly backdoor IRA - leave the TSP in the 401K

3. Do not contribute to the Simple IRA - don’t do the yearly backdoor IRA - transfer part of the TSP to Vanguard

Any help or thoughts would be greatly appreciated.
TSP withdrawal rules are becoming far more flexible this September, details here: https://www.tsp.gov/PDF/formspubs/tspfs10.pdf

TSP's I Fund (already with a much lower expense ratio than most int'l index funds) will get emerging markets exposure starting next year.

With those changes, I don't see much reason to leave TSP, unless you need to do Roth conversions (which was my reason for rolling out part of my TSP balance to Vanguard - if you do that, triple-check Vanguard's work. Vanguard made a bunch of errors with the incoming transfer, and apparently that's not at all uncommon.)

To answer your question - you should definitely not miss out on any matching. Does your SIMPLE IRA allow you to transfer a balance to another plan (e.g. TSP) while you're still in the job? Some 401k plans allow this, but I don't know about SIMPLE IRAs. If that's possible, rolling the balance into TSP would clear the deck for the backdoor Roth.

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teen persuasion
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Re: Retirement Funds Questions

Post by teen persuasion » Sun Jul 07, 2019 11:25 am

Other thoughts:

What mix or balance of traditional vs Roth accounts do you desire? A SIMPLE IRA is always pre-tax, can't be Roth. If you have to choose between contributing to SIMPLE vs backdoor Roth, which do you need more of, tax deferral, or tax free withdrawal?

You mentioned a pension - usually pension income in retirement fills the lower tax brackets first, along with SS, making Roth more desirable. High traditional account balances will trigger larger RMDs eventually, which will be taxed at your ordinary marginal rate. High traditional account balances can be acceptable if you will have a period of lower income in which to do Roth conversions (early retirement, no pension income, delayed SS). Do you anticipate a lower income period for conversions, between retirement and pension/SS income beginning?

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Re: Retirement Funds Questions

Post by SquawkIdent » Sun Jul 07, 2019 3:38 pm

teen persuasion wrote:
Sun Jul 07, 2019 11:07 am
My employer is finally offering a SIMPLE IRA to us, we just signed up.


A SIMPLE IRA is an IRA, so any balance in it will trigger the pro rata issues, making a backdoor Roth IRA contribution complex. In the first 2 years you have a SIMPLE IRA, it can only be rolled to another SIMPLE IRA. After 2 years, it can be rolled to ANY IRA, SIMPLE or not.

Usually the way around the pro rata issue with existing IRA balances is to roll the IRA into an employer's 401k plan. This isn't possible with the SIMPLE IRA for at least 2 years.


How much did you anticipate contributing to retirement accounts for each year? If only $6k (or $7k if age 50+), you could do the backdoor Roth IRA and skip the SIMPLE. If $13k (or $16k if age 50+), you could contribute to the SIMPLE - this is pre-tax and gets the 3% match - and skip the backdoor Roth IRA.
Thanks for you feedback.

Yes, I am now familiar with the rules of the Simple IRA. I did realize that I would have to wait the 2 years before I could roll it into my 401K (if it is still there).

I don't have an exact figure of what I would contribute yearly but my thought was it would be on the lower end of things as I planned on using my salary along with the pension to live on and let my other investments continue to be tax deferred or tax free as long as possible.

It's the giving up the free money from the match that is complicating this. I have to decided whether it is better in my case to do that and then do the backdoor every year of my employment.

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Re: Retirement Funds Questions

Post by SquawkIdent » Sun Jul 07, 2019 3:41 pm

02nz wrote:
Sun Jul 07, 2019 11:18 am
SquawkIdent wrote:
Sun Jul 07, 2019 10:45 am
I do have a desire to rollover at least part of my TSP to Vanguard for more diverse funds and eventual withdrawal flexibility. I would leave some money in the TSP (G fund) to make sure I have funds to last me until age 59 1/2 (just a couple years). I don’t foresee myself needing those funds though but just in case I can access it without 72T, early withdrawal penalty, etc.

So my issue comes in because if I did the partial TSP rollover I would be dealing with 3 IRA accounts and the pro rata rules.

My question is should I keep doing the yearly backdoor Roth, start the Simple IRA and do the partial rollover or any combination of those choices. I am having a trouble figuring out if the pro rata rules are a big deal or not. I have read lots of articles about it (mostly stating to avoid the pro rata rules at all costs) and I have done several sample form 8606 and it makes it even more confusing as to whether it’s worth it. I’ve come up with 3 solutions to avoid the pro rata rules (and have just 1 IRA account) and they are listed below.

1. Contribute to the Simple IRA (at least to the match) - don’t do the yearly backdoor IRA - leave the TSP in the 401K

2. Do not contribute to the Simple IRA - do the yearly backdoor IRA - leave the TSP in the 401K

3. Do not contribute to the Simple IRA - don’t do the yearly backdoor IRA - transfer part of the TSP to Vanguard

Any help or thoughts would be greatly appreciated.
TSP withdrawal rules are becoming far more flexible this September, details here: https://www.tsp.gov/PDF/formspubs/tspfs10.pdf

TSP's I Fund (already with a much lower expense ratio than most int'l index funds) will get emerging markets exposure starting next year.

With those changes, I don't see much reason to leave TSP, unless you need to do Roth conversions (which was my reason for rolling out part of my TSP balance to Vanguard - if you do that, triple-check Vanguard's work. Vanguard made a bunch of errors with the incoming transfer, and apparently that's not at all uncommon.)

To answer your question - you should definitely not miss out on any matching. Does your SIMPLE IRA allow you to transfer a balance to another plan (e.g. TSP) while you're still in the job? Some 401k plans allow this, but I don't know about SIMPLE IRAs. If that's possible, rolling the balance into TSP would clear the deck for the backdoor Roth.
Thank for your thoughts. Yes, I am aware of the more liberal withdrawal rules coming soon. That comes into play also.

My specific Simple IRA rules are forthcoming to me but the point you raised in the last paragraph is a factor too.

It almost comes down to what is more important...the 3% match in the Simple IRA or the yearly backdoor IRA.

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Re: Retirement Funds Questions

Post by SquawkIdent » Sun Jul 07, 2019 3:49 pm

teen persuasion wrote:
Sun Jul 07, 2019 11:25 am
Other thoughts:

What mix or balance of traditional vs Roth accounts do you desire? A SIMPLE IRA is always pre-tax, can't be Roth. If you have to choose between contributing to SIMPLE vs backdoor Roth, which do you need more of, tax deferral, or tax free withdrawal?

You mentioned a pension - usually pension income in retirement fills the lower tax brackets first, along with SS, making Roth more desirable. High traditional account balances will trigger larger RMDs eventually, which will be taxed at your ordinary marginal rate. High traditional account balances can be acceptable if you will have a period of lower income in which to do Roth conversions (early retirement, no pension income, delayed SS). Do you anticipate a lower income period for conversions, between retirement and pension/SS income beginning?
I need more funds in the tax free portion. Right now it's 77% tax deferred and 23% tax free. But to do that I would give up the Simple IRA and that 3% match. That is the difficult decision. But we are only talking about a couple thousand dollars a year doing that.

Yes, I am somewhat concerned about RMD's as you're right my pension and current income make Roth conversions difficult right now. Maybe later, who knows. In about 5 years I may be in a better place to contemplate that.

I also plan on putting off SS as long as possible, probably wait until 70 to do so. So, in the meantime (after total retirement) I will work that 401k balance down.

The more I think about this the more I think I should leave the TSP (401K) alone, skip the Simple IRA and do a yearly backdoor Roth IRA. Still contemplating...

lakpr
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Re: Retirement Funds Questions

Post by lakpr » Sun Jul 07, 2019 4:01 pm

SquawkIdent,

What is your asset allocation, and do you have any allocation towards your bonds at all?

The reason I ask this is that, you can continue to do the backdoor Roth IRA, at least the first step of it, while you are contributing to the SIMPLE IRA.
Simply make non-deductible contributions to the traditional IRA every year, but do NOT convert. File form 8606 every year and keep track of the total basis. Invest exclusively into only bond funds in both these accounts. Since you are forced to contribute into bonds in the SIMPLE IRA and traditional IRA, exchange the funds in your TSP into stocks to maintain your asset allocation.

As far as bonds go, there is not much difference between contributing within a deductible account (like SIMPLE IRA / 401-k) and non-deductible tIRA. The growth is taxed as ordinary income in either option, it's only the front-end contribution that's either taxed at contribution (n-d-tIRA) or withdrawal (SIMPLE IRA) as ordinary income. If the time period we are talking about is less than 5 years, it really does not matter. The conversion step from n-d-tIRA to Roth IRA can take place after you are able to roll the SIMPLE IRA into TSP (after 2 years or you retire for good); the tax bite is going to be minimal. Growth in bond funds is what, perhaps 1% over inflation? Keep in mind that the tax brackets are going to be adjusted for inflation also, so the tax brackets may grow faster than the growth in these accounts.

I'd hate to be losing that tax-advantaged space ($13000 for SIMPLE + $6k or $7k for n-d-tIRA) every year you continue to work. All this money can eventually be converted into Roth IRA, take the minimal tax bite, and from then on growth can be tax free.

Whatever you do, please do not close the TSP account. It has some really unicorn benefits, that it will allow the roll over of IRAs into it even if you leave the Federal workforce, there is really nothing like its equivalent in the private world. You can use the TSP to shield those pesky IRAs that could cause pro-rata issues with the Roth conversion step in the back-door Roth maneuver. Given that you have the TSP account for a few years, I am assuming you have some substantial balances in there that you can easily switch from a bond fund to a stock fund within the account to counteract the exclusive investments in bond fund between the upcoming SIMPLE IRA and the n-d-tIRA.

02nz
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Re: Retirement Funds Questions

Post by 02nz » Sun Jul 07, 2019 4:20 pm

SquawkIdent wrote:
Sun Jul 07, 2019 3:49 pm
The more I think about this the more I think I should leave the TSP (401K) alone, skip the Simple IRA and do a yearly backdoor Roth IRA. Still contemplating...
I really can't think of a situation in which it would make sense to give up 3% matching to do a backdoor Roth IRA. We don't know your income, but let's say $100K, so the matching is $3K. You'd pay $3K to get the tax benefits of a $6K backdoor Roth contribution?? That sounds nuts to me. If you're so into having more Roth space, just do Roth conversions. Even at the highest possible marginal tax rates - fed + CA combined - $3K is about what you'd pay in taxes to convert $6K from traditional to Roth, but then your 3% matching would come to a lot more than $3K, and of course you have opportunities to pay less than 50% taxes when income is lower.

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Re: Retirement Funds Questions

Post by SquawkIdent » Sun Jul 07, 2019 4:37 pm

lakpr wrote:
Sun Jul 07, 2019 4:01 pm
SquawkIdent,

What is your asset allocation, and do you have any allocation towards your bonds at all?

The reason I ask this is that, you can continue to do the backdoor Roth IRA, at least the first step of it, while you are contributing to the SIMPLE IRA.
Simply make non-deductible contributions to the traditional IRA every year, but do NOT convert. File form 8606 every year and keep track of the total basis. Invest exclusively into only bond funds in both these accounts. Since you are forced to contribute into bonds in the SIMPLE IRA and traditional IRA, exchange the funds in your TSP into stocks to maintain your asset allocation.

As far as bonds go, there is not much difference between contributing within a deductible account (like SIMPLE IRA / 401-k) and non-deductible tIRA. The growth is taxed as ordinary income in either option, it's only the front-end contribution that's either taxed at contribution (n-d-tIRA) or withdrawal (SIMPLE IRA) as ordinary income. If the time period we are talking about is less than 5 years, it really does not matter. The conversion step from n-d-tIRA to Roth IRA can take place after you are able to roll the SIMPLE IRA into TSP (after 2 years or you retire for good); the tax bite is going to be minimal. Growth in bond funds is what, perhaps 1% over inflation? Keep in mind that the tax brackets are going to be adjusted for inflation also, so the tax brackets may grow faster than the growth in these accounts.

I'd hate to be losing that tax-advantaged space ($13000 for SIMPLE + $6k or $7k for n-d-tIRA) every year you continue to work. All this money can eventually be converted into Roth IRA, take the minimal tax bite, and from then on growth can be tax free.

Whatever you do, please do not close the TSP account. It has some really unicorn benefits, that it will allow the roll over of IRAs into it even if you leave the Federal workforce, there is really nothing like its equivalent in the private world. You can use the TSP to shield those pesky IRAs that could cause pro-rata issues with the Roth conversion step in the back-door Roth maneuver. Given that you have the TSP account for a few years, I am assuming you have some substantial balances in there that you can easily switch from a bond fund to a stock fund within the account to counteract the exclusive investments in bond fund between the upcoming SIMPLE IRA and the n-d-tIRA.
I never thought of the awesome point you raised. :oops:

Another option...contribute to the Simple IRA (at a bare minimum to get the full match), contribute to the traditional IRA (but don't backdoor it...yet) and leave the TSP alone still in the 401K.

Yes, I can tweak allocations in all the other accounts to make this work.

After total retirement, look at it again and combine accounts where I can. And back door that traditional IRA funds.

Thanks. :sharebeer

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Re: Retirement Funds Questions

Post by SquawkIdent » Sun Jul 07, 2019 4:39 pm

02nz wrote:
Sun Jul 07, 2019 4:20 pm
SquawkIdent wrote:
Sun Jul 07, 2019 3:49 pm
The more I think about this the more I think I should leave the TSP (401K) alone, skip the Simple IRA and do a yearly backdoor Roth IRA. Still contemplating...
I really can't think of a situation in which it would make sense to give up 3% matching to do a backdoor Roth IRA. We don't know your income, but let's say $100K, so the matching is $3K. You'd pay $3K to get the tax benefits of a $6K backdoor Roth contribution?? That sounds nuts to me. If you're so into having more Roth space, just do Roth conversions. Even at the highest possible marginal tax rates - fed + CA combined - $3K is about what you'd pay in taxes to convert $6K from traditional to Roth, but then your 3% matching would come to a lot more than $3K, and of course you have opportunities to pay less than 50% taxes when income is lower.
Point taken, thanks. Many pieces to this puzzle.

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Re: Retirement Funds Questions

Post by Duckie » Sun Jul 07, 2019 4:52 pm

SquawkIdent wrote:I’ve come up with 3 solutions to avoid the pro rata rules (and have just 1 IRA account) and they are listed below.

1. Contribute to the Simple IRA (at least to the match) - don’t do the yearly backdoor IRA - leave the TSP in the 401K

2. Do not contribute to the Simple IRA - do the yearly backdoor IRA - leave the TSP in the 401K

3. Do not contribute to the Simple IRA - don’t do the yearly backdoor IRA - transfer part of the TSP to Vanguard

Any help or thoughts would be greatly appreciated.
4. For the next two years, contribute to the SIMPLE IRA to the max, contribute to the TIRA to the max but don't convert, and leave the Thrift Savings Plan where it is. After your SIMPLE IRA has existed for two years you can roll its assets over to your TSP on at least a yearly basis, preferably the end of December. Once that happens you can convert your TIRA to your Roth IRA. (You'll have two years of growth in your TIRA on which to pay taxes, so hold just a money market in the TIRA.)

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Re: Retirement Funds Questions

Post by SquawkIdent » Sun Jul 07, 2019 7:19 pm

Duckie wrote:
Sun Jul 07, 2019 4:52 pm
SquawkIdent wrote:I’ve come up with 3 solutions to avoid the pro rata rules (and have just 1 IRA account) and they are listed below.

1. Contribute to the Simple IRA (at least to the match) - don’t do the yearly backdoor IRA - leave the TSP in the 401K

2. Do not contribute to the Simple IRA - do the yearly backdoor IRA - leave the TSP in the 401K

3. Do not contribute to the Simple IRA - don’t do the yearly backdoor IRA - transfer part of the TSP to Vanguard

Any help or thoughts would be greatly appreciated.
4. For the next two years, contribute to the SIMPLE IRA to the max, contribute to the TIRA to the max but don't convert, and leave the Thrift Savings Plan where it is. After your SIMPLE IRA has existed for two years you can roll its assets over to your TSP on at least a yearly basis, preferably the end of December. Once that happens you can convert your TIRA to your Roth IRA. (You'll have two years of growth in your TIRA on which to pay taxes, so hold just a money market in the TIRA.)
I like it. It takes advantage of all the great things each type of account has to offer and without the rules of the pro rata situation. I'll think about it but this is definitely a strong contender.

Thank you. :sharebeer

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Re: Retirement Funds Questions

Post by SquawkIdent » Tue Jul 16, 2019 3:43 pm

Updated information...

The Simple IRA plan charges a $10 account annual fee, .50% management account fee and the average fund fee is about .50%.

So my question is, should the fees come into account as to the plan going forward? I am planning to only keep this money in here as long as I can get it into the 401K ASAP without penalty. If I allowed that to happen I would be giving up the 3% match.

lakpr
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Re: Retirement Funds Questions

Post by lakpr » Tue Jul 16, 2019 4:01 pm

I would still max the SIMPLE IRA. Given that after two years you are allowed to roll this entire balance into TSP, and at least once an year after that, you are essentially paying $140 fee per year (as you won’t allow the balance to grow indefinitely, you have that wonderful backstop oc TSP). I am sure your 3% match from the employer is more than $140 per year.

I got $140 based on 1% of $13k max, plus $10 per year. You are going to invest in bond funds only in the SIMPLE IRA aren’t you? So there should be minimal growth, thus your fees is not much more than $150 per year.

If it helps any: my MegaCorp plan charges a flat fees of $15 per quarter. Half of what you pay, yes, but also your employer has a tiny fraction of employees MegaCorp has, so another $80 per year isn’t an unreasonable additional cost to administer the plan.

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Re: Retirement Funds Questions

Post by lakpr » Tue Jul 16, 2019 4:05 pm

Making a separate post, I didn’t get the last paragraph. Are you saying that if you roll over the balance in your SIMPLE IRA externally, you are going to have to forfeit the 3% match? Does this have a time limit before you are fully vested in the employer match?

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Re: Retirement Funds Questions

Post by SquawkIdent » Tue Jul 16, 2019 7:31 pm

lakpr wrote:
Tue Jul 16, 2019 4:05 pm
Making a separate post, I didn’t get the last paragraph. Are you saying that if you roll over the balance in your SIMPLE IRA externally, you are going to have to forfeit the 3% match? Does this have a time limit before you are fully vested in the employer match?
No, I would give up the 3% match, if I roll over. I'm saying I would give up the 3% match if I decided not to do it at all.

Thanks for that info on the MegaCorp fees. I was unaware of that as I have been more than spoiled with the TSP fund fees and not annual/quarterly fees for the account. So my Simple IRA fees don't really sound too high comparatively.

I'll have to look closer at the funds offered and find the best ones to fit my portfolio.

Thanks. :sharebeer

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