TSP rollover to Vanguard IRA?

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PGary
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TSP rollover to Vanguard IRA?

Post by PGary » Wed Dec 06, 2017 7:58 pm

My wife and I are in our late 60s and I am considering transferring my TSP to a Vanguard IRA.
Advantages of the TSP include the G fund and marginally lower costs. A disadvantage of the TSP is that heirs will owe taxes on their inheritance in the year received rather than the life expectancy method for IRA inheritance. The TSP also has more restrictive withdrawal rules although more flexible withdrawal options will become available within the next 2 years.
Am I correct about taxation during the inheritance year for TSP non-spousal beneficiaries? If so I would favor doing the rollover to a Vanguard IRA.

ENT Doc
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Re: TSP rollover to Vanguard IRA?

Post by ENT Doc » Wed Dec 06, 2017 8:05 pm

Not sure it's mandatory that they receive it in a lump sum. See:

https://www.tsp.gov/PDF/bulletins/14-04.html

If the G fund is an important aspect of your asset allocation and draw-down plan I'd keep it there.

Swansea
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Re: TSP rollover to Vanguard IRA?

Post by Swansea » Thu Dec 07, 2017 6:00 am

Below is an excellent discussion of the case where a spouse inherits a TSP account and needs to decide whether or not to roll it over into an IRA for the benefit of any children. Also, if you crunch the numbers you will find some large mutual funds have very competitive ERs. I found one cheaper than the comparable TSP fund.

Please share this article with your friends and associates. Any mention of our articles and www.fedretire.net on Facebook and other social media would be appreciated.
When a spouse is designated the beneficiary of a Thrift Savings Plan (TSP) account, the inherited account will be converted to the G-Fund upon notification of the death of the annuitant. The spousal beneficiary will be able to access and manage their inherited TSP account, select funds, and elect payouts just as before. No taxes would be due unless you withdraw funds or are required by age to take a minimum distribution.
The TSP’s Death Benefits brochure states on page 11 that, “A beneficiary who is not a surviving spouse cannot retain a TSP account. The death benefit payment will be made directly to the beneficiary or to an ‘inherited’ IRA.” There are distinct benefits for non-spousal beneficiaries to have their inheritance transferred to an inherited IRA. When a death benefit is paid directly to a beneficiary they may be subject to a 20% mandatory federal income tax withholding and the entire amount will be taxable in the year it was inherited. This may create a significant tax burden, depending on the account balance, that can be deferred if the funds are transferred to an inherited IRA with a financial institution such as a brokerage house, financial planning firm, or mutual fund family.
In my article titled “Survivor’s Beware – The TSP Trap“ I discuss what a surviving spouse needs to consider before moving their funds to a private equity firm, precautions they should take, the advantages of the Thrift Savings Plan, the ease of managing their TSP account, and recommendations to safeguard their TSP assets with little to no market risk. These same considerations should be evaluated by retirees and those approaching retirement who are often approached by financial planners with recommendations to move their funds from the TSP to higher market risk investments. There are also some disadvantages to consider for inherited spousal TSP account holders that could negatively impact their heirs.
I kept my TSP account in retirement because of the many TSP advantages that I discuss in the above mentioned article and in The TSP Advantage (Should I Stay or Go). I like the simplicity of the TSP, the lowest management fees in the industry, and the fact that the G-Fund has NO MARKET RISK and is paying a fair return, more than twice what the highest earning CDs are paying these days, 2.4% in 2014. When you consider the L-Income Fund, that has some market risk, pays close to twice what the G-Fund pays you can easily understand my reasoning.
There is one significant exception to this analysis. According to the TSP, “If a beneficiary participant (Annuitant’s spouse) dies, the new beneficiary(ies) cannot continue to maintain the account in the TSP. Also, the death benefit cannot be transferred or rolled over into any type of IRA or plan.” If you are the surviving spouse and inherit your husband or wife’s TSP account your beneficiaries must claim the full amount as income the year that you die.
TSP accounts, especially for FERS annuitants, can be hundreds of thousands of dollars and some exceed a million or more. Because your beneficiaries would have to claim all of that income the year it is inherited they could end up in the top tax bracket, depending on your account balance. The top tax bracket for 2015 of 39.6% starts at $413,200 for a single filer to $464,850 for a married couple filing jointly. If they were allowed to transfer the funds to an inherited IRA account they could spread out or defer payments for years.
If you have a spousal TSP account, and want your beneficiaries to have the option to transfer their inheritance to an inherited IRA account when you die, you can transfer your TSP account to an IRA with either a financial planner, brokerage house, or mutual fund family. If you transfer to an IRA account your heirs can, if desired, transfer their share to an inherited IRA and won’t have to claim the entire amount the year of the inheritance.
You can closely match TSP funds to private sector indexed funds with companies like Fidelity and Vanguard mutual funds or exchange traded funds (ETFs). Indexed funds generally have very low management fees, far less than managed funds charge and ETFs mirror the performance of many indexed mutual funds and they are traded like stocks. These two companies are the giants of the mutual fund industry and will assist you with the transfer and recommend funds that closely match the TSP fund options with some exceptions.
Most mutual fund families and brokerage houses can establish inherited IRAs for their clients however you need to be aware of front and back end loads (fees) that some mutual funds charge that can be as high as 5% or more. I don’t believe there are any mutual funds that can guarantee that your investment will never decrease in value like the TSP G-Fund does. However, there are many government bond fund options to choose from. You don’t have to invest in stocks or mutual funds. You can invest your funds in Certificates of Deposit, maintain a cash account, buy municipal bonds, U.S. Treasury bills, notes or bonds, corporate bonds of all types, or any other investment that you choose in an IRA.
I left instructions with our estate plan advising my wife to eventually transfer her spousal TSP account to an IRA so that our children can elect to transfer their inheritance to an inherited IRA when she dies. Eventually I may consider transferring my TSP account to an IRA so that my wife will not have to deal with this when I die.

PGary
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Re: TSP rollover to Vanguard IRA?

Post by PGary » Thu Dec 07, 2017 10:15 am

Thank you ENT Doc and Swansea for your replies. Is the fedretire.net posting giving conflicting information about tax implications for non-spousal beneficiaries?

www.fedretire.net
The TSP’s Death Benefits brochure states on page 11 that, “A beneficiary who is not a surviving spouse cannot retain a TSP account. The death benefit payment will be made directly to the beneficiary or to an ‘inherited’ IRA.”

According to the TSP, “If a beneficiary participant (Annuitant’s spouse) dies ... the death benefit cannot be transferred or rolled over into any type of IRA or plan.” If you are the surviving spouse and inherit your husband or wife’s TSP account your beneficiaries must claim the full amount as income the year that you die.

nclion
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Re: TSP rollover to Vanguard IRA?

Post by nclion » Sat Dec 09, 2017 12:56 pm

I think a civilian or uniformed service member TSP account can be transferred to an inherited IRA, but a beneficiary(spousal) account can not. Not sure I understand why.

https://www.tsp.gov/PDF/formspubs/tsp-583.pdf

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Jerry55
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Re: TSP rollover to Vanguard IRA?

Post by Jerry55 » Sat Dec 09, 2017 6:33 pm

I have no spouse, so my TSP in full, will be transferred to my 3 children, in equal shares.
My instructions to them are to open an "Inherited IRA" thru Vanguard, choosing either Wellesley or Wellington
(if available and have the TSP transfer those funds DIRECTLY to Vanguard, not to them, because of the tax issues mentioned above....)
and since they are not interested, for now, in attempting to learn, take time THEN, to learn about what to do and how to do it.
They're all between 25 and 37, and have resisted my attempts to teach them. (Dad ! I get a headache whenever you talk about that stuff)

At least, those two funds should keep them out of trouble....for a time being.

The way the Inherited IRA is labled has to be quite clear, and in compliance with how those things are identified. Vanguard knows how.
Retired 12/19/2012 @ age 57 | Good Bye Tension, Hello Pension !!!

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hoppy08520
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Re: TSP rollover to Vanguard IRA?

Post by hoppy08520 » Sat Dec 09, 2017 9:08 pm

This Boglehead wiki page explains it:

TSP estate planning - Bogleheads

If you die first, then your wife can inherit your TSP (assuming she's the beneficiary) as a spousal TSP beneficiary participant. She can remain a TSP participant, but with less options than you had. At that point, when she dies, any of her beneficiaries must take a full taxable distribution. So, sometime after inheriting the TSP, it would be smart of your surviving wife to roll over the TSP to an IRA in order to preserve the tax-advantaged benefits of the account to her heirs.

If your wife dies first and then you die, your beneficiaries cannot become a TSP participant (only a surviving spouse can) but they could roll over your TSP into an inherited IRA (as Jerry55 wrote earlier).

So, you don't really have any looming inheritance taxation problems now. The only inheritance problem is the first scenario, if you die first and then your wife inherits your TSP, and then she dies.

That being said, you might want to make these moves now for the sake of getting your accounts in order.

I think the confusion over what looks like conflicting information is based on mixing up who is dying first. If the original TSP participant dies, any of his beneficiaries can get an inherited IRA, with the exception of a surviving spouse who can either take an inherited IRA or stay in the TSP as a "'beneficiary participant". It's when the TSP beneficiary participant (i.e. a surviving spouse) dies that those beneficiaries of the spouse beneficiary (who are called “successor beneficiaries”) must take a taxable distribution.

Put another way, suppose your have a daughter Dawn. If she is your TSP beneficiary (in part of in full), she can roll over the funds into an inherited IRA, after you die. But if she is your wife's beneficiary after your wife inherits your TSP, then Dawn must take a taxable distribution when your wife dies.

I'm keeping my TSP but I've instructed my wife that if I die first, she should roll the TSP over to an IRA to avoid the tax hit that her beneficiaries (our children) would take when she dies, unless it's at the point where the TSP balance in the context of our overall portfolio could be left to a charity (which wouldn't need to pay taxes on the distribution).

PGary
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Re: TSP rollover to Vanguard IRA?

Post by PGary » Sun Dec 10, 2017 11:18 am

hoppy08520 wrote: If the original TSP participant dies, any of his beneficiaries can get an inherited IRA, with the exception of a surviving spouse who can either take an inherited IRA or stay in the TSP as a "'beneficiary participant". It's when the TSP beneficiary participant (i.e. a surviving spouse) dies that those beneficiaries of the spouse beneficiary (who are called “successor beneficiaries”) must take a taxable distribution.
Thanks. That clears up what I thought was conflicting information.

Engineer250
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Re: TSP rollover to Vanguard IRA?

Post by Engineer250 » Sun Dec 10, 2017 1:36 pm

Jerry55 wrote:
Sat Dec 09, 2017 6:33 pm
They're all between 25 and 37, and have resisted my attempts to teach them. (Dad ! I get a headache whenever you talk about that stuff)
Very generous of you. Not sure I'd leave money to anyone who couldn't be bothered to listen to my advice about it while I was alive. But probably a good reason why I don't have kids.
Where the tides of fortune take us, no man can know.

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VictoriaF
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Re: TSP rollover to Vanguard IRA?

Post by VictoriaF » Mon Dec 11, 2017 11:43 pm

After I retired from the Federal service, I took the first distribution from the TSP, rolled it over into Vanguard, and started making Roth conversions within Vanguard. To continue with my planned Roth conversions, I was going to take the second and final lump-sum distribution from the TSP in 2018. However, after learning about the TSP potentially relaxing their distribution rules and talking with David Grabiner, I decided to take the final distribution in the form of monthly roll-overs from the TSP to my Vanguard Rollover IRA account.

If you are planning to do something similar, keep in mind that the rollover process may take weeks, especially at the end of a year. You have to fill out a TSP form, notarize your signature and send the package to Vanguard. In Vanguard, new requests go into a queue, and at the end of a year, it may take several days for your request to be processed by Vanguard. Vanguard has to fill out their part of the form and forward the package to the TSP. The TSP advises that it may take them 7 to 10 business days to process the request, and additional 7 to 10 business days to send a check to Vanguard.

Thus, allow yourself several weeks for the process. Start it at the end of October or very early November.

Monitor the progress of your request. For example, I wrote to Vanguard a letter with instructions for how to fill out their part of the form and forward the package to the TSP. Today, I learned that Vanguard did NOT follow my instructions about sending the package to the TSP. I hope they filled out the form properly, but I will not find it out until the TSP receives and reviews the form.

Good luck,
Victoria
WINNER of the 2015 Boglehead Contest. | Every joke has a bit of a joke. ... The rest is the truth. (Marat F)

PGary
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Re: TSP rollover to Vanguard IRA?

Post by PGary » Tue Dec 12, 2017 9:03 pm

VictoriaF wrote:
After I retired from the Federal service, I took the first distribution from the TSP, rolled it over into Vanguard, and started making Roth conversions within Vanguard. To continue with my planned Roth conversions, I was going to take the second and final lump-sum distribution from the TSP in 2018. However, after learning about the TSP potentially relaxing their distribution rules and talking with David Grabiner, I decided to take the final distribution in the form of monthly roll-overs from the TSP to my Vanguard Rollover IRA account. [/quoted]

I am also doing annual Roth conversions. Per the previous posts the disadvantage of monthly TSP distributions is that if I die first my spouse would have to roll over the TSP to an IRA in order to preserve the tax-advantaged benefits of the account to her heirs. Is the G fund the main reason you decided not to do a complete roll over to Vanguard?

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