TSP(401k?) to IRA to ROTH - questions

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StretchNM
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TSP(401k?) to IRA to ROTH - questions

Post by StretchNM » Wed Nov 07, 2018 3:43 pm

Hello, I'm new but have been working with a Financial Advisor at First Command and reading articles published by Nerdwallet, PTMoney, and others. I already have 2 ROTH IRAs with First Command - brokered by Franklin Templeton. I hope you can help me.

I am 60 and retired earning a pension. My wife is 58 and works part-time, earning about $10K per year. Our total income is about $95k (not adjusted) per year. I am in the 20% tax rate I think. (?)

My TSP - Thrift Savings Plan is entirely pre-tax, and is currently invested 60% Govt. Bonds and Securities and 40% S&P Index Funds. I have no ROTH account in my TSP.

Working with Financial Advisor, I want to rollover my entire TSP (example: $300K) into a new Traditional IRA. Then, convert tax-manageable chunks each year into one ROTH or split between both of my ROTH accounts. Tax-manageable meaning amounts that, when added with our income, will keep me in the same tax bracket next year (i.e. 20% rate is maximum $165K, less $95K income, so then maximum $70K conversion to ROTH.)

In fact, what we are currently planning is to do the rollover to IRA now and when it is complete, then convert an amount (say the $70K) into the ROTH for this year. Taxes will be due on it next year(2019). Then, in January 2019, convert another tax-manageable amount so it can begin earning throughout the year, and I will owe income tax on it for the 2019 tax year.

I have been reading about tax due on certain money that remains in the Traditional IRA after conversion; Aggregation Rule and pro-rata; Step-Transaction rule violations, etc., and I am concerned that we may not be doing the right thing, or maybe I could face trouble down the road.

Can you shed some light on my situation? I will answer any questions to help clarify. Right now I'm confused and don't want IRS or other trouble.
Thank you.

retiredjg
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Re: TSP(401k?) to IRA to ROTH - questions

Post by retiredjg » Wed Nov 07, 2018 5:26 pm

I'm going to suggest that you abandon this idea. :happy

The idea of rolling part of your TSP into an IRA and converting part of it to Roth IRA each year is likely a good one. First Command is not a good choice of where to do that.

It is not uncommon for "advisors" to recommend that retirees take money out of the best plan on the planet (the TSP) and move it to their own company. They don't suggest this for your good. In fact, your costs will go up A LOT and that means less money for you.

The reason the advisors make this suggestion is so that they can make money from your money. Some of the portfolios we've seen from First command not only have high fees for their funds, they also charge you more than 1% a year to manage your money for you.

If you get into this relationship, you could easily be giving your "advisor" a full 1/4 (or more) of what should be your annual withdrawal.

Don't do it.

Here are some previous threads regarding First Command. I suggest you check some out. Also be sure to read the link about "Military Finances".

https://www.google.com/search?sitesearc ... st+command

First off...do not do this rollover. It is a bad idea..

Next, after the dust settles, people here can help you figure out what to do - how much (if any) to convert, etc. However, it will take some work on your part to help us help you.

retiredjg
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Re: TSP(401k?) to IRA to ROTH - questions

Post by retiredjg » Wed Nov 07, 2018 5:27 pm

P.S. Welcome to the forum! You have come to the right place. :happy

Helo80
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Re: TSP(401k?) to IRA to ROTH - questions

Post by Helo80 » Wed Nov 07, 2018 5:32 pm

StretchNM wrote:
Wed Nov 07, 2018 3:43 pm
Hello, I'm new but have been working with a Financial Advisor at First Command and reading articles published by Nerdwallet, PTMoney, and others. I already have 2 ROTH IRAs with First Command - brokered by Franklin Templeton. I hope you can help me.

I am 60 and retired earning a pension. My wife is 58 and works part-time, earning about $10K per year. Our total income is about $95k (not adjusted) per year. I am in the 20% tax rate I think. (?)

My TSP - Thrift Savings Plan is entirely pre-tax, and is currently invested 60% Govt. Bonds and Securities and 40% S&P Index Funds. I have no ROTH account in my TSP.


Did your Financial Adviser tell you that if you roll all of your money out of TSP (or have a balance of less than $200), your TSP account is closed permanently? The only way to re-open it is to enter federal service again. It sounds like you're using the G-Fund, and that is a unique asset vehicle exclusively for federal employees as there is never the risk of loss of principal.

As others have mentioned, TSP, while having relatively few options, is honestly a terrific plan and gets high marks from most posts on BH.

krafty81
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Re: TSP(401k?) to IRA to ROTH - questions

Post by krafty81 » Wed Nov 07, 2018 5:35 pm

Jettison First Command for sure. You should keep your TSP.

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Jerry55
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Re: TSP(401k?) to IRA to ROTH - questions

Post by Jerry55 » Wed Nov 07, 2018 5:37 pm

retiredjg wrote:
Wed Nov 07, 2018 5:26 pm
I'm going to suggest that you abandon this idea. :happy
.
.
.
.
First off...do not do this rollover. It is a bad idea..

Next, after the dust settles, people here can help you figure out what to do - how much (if any) to convert, etc. However, it will take some work on your part to help us help you.
I agree 110%. I retired in 2012, and prior to that, I went to 3 or 4 retirement seminars.
A ROTH IRA was not part of my vision, but after the first 2 advisors told me the best thing to do was to roll it OUT of the TSP and follow their suggestions. Being suspicious by nature, and being a Boglehead here for a few years before that, I looked into what their "Suggestions" would cost
me, and ran the numbers.

All I can say it "HOLY COW" !!!

I basically saw what amounted to a transfer of wealth from ME to THEM, comparatively speaking, with High Fees, and more.
Suffice it to say that I did not take ANY of their suggestions, thanked them for their time and moved on. I was 57 at that time, so I had many
years to figure it out, and I have. None of them are part of my solution, and were mentally kicked to the curb quickly.

Good Luck with your choices. Take your time. This board is a great place to begin if you are.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

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HueyLD
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Re: TSP(401k?) to IRA to ROTH - questions

Post by HueyLD » Wed Nov 07, 2018 5:46 pm

I don't know anything about Roth TSP. So, here is a dumb question.

Can you convert from traditional TSP to Roth TSP for any amount you choose?

StretchNM
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Re: TSP(401k?) to IRA to ROTH - questions

Post by StretchNM » Wed Nov 07, 2018 6:21 pm

HueyLD wrote:
Wed Nov 07, 2018 5:46 pm
I don't know anything about Roth TSP. So, here is a dumb question.

Can you convert from traditional TSP to Roth TSP for any amount you choose?
No HueyLD. After leaving Govt service, you can no longer contribute monies to the account, nor can you rollover over into their ROTH. So basically, my options are: Intrafund transfer between investment plans, partial or full withdrawal (including rollover), and withdrawing monthly payments. So the only way for me to get any of the TSP money into a ROTH is to roll it into a Traditional IRA, then convert to ROTH.
Thank you

StretchNM
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Re: TSP(401k?) to IRA to ROTH - questions

Post by StretchNM » Wed Nov 07, 2018 6:32 pm

Thank you retiredJG, Helo80, Krafty81, and Jerry55. Your warnings are in addition to other warnings I have received about personal Financial Advisors, and even about First Command.

First, there is a 2% sales charge. My TSP account is more than 300K (I used that as an example to keep it simple) so the sales charge on the full amount is HUGE, right off the top and right up front. And yes, I was planning to rollover the entire TSP account and let them close it.

Then there is a .98% management fee. Then there may be load fees depending on the investment funds I choose with Franklin Templeton.

BUT! I really do think that converting at least some relatively large fund amounts into a ROTH (albeit perhaps with a different broker) is still a good idea. Am I on track about this?

We were planning to do this and complete it a couple of weeks ago, but before I did I went to the TSP Facebook page and posted questions. Of course they advised to leave it in the TSP and just wait for the new withdrawal options to come into play in late 2019. SO I began reading, and reading, and reading, and eventually ended up in here to learn some more.
Thank you. Please keep posting your thoughts if you don't mind.

ON EDIT: Yes my TSP investments are currently 60% G and 40% C.
Last edited by StretchNM on Wed Nov 07, 2018 6:37 pm, edited 1 time in total.

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FiveK
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Re: TSP(401k?) to IRA to ROTH - questions

Post by FiveK » Wed Nov 07, 2018 6:35 pm

StretchNM wrote:
Wed Nov 07, 2018 6:32 pm
I really do think that converting at least some relatively large fund amounts into a ROTH (albeit perhaps with a different broker) is still a good idea. Am I on track about this?
Yes!

The general idea to do strategic traditional->Roth conversions is a good one. It's the specific tactic of using a high cost advisor/provider such as First Command to which posters are objecting.

retiredjg
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Re: TSP(401k?) to IRA to ROTH - questions

Post by retiredjg » Wed Nov 07, 2018 6:39 pm

StretchNM wrote:
Wed Nov 07, 2018 6:21 pm
So the only way for me to get any of the TSP money into a ROTH is to roll it into a Traditional IRA, then convert to ROTH.
This is what I do/did. I used my "one time" lump sum withdrawal after retirement and rolled a chunk of money into an IRA at Vanguard. The rest I left in the TSP for the low costs. It is invested entirely in the F and G funds. I have not touched that account in 11 years and it just keeps cooking along with its ultra low costs.

Regarding the IRA, I take whatever money I need for expenses out of the IRA each year. And I do a Roth conversion up to an AGI of $85k each year. I don't go higher than that because it would increase what I pay for Medicare Part B (I'm single).

I will not get all my tax-deferred money converted to Roth before age 70.5 by any means. But I hope to move enough of it that I don't get pushed into a higher tax bracket after RMDs start. That's the whole point of the Roth conversions for me.

Once the rules change next year, I hope to take money from the TSP for my expenses because my TSP money is not taxed by the state I live in. :D

Many people here are doing Roth conversions. In fact, here is a great thread from a few years ago started by Victoria as she was planning how to do hers.

viewtopic.php?t=170477

retiredjg
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Re: TSP(401k?) to IRA to ROTH - questions

Post by retiredjg » Wed Nov 07, 2018 6:42 pm

StretchNM wrote:
Wed Nov 07, 2018 6:32 pm
BUT! I really do think that converting at least some relatively large fund amounts into a ROTH (albeit perhaps with a different broker) is still a good idea. Am I on track about this?
Yes. Roth conversions up to a logical limit is a good idea. It's First Command or any other high cost broker that is a bad idea. Your instincts were right.

rkhusky
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Re: TSP(401k?) to IRA to ROTH - questions

Post by rkhusky » Wed Nov 07, 2018 6:57 pm

StretchNM wrote:
Wed Nov 07, 2018 3:43 pm
I am 60 and retired earning a pension. My wife is 58 and works part-time, earning about $10K per year. Our total income is about $95k (not adjusted) per year. I am in the 20% tax rate I think. (?)
With a total income of $95K, you are near the top of the 12% tax bracket (married filing jointly with standard deduction of $24K). What you need to figure out is what your marginal rate will be later in retirement to decide if converting to Roth would be beneficial.

Will you get cost of living adjustments to your pension starting at age 62? Are you getting a FERS supplement that will end at age 62?

To figure out your future tax rate, you will need to consider SS (perhaps taken at 70) and RMD's, required distributions from TSP or Traditional IRA at age 70.5. You can use a current tax form to play with the numbers. The first RMD at age 70.5 will be the total of your TSP and Traditional IRA accounts divided by 27.4. The denominator becomes smaller every year thereafter.

What are your yearly expenses? And do you expect the expenses to be relatively stable in future years? This will determine if you will need to withdraw from your retirement accounts to pay for retirement expenses or will your pension cover all your expenses.

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Jerry55
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Re: TSP(401k?) to IRA to ROTH - questions

Post by Jerry55 » Wed Nov 07, 2018 8:49 pm

May I also suggest another website for FEDs, which I frequent as much as this one.

https://forum.federalsoup.com/

Lots of Federal employees and Agencies / Organizations with experts from Federal Times/ Federal News Radio like Ed Zurndorfer, CFP who's quite adept at Federal programs. Too many topics are there to read, from Getting Hired, to Retirement, and maybe 20 others. That's where I learned about the VCP program (available to CSRS and CSRS Offset - TransFERS only). Many there are also here, and vice versa.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

StretchNM
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Re: TSP(401k?) to IRA to ROTH - questions

Post by StretchNM » Wed Nov 07, 2018 9:17 pm

Thank you retiredjg and Jerry55
rkhusky wrote:
Wed Nov 07, 2018 6:57 pm
With a total income of $95K, you are near the top of the 12% tax bracket (married filing jointly with standard deduction of $24K). What you need to figure out is what your marginal rate will be later in retirement to decide if converting to Roth would be beneficial.
Thanks rkhusky. I'm looking at a tax percentage table and, assume my AGI is $74K, then it looks like you're right I'm in the 12% bracket. But if I actually make a little more than that, then I would be in the 22% bracket and I could convert substantially more to the ROTH (up to $165K of income). Or, I could just suffer the 22% bracket and convert that larger amount. Is this correct?
rkhusky wrote:
Wed Nov 07, 2018 6:57 pm
Will you get cost of living adjustments to your pension starting at age 62? Are you getting a FERS supplement that will end at age 62?
I'm not sure about the COLA adjustments, but I am getting a FERS Supplement that I think stops at age 62. That's really going to take my income down quite a bit (uncomfortably so).
rkhusky wrote:
Wed Nov 07, 2018 6:57 pm
.........
What are your yearly expenses? And do you expect the expenses to be relatively stable in future years? This will determine if you will need to withdraw from your retirement accounts to pay for retirement expenses or will your pension cover all your expenses.
My yearly expenses are very low and I expect them to remain so. Still, we will want to be able to draw some money for "retirement activities". But mostly, the IRA and ROTHs will be for my spouse to assume or rollover into hers if she can, then she'll leave my daughter as her beneficiary.

rkhusky
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Re: TSP(401k?) to IRA to ROTH - questions

Post by rkhusky » Wed Nov 07, 2018 9:40 pm

StretchNM wrote:
Wed Nov 07, 2018 9:17 pm
Thank you retiredjg and Jerry55
rkhusky wrote:
Wed Nov 07, 2018 6:57 pm
With a total income of $95K, you are near the top of the 12% tax bracket (married filing jointly with standard deduction of $24K). What you need to figure out is what your marginal rate will be later in retirement to decide if converting to Roth would be beneficial.
Thanks rkhusky. I'm looking at a tax percentage table and, assume my AGI is $74K, then it looks like you're right I'm in the 12% bracket. But if I actually make a little more than that, then I would be in the 22% bracket and I could convert substantially more to the ROTH (up to $165K of income). Or, I could just suffer the 22% bracket and convert that larger amount. Is this correct?
rkhusky wrote:
Wed Nov 07, 2018 6:57 pm
Will you get cost of living adjustments to your pension starting at age 62? Are you getting a FERS supplement that will end at age 62?
I'm not sure about the COLA adjustments, but I am getting a FERS Supplement that I think stops at age 62. That's really going to take my income down quite a bit (uncomfortably so).
rkhusky wrote:
Wed Nov 07, 2018 6:57 pm
.........
What are your yearly expenses? And do you expect the expenses to be relatively stable in future years? This will determine if you will need to withdraw from your retirement accounts to pay for retirement expenses or will your pension cover all your expenses.
My yearly expenses are very low and I expect them to remain so. Still, we will want to be able to draw some money for "retirement activities". But mostly, the IRA and ROTHs will be for my spouse to assume or rollover into hers if she can, then she'll leave my daughter as her beneficiary.
My guess is that you are not getting COLA's now, but will start getting them at 62.

Once you lose the FERS supplement and your wife stops working, then your income will drop even further below the 12%/22% boundary. That would be an ideal time to do Roth conversions, until taking SS and facing RMD's.

It's a no-brainer to do Roth conversions to the top of the 12% bracket. It is very unlikely that you will end up paying less than 12% with SS and RMD's

If you pay 22% now to do Roth conversions and end up being in the 22% bracket with SS and RMD's, then you break even. If you instead end up in the 12% bracket with SS and RMD's, you paid too much to do the Roth conversions. From what I can tell, it is very unlikely you would end up in the 24% tax bracket.

The decision requires a bit of prognostication. Playing with tax software or the tax forms is helpful to get a sense of the trade-offs.

Note that AGI is approximately your total income (e.g. $95K). Taxable income is approximately what you pay taxes on (e.g. $71K).

retiredjg
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Re: TSP(401k?) to IRA to ROTH - questions

Post by retiredjg » Thu Nov 08, 2018 7:19 am

StretchNM wrote:
Wed Nov 07, 2018 9:17 pm
Thanks rkhusky. I'm looking at a tax percentage table and, assume my AGI is $74K, then it looks like you're right I'm in the 12% bracket.
You are getting the terms AGI (aggregated gross income) and taxable income confused.

AGI is the last line on last year's Form 1040. If your income is $95k, your AGI is probably at or near $95k.

Your taxable income is line 43 on Form 1040. That is the number after deductions and more likely to be $74k. This is the number to compare to the tax table.

So, yes, if your taxable income this year will be about $74k, you are in the 12% tax bracket with only a little room left in that tax bracket.


But if I actually make a little more than that, then I would be in the 22% bracket and I could convert substantially more to the ROTH (up to $165K of income). Or, I could just suffer the 22% bracket and convert that larger amount. Is this correct?
You can convert as much as you want if you are willing to pay the taxes.

But....it is not obvious yet (to us) that you even NEED to do these Roth conversions. If your total tax-deferred savings is only $300k, you may not need to do this at all.

retiredjg
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Re: TSP(401k?) to IRA to ROTH - questions

Post by retiredjg » Thu Nov 08, 2018 7:29 am

rkhusky wrote:
Wed Nov 07, 2018 9:40 pm
It's a no-brainer to do Roth conversions to the top of the 12% bracket. It is very unlikely that you will end up paying less than 12% with SS and RMD's
This is how I see it as well.

If you pay 22% now to do Roth conversions and end up being in the 22% bracket with SS and RMD's, then you break even. If you instead end up in the 12% bracket with SS and RMD's, you paid too much to do the Roth conversions. From what I can tell, it is very unlikely you would end up in the 24% tax bracket.
However, when one of you dies, the survivor will be pushed into the 22% for sure (which will be the 25% bracket if/when tax rates go back). So converting some now into the 22% bracket is reasonable.....if you actually need to do the Roth conversions in the first place.

In my mind, the primary reason to do the Roth conversions is because your tax-deferred savings is so large that RMDs will push you into a higher bracket in your later years. It is not clear to me that you are in that position.

What are your reasons for considering Roth conversions? Did the "advisor" suggest some reasons? If yes, you may want to examine them a little more closely.

MichDad
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Re: TSP(401k?) to IRA to ROTH - questions

Post by MichDad » Thu Nov 08, 2018 10:47 am

I'm late to this thread but want to join the chorus. I'm a retired federal employee (FERS) with a substantial TSP balance. Here's my advice:

1. Fire your advisor. He (or she) is charging way too much. You can read up on these issues on this forum and do 90 percent of what you need to do without the high fees.

2. Do not close your TSP account. Yes, it may be worthwhile to move a significant portion to a rollover IRA and to then make annual Roth conversions from that rollover IRA, but do not close your TSP account. Please read up (on this forum, for example) on the benefits of the TSP's G Fund. It could be worthwhile for you to maintain holdings in the G Fund.

3. In September 2019 (only ten months from now), the Federal Retirement Thrift Investment Board will implement new liberalized TSP withdrawal rules. In general, those new rules will allow separated TSP participants and beneficiaries to make many withdrawals from their accounts and to change the amounts of those withdrawals as needed. I retired earlier this year (at age 62) but have decided to not touch my TSP account until those liberalized withdrawal rules take effect.

4. Consider delaying receipt of your Social Security benefits until age 70, if you can afford it. Consider using the time between now and age 70 to make Roth conversions.

5. I agree with the comment that a TSP balance of "only" $300,000 may not pose problems when Required Minimum Distributions kick in at age 70.5. You need to do some tax simulations that assume that you and your wife are both alive or that only one of you is alive.

Continue to read up and pose questions on this forum.

All the best,

MichDad

retiredjg
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Re: TSP(401k?) to IRA to ROTH - questions

Post by retiredjg » Thu Nov 08, 2018 10:55 am

MichDad wrote:
Thu Nov 08, 2018 10:47 am
3. In September 2019 (only ten months from now), the Federal Retirement Thrift Investment Board will implement new liberalized TSP withdrawal rules. In general, those new rules will allow separated TSP participants and beneficiaries to make many withdrawals from their accounts and to change the amounts of those withdrawals as needed.
You are always so good about keeping up with the TSP info. :happy

Any idea how many "many withdrawals" might be? I'm also looking forward to this because it will lower my state income tax (which isn't high, but...)

02nz
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Re: TSP(401k?) to IRA to ROTH - questions

Post by 02nz » Thu Nov 08, 2018 11:06 am

There isn't much time left in this year to roll over a portion of your TSP to an IRA at another institution so you need to plan carefully (and maybe just forget about 2018 - better to get this right than be in a rush and make a big mistake). You need to fill out the TSP paperwork, have it notarized, send it to the receiving institution for them to fill out their part, then they send it to TSP for processing. (The actual conversion to Roth at the new institution is basically instantaneous.) TSP is fairly quick doing their part, so it will come down to how quickly the receiving institution does their work. Quite possible that this time of year it will take longer than usual, e.g. see this report from a few years ago: viewtopic.php?t=178281.

Agree with all the advice about not using First Command and financial advisors generally. Two months ago I would've readily recommended Vanguard, but they managed to thoroughly screw up a very similar transaction for me (viewtopic.php?t=261539). You can hold Vanguard funds or ETFs at another institution, e.g., Fidelity, Schwab, or Merrill Edge.
Last edited by 02nz on Thu Nov 08, 2018 11:14 am, edited 1 time in total.

02nz
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Re: TSP(401k?) to IRA to ROTH - questions

Post by 02nz » Thu Nov 08, 2018 11:08 am

retiredjg wrote:
Thu Nov 08, 2018 10:55 am
MichDad wrote:
Thu Nov 08, 2018 10:47 am
3. In September 2019 (only ten months from now), the Federal Retirement Thrift Investment Board will implement new liberalized TSP withdrawal rules. In general, those new rules will allow separated TSP participants and beneficiaries to make many withdrawals from their accounts and to change the amounts of those withdrawals as needed.
You are always so good about keeping up with the TSP info. :happy

Any idea how many "many withdrawals" might be? I'm also looking forward to this because it will lower my state income tax (which isn't high, but...)
Link below is the best info so far. It does not specify a number for post-separation withdrawals; for age-based in-service withdrawals it's 4 per calendar year.

https://www.tsp.gov/PDF/formspubs/tspfs10.pdf

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Re: TSP(401k?) to IRA to ROTH - questions

Post by retiredjg » Thu Nov 08, 2018 11:32 am

Thanks :happy

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SquawkIdent
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Re: TSP(401k?) to IRA to ROTH - questions

Post by SquawkIdent » Thu Nov 08, 2018 12:01 pm

MichDad wrote:
Thu Nov 08, 2018 10:47 am
I'm late to this thread but want to join the chorus. I'm a retired federal employee (FERS) with a substantial TSP balance. Here's my advice:

1. Fire your advisor. He (or she) is charging way too much. You can read up on these issues on this forum and do 90 percent of what you need to do without the high fees.

2. Do not close your TSP account. Yes, it may be worthwhile to move a significant portion to a rollover IRA and to then make annual Roth conversions from that rollover IRA, but do not close your TSP account. Please read up (on this forum, for example) on the benefits of the TSP's G Fund. It could be worthwhile for you to maintain holdings in the G Fund.

3. In September 2019 (only ten months from now), the Federal Retirement Thrift Investment Board will implement new liberalized TSP withdrawal rules. In general, those new rules will allow separated TSP participants and beneficiaries to make many withdrawals from their accounts and to change the amounts of those withdrawals as needed. I retired earlier this year (at age 62) but have decided to not touch my TSP account until those liberalized withdrawal rules take effect.

4. Consider delaying receipt of your Social Security benefits until age 70, if you can afford it. Consider using the time between now and age 70 to make Roth conversions.

5. I agree with the comment that a TSP balance of "only" $300,000 may not pose problems when Required Minimum Distributions kick in at age 70.5. You need to do some tax simulations that assume that you and your wife are both alive or that only one of you is alive.

Continue to read up and pose questions on this forum.

All the best,

MichDad
+1 to all of the above. My only question is your point raised in #3. Is there something in writing that this will actually occur during that month and they are legally required to do so by then? I have seen too many delays in these processes. It takes forever to get this stuff done. But they had to do something because retirees were leaving the TSP in droves to "greener" pastures with VG, Fidelity, etc.

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Re: TSP(401k?) to IRA to ROTH - questions

Post by StretchNM » Thu Nov 08, 2018 12:31 pm

Thank all of you who replied.

I was thinking "AGI" was adjusted gross income, but I was really talking about taxable income. Thanks for the correction. :happy

OK now, the TSP balance is really $553K, I just didn't want to put that in here, I don't know why. I'm revealing it now because it appears some need that amount to give the best advice. That makes sense.

If I do nothing with the TSP, and say I die at age 65, for example, I'm thinking that by 2028 (or actually one year later in 2029), when I would have turned 70.5, my wife will have to take RMDs. Well, then she's subject to the full tax on those. But if I begin rolling over to IRA, then yearly conversions from IRA into my ROTH, she will not be required to make RMDs on the ROTH amount, plus she won't have to pay taxes on the earnings (in the ROTH). If I convert, for example, $75K per year from IRA to ROTH, in 5 years I'll have $450K in there PLUS non-taxable earnings. And, I could set up the ROTH for low-risk investments (or moderate). Of course, she'll still have to take RMDs on whatever is left in the TSP and any civilian IRAs. Am I seeing this correctly?

We don't really "know" what the TSP is going to do. We know only what the Modernization Act authorized and what the TSP says they're going to do. But since I believe there was some underhandedness during their lobbying for the bill (specifically for asking for 2 years to implement changes), I do not trust them completely to do what they say they're going to do when the new rules come out. After all, I think the only reason they lobbied for changes was because so many were rolling their accounts into IRAs when they retired, costing the TSP funds money. So the two years they wanted to implement changes (I know what they say their reasons were, but certainly I do not buy that bs) is like a dangling carrot to convince retirees to stay in the TSP. 31 years in a career that depends on skepticism and questioning everything will do that, I believe. If they follow through with their "promises", I'll be surprised and very happy. So, no I won't close the TSP account completely. Besides, with or without promised changes, I know the TSP does have its benefits.

With money remaining in the TSP (and quite possibly the entire amount - which is why I'm asking advice from you good people), I figure that the TSP "changes" will be implemented long before my Supplement goes away. So then I can withdraw monthly payments to cover the difference. Of course, I believe I could do that from a tIRA or ROTH too. Right?

I do not believe someone can rollover traditional TSP funds (meaning funds not in their recently created ROTH) directly into a civilian ROTH. Don't the funds have to rollover into an IRA first, then be converted into the ROTH?

I hear all of you about Financial Advisors and 1st Command, and thank you for that advice.
Thank you.

ON EDIT: SquawkIdent you and I were composing at the same time so I didn't see your post before submitting. I agree completely with your skepticism.
SquawkIdent wrote:
Thu Nov 08, 2018 12:01 pm
+1 to all of the above. My only question is your point raised in #3. Is there something in writing that this will actually occur during that month and they are legally required to do so by then? I have seen too many delays in these processes. It takes forever to get this stuff done. But they had to do something because retirees were leaving the TSP in droves to "greener" pastures with VG, Fidelity, etc.
The only things in writing is what is authorized in the TSP Modernization Act, and TSP publications (a good link to their pdf was supplied a post or three up). But I know what you're asking (is there a binding contract) and no I don't believe there is anything in writing that binds them specifically to the changes they say they will make, only generally. For example, at the last minute they could say "Here are some new regs, and unfortunately we can only allow one extra lump-sum withdrawal at this time. We plan to expand on the withdrawal limits even more next year and the year after. Also, we're sorry but we must limit monthly payment changes to twice per year, but again we plan to expand on that over the next few years. Thank you for your patience."
https://www.congress.gov/bill/115th-con ... -bill/3031
Click on appropriate links to read entire Bill.

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SquawkIdent
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Re: TSP(401k?) to IRA to ROTH - questions

Post by SquawkIdent » Thu Nov 08, 2018 12:55 pm

StretchNM wrote:
Thu Nov 08, 2018 12:31 pm

ON EDIT: SquawkIdent you and I were composing at the same time so I didn't see your post before submitting. I agree completely with your skepticism.
SquawkIdent wrote:
Thu Nov 08, 2018 12:01 pm
+1 to all of the above. My only question is your point raised in #3. Is there something in writing that this will actually occur during that month and they are legally required to do so by then? I have seen too many delays in these processes. It takes forever to get this stuff done. But they had to do something because retirees were leaving the TSP in droves to "greener" pastures with VG, Fidelity, etc.
The only things in writing is what is authorized in the TSP Modernization Act, and TSP publications (a good link to their pdf was supplied a post or three up). But I know what you're asking (is there a binding contract) and no I don't believe there is anything in writing that binds them specifically to the changes they say they will make, only generally. For example, at the last minute they could say "Here are some new regs, and unfortunately we can only allow one extra lump-sum withdrawal at this time. We plan to expand on the withdrawal limits even more next year and the year after. Also, we're sorry but we must limit monthly payment changes to twice per year, but again we plan to expand on that over the next few years. Thank you for your patience."
https://www.congress.gov/bill/115th-con ... -bill/3031
Click on appropriate links to read entire Bill.
That would be my concern also. They could potentially stretch this out for years with folks waiting to this to happen. Since I have learned from past experiences, I don't consider it fact until it is in force and I am actually able to do it. Until then, it is just a proposal.

And even though they are attempting to "fix" the withdrawal rules, I still see many retirees leave the TSP because they are sick of the delays and want more control of their money. That said, the G fund is one in a million and I've seen many people just keep their bond portion of their portfolio in that fund and move the remaining balances to VG, Fidelity, etc. They are willing to deal with the strict withdrawal rules to keep that fund. :sharebeer

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Watty
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Re: TSP(401k?) to IRA to ROTH - questions

Post by Watty » Thu Nov 08, 2018 1:07 pm

Be sure to understand the inheritance rules if you leave the money in the TSP. Here is what I have posted about that before.
You need to understand the details of the inheritance laws for the TSP since they are not as good as for an IRA. It might make sense to roll the money into an IRA just for the estate planning. 

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

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

a) Dad had a large TSP, then the Dad died and left it to his wife.
b) Wife left it in the TSP as a beneficiary participant, then died a few years later and leaves it to their kid.
c) The kid is not allowed to leave it in the TSP or roll it out to an inherited IRA so they had to withdrawal all the money from the TSP and pay taxes on it. 

The kid already had a good income and was in a high tax bracket so the TSP withdrawal put them into into a very high tax bracket. It sounded like if either of the parents had rolled it out into a IRA they could have saved a six figure tax bill. In addition to the actual money the poster felt bad because the frugal dad would have been disappointed if he knew that a lot of the money that he had worked so hard for had gone to unnecessary taxes.

rkhusky
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Re: TSP(401k?) to IRA to ROTH - questions

Post by rkhusky » Thu Nov 08, 2018 1:36 pm

StretchNM wrote:
Thu Nov 08, 2018 12:31 pm
I do not believe someone can rollover traditional TSP funds (meaning funds not in their recently created ROTH) directly into a civilian ROTH. Don't the funds have to rollover into an IRA first, then be converted into the ROTH?
You can convert directly into a Roth IRA, but you have to pay all the tax at the same time. It is right there in the transfer forms. The benefit of moving first to a Traditional IRA is that you can convert to Roth one chunk at a time and spread the tax over a number of years.

As mentioned above, the protection that a Roth provides to a potentially single spouse should be seriously considered, especially if one is in poor health. The risk of potentially paying too much may be worth it. Consider it like insurance. Even if you don't use it, it is still valuable.
Last edited by rkhusky on Thu Nov 08, 2018 1:38 pm, edited 1 time in total.

StretchNM
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Re: TSP(401k?) to IRA to ROTH - questions

Post by StretchNM » Thu Nov 08, 2018 1:38 pm

Yes Watty, I was aware of that and is one of the reasons I embarked on the plan outlined in my original post. Thank you for the good info.

RE: Inherited TSP. I clarified the other day with a financial expert (not my advisor) that a Primary Beneficiary (usually spouse) gets all the rights and privileges of the Original Account Owner (me) (regarding Interfund Transfers, Lump Sum and /or Monthly Withdrawals, and rollovers into an outside IRA). AND.... that the beneficiary can rollover that account to a Traditional IRA (as opposed to Beneficiary IRA) and can then convert to ROTH or withdraw, or whatever. BUT..... the secondary beneficiary (daughter) of the original beneficiary (spouse) is, as you stated, forced to take the account in its entire value costing them the taxes on it.

StretchNM
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Re: TSP(401k?) to IRA to ROTH - questions

Post by StretchNM » Thu Nov 08, 2018 1:42 pm

rkhusky wrote:
Thu Nov 08, 2018 1:36 pm
...............
You can convert directly into a Roth IRA, but you have to pay all the tax at the same time. It is right there in the transfer forms. The benefit of moving first to a Traditional IRA is that you can convert to Roth one chunk at a time and spread the tax over a number of years.

As mentioned above, the protection that a Roth provides to a potentially single spouse should be seriously considered, especially if one is in poor health. The risk of potentially paying too much may be worth it. Consider it like insurance. Even if you don't use it, it is still valuable.
Yes, you are correct and your post jogged my memory about that. Thank you rkhusky. And yes, that's the reason for my original plan - to rollover to IRA so I could remain tax-deferred while converting "tax-manageable" chunks each year to the ROTH(s).

MichDad
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Re: TSP(401k?) to IRA to ROTH - questions

Post by MichDad » Thu Nov 08, 2018 2:46 pm

The FRTIB is way behind in posting its monthly minutes on its website. They still haven't posted their minutes from July, August, and September. [I'll cut them a break for October.] It's not very professional, in my opinion.

Anyway, please take a look at the FRTIB's minutes from its May 30, 2018 meeting; specifically item number 5 on pages 5-6. Here's the link:

https://www.frtib.gov/MeetingMinutes/2018/2018May.pdf

And here's a link to the related PowerPoint presentation on the same topic:

https://www.frtib.gov/pdf/minutes/MM-2018May-Att7.pdf

They make clear there that, under the upcoming liberalized withdrawal rules, separated TSP participants and beneficiaries will be able to take one withdrawal every thirty days with no limit on the total number of withdrawals.

Further, they reconfirmed that they intend to have the liberalized withdrawal rules in place by September 2019 but acknowledge that the statute allows them until November 2019 to implement the changes. I've been in contact with FRTIB staff as recently as about two weeks ago and was assured, again, that they remain on target for a September 2019 implementation.

I hope this helps.

MichDad

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