Too late for a Roth?

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JKChic
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Too late for a Roth?

Post by JKChic » Sun Sep 08, 2019 9:01 pm

Hello,

I currently work for the federal government (past 19 years) and have a TSP account with a little over 500k. I plan to retire in about 5 years, 1 month (law enforcement coverage for those who are familiar with TSP). I’ll be 54 when I retire. I plan to move out of the state of CA at that time. I am single and have one dependent at home. I currently am maxing out my TSP yearly with the $19,500 we’re allowed to put into it.

I’m currently 48, will be 49 later this year. The YEAR I turn 50 (which will be next year) I can make catch up contributions, which I plan to do.

My question is, is it too late for me to even consider a Roth? I can do both the traditional TSP (as I have now) and a Roth thru TSP as well. Am I too late getting into the Roth game or would you suggest it even knowing I only have a bit over 5 years to contribute to it?

Thanks in advance! :)

123
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Re: Too late for a Roth?

Post by 123 » Mon Sep 09, 2019 12:39 am

As long as you've got qualifying earnings and are otherwise eligible (either for direct Roth contribution or via the backdoor) Roth is a good option.

As near as I can tell there is no additional cost or tax to put contributions in a Roth account. And (assuming you meet Roth duration rules, age, etc) you never are taxed on the money you take out. Much better than a taxable investment account.

Every dollar in a tax-advantaged account is precious, particularly as it is excluded from all future taxation.
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BL
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Re: Too late for a Roth?

Post by BL » Mon Sep 09, 2019 1:11 am

It's never too late for a Roth! With a pension, that might be a good idea for some/all of your TSP.

Are you also contributing to a Roth IRA? If you make too much for direct contributions, you could check Wiki for Backdoor Roth.

MichDad
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Re: Too late for a Roth?

Post by MichDad » Mon Sep 09, 2019 5:31 am

I don’t know your full financial situation so it’s more difficult to provide precise advice. Since you’ll receive both a FERS pension and Social Security, you should give serious consideration to investing in the Roth TSP and/or a Roth IRA. Personally, I’d invest in both.

MichDad

cherijoh
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Re: Too late for a Roth?

Post by cherijoh » Mon Sep 09, 2019 6:56 am

JKChic wrote:
Sun Sep 08, 2019 9:01 pm
Hello,

I currently work for the federal government (past 19 years) and have a TSP account with a little over 500k. I plan to retire in about 5 years, 1 month (law enforcement coverage for those who are familiar with TSP). I’ll be 54 when I retire. I plan to move out of the state of CA at that time. I am single and have one dependent at home. I currently am maxing out my TSP yearly with the $19,500 we’re allowed to put into it.

I’m currently 48, will be 49 later this year. The YEAR I turn 50 (which will be next year) I can make catch up contributions, which I plan to do.

My question is, is it too late for me to even consider a Roth? I can do both the traditional TSP (as I have now) and a Roth thru TSP as well. Am I too late getting into the Roth game or would you suggest it even knowing I only have a bit over 5 years to contribute to it?

Thanks in advance! :)


Good job on maxing your TSP and planning to do catch-up contributions! Will you also have a pension?

It is probably a good idea to diversify your retirement assets from a tax-treatment perspective by adding Roth. But how much to do is the question. It doesn't need to be all or nothing for traditional vs. Roth. Do you already have a Roth IRA?

One consideration is the CA is a very high tax state. Where are you planning to move and how do they treat distributions from retirement plans and pensions? Some states exempt distributions up to $xx from state income tax including distributions used to do Roth conversions. This might allow you to avoid CA income tax going in to traditional and partially avoid state tax altogether upon withdrawal. If you are also paying less federal tax that could be a better combination thanswitching totally to Roth going forward. You would need to run the numbers.

Does TSP allow you to do in-plan conversions from traditional to Roth? (I would recommend leaving the funds in TSP as long as possible). The withdrawal rules for Roth IRA conversions are complex; I don't know if Roth 401k/TSP are equally complex. But I recommend that you look into them.

deikel
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Re: Too late for a Roth?

Post by deikel » Mon Sep 09, 2019 1:00 pm

Its simply a question of your current tax status

You say you are single/head of household and have one dependent AND live in California, so the chances you are in a high tax bracket are high

If so, IRA and catch up contributions for the TSP is the way to go for the tax savings, if you are in a low tax bracket, then its great to load up a Roth IRA

But you always put top tax dollars into an IRA and you take out bottom tax dollars from the account in retirement, so probability that you save on your tax bracket is high

Or if you have such high income that you fall out of the IRA eligibility, then you can do RothIRA or even higher you can do IRA to Roth backdoor.

And I think its never too late, simply because you will be retired for many years to come. SO whatever money you put in now, might only come out 30 years later...its not always RoRo
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Wiggums
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Re: Too late for a Roth?

Post by Wiggums » Mon Sep 09, 2019 1:13 pm

I agree. Based on the information that you provided, a Roth is likely to be a good option. You’ll have time to do that overly many years, given your retirement age.

Good luck to you...

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Re: Too late for a Roth?

Post by rkhusky » Mon Sep 09, 2019 1:42 pm

JKChic wrote:
Sun Sep 08, 2019 9:01 pm
My question is, is it too late for me to even consider a Roth?
It is not too late for a Roth, especially a Roth IRA, into which you can contribute $6K/yr, independent of how much you contribute to the TSP.

Whether or not you want to use Roth or Traditional TSP depends on future plans. Do you plan to work after retiring? Will you get your pension at retirement or do you have to wait until age 62?

If you wait until age 70 to get SS, then you will likely have a number of years to convert your Traditional money to Roth at a lower income tax rate than what your are currently paying.

Note that if you retire in the year that you turn 55, you can withdraw from your TSP without penalty. If you retire before that, you have to wait until age 59.5 or pay a 10% penalty.

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grabiner
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Re: Too late for a Roth?

Post by grabiner » Mon Sep 09, 2019 7:27 pm

rkhusky wrote:
Mon Sep 09, 2019 1:42 pm
JKChic wrote:
Sun Sep 08, 2019 9:01 pm
My question is, is it too late for me to even consider a Roth?
It is not too late for a Roth, especially a Roth IRA, into which you can contribute $6K/yr, independent of how much you contribute to the TSP.

Whether or not you want to use Roth or Traditional TSP depends on future plans. Do you plan to work after retiring? Will you get your pension at retirement or do you have to wait until age 62?
Since you live in CA, don't plan to retire there, and are presumably near your earnings peak, you are probably in a significantly higher tax bracket now than you will be in after you retire. Therefore, you should probably prefer the traditional TSP. (You still need to use a Roth IRA because you are over the limit for deducting contributions to a traditional IRA.)
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Jerry55
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Re: Too late for a Roth?

Post by Jerry55 » Mon Sep 09, 2019 8:00 pm

I agree with all of the above for the most part.

I would like to add that with a ROTH TSP / IRA, there are no Required Minimum Distributions at age 70½ and earnings are TAX FREE.

The ROTH TSP didn't appear until after I retired in 2012, but fortunately, I had other options. GO-4-IT.
Retired CSRS on 12/19/2012 @ age 57 w/39 years | Good Bye Tension, Hello Pension !!!

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grabiner
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Re: Too late for a Roth?

Post by grabiner » Mon Sep 09, 2019 8:20 pm

Jerry55 wrote:
Mon Sep 09, 2019 8:00 pm
I agree with all of the above for the most part.

I would like to add that with a ROTH TSP / IRA, there are no Required Minimum Distributions at age 70½ and earnings are TAX FREE.
The Roth TSP does have RMDs, although you can roll the Roth balance over to a Roth IRA (now possible to do while keeping the traditional balance intact) to avoid the RMDs.

But you can get a similar benefit with the traditional TSP, by rolling the traditional TSP to a Roth IRA after you retire. You got a tax deduction when you contributed, so if you paid a lower tax rate on the conversion, you did better than tax-free investment.
Wiki David Grabiner

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Re: Too late for a Roth?

Post by togb » Mon Sep 09, 2019 8:43 pm

It's only too late if you don't start now. (one of my mantras)
Seriously, I am 3 years from retirement and obsessed with building my Roth. I love the idea of having some "reserves" that I can draw upon without it being a taxable event. And, if I don't live long enough to enjoy it all, my beneficiaries will prefer Roth over something that requires them to take RMDs and mess with their taxes.

Do it.

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JKChic
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Re: Too late for a Roth?

Post by JKChic » Tue Sep 10, 2019 3:32 pm

THANK YOU ALL SO MUCH for your insight!

For those asking....yes I will receive a pension (thankfully). I will also get a supplement (takes the place of SS sort of) and can draw from my TSP when I retire. A 3-fold income actually.

With the federal govt., and being in a law enforcement position, we have different parameters when we retire. We MUST be out by age 57 and we earn a slightly higher percentage per year for pension calculations.

I am not sure whether I'll work when I'm retired. Having less responsibility than I do now sounds awfully nice. I am looking to move to AZ or ID possibly--anywhere but CA is the main goal.

I do not currently have a Roth of any sort and I think I have learned that I make too much to contribute to TSP's Roth option. I believe I'll have to backdoor the Roth which is cool with me. I can always roll that outside Roth into the TSP--even after I am already retired. I'm probably going to stay with the TSP after I retire as well since their rates are super low and there are more withdrawl options, etc. on the way starting this month.

Thank you all again for your input, I think I'm going to go with a Vanguard Roth and backdoor it. I might not be able to accumulate 100s of thousands in it the next 5 years, but you've all convinced me that something is better than nothing! :)

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Re: Too late for a Roth?

Post by fru-gal » Tue Sep 10, 2019 4:05 pm

I don't know if this will work for you, given you list a lot of factors I know nothing about, but I only had two years when I could contribute to a Roth (and did so), but I did a lot of conversions to Roths after I retired, when my tax rate was low.

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Re: Too late for a Roth?

Post by frcabot » Tue Sep 10, 2019 4:12 pm

It’s not too late. Because you are still pretty young, there’s quite a few decades that funds in a Roth IRA or TSP can still appreciate tax-free. Given that you’re in a high tax bracket now (especially living in CA), I wouldn’t necessarily put all my money in a Roth TSP if I were you. I would, however, consider contributing some portion to a Roth and some portion to a traditional, and/or maxing out on a Roth IRA (no RMDs, so it can grow tax-free for decades after you retire and also be an estate planning tool) and Traditional TSP if that’s feasible.

Congrats on being able to retire at such a young age!

Edit to add: when your taxable income decreases in retirement and you move out of CA, you might want to consider *gradually* converting some Traditional assets to Roth assets (ie do so in a way that maxes out your tax bracket at the time and doesn’t push you into a higher marginal tax bracket).

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Re: Too late for a Roth?

Post by frcabot » Tue Sep 10, 2019 4:30 pm

JKChic wrote:
Tue Sep 10, 2019 3:32 pm
I do not currently have a Roth of any sort and I think I have learned that I make too much to contribute to TSP's Roth option. I believe I'll have to backdoor the Roth which is cool with me. I can always roll that outside Roth into the TSP--even after I am already retired.
This doesn’t sound right. There is no income limit on a Roth TSP (like a Roth 401k) AFAIK. There IS an income limit for a Roth *IRA* but it’s easily bypassed by contributing to a traditional IRA and immediately converting to Roth.

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Re: Too late for a Roth?

Post by abuss368 » Tue Sep 10, 2019 4:37 pm

I don’t think it is ever to late. Any amount to can place in a Roth will increase tax diversification.
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2cents2
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Re: Too late for a Roth?

Post by 2cents2 » Tue Sep 10, 2019 9:39 pm

It is not too late for a Roth. But, as others have pointed out it might not be the most tax efficient since you are planning to retire in another state. Maybe the new state doesn't have state income tax or maybe they don't tax distributions from TSP?

Since you are a LEO, I believe you are allowed to access your TSP funds penalty free if you retire after the age of 50. https://www.fedsmith.com/2015/06/29/bil ... comes-law/ This is something to consider if you are considering rollovers to IRA. IRAs will still have the 59 1/2 rule.

Another thing to consider when you ask if it is too late for a Roth is the qualification period. Roth contributions have a 5 year qualification period in order for your Roth account to be "qualified" (and penalty free). And, the qualification period does not extend to different account types. In other words--the TSP Roth and the Roth IRA have their own qualification periods. If you make a Roth contribution to TSP this year and then decide to do a rollover to a Roth IRA at a later date--the Roth IRA will have a separate 5 year qualification period (even if you are over 59 1/2).

What you can do is establish a Roth IRA this year to start the 5 year qualification period. It can be for any amount. If you make too much to make a direct contribution, you can contribute to a traditional non deductible contribution to an IRA and then do a conversion to Roth* in order to start the qualification period. (I believe Fidelity does not have minimum amounts on their IRA accounts). Then, if you decide you want to do future Roth rollovers or conversions prior to RMDs kicking in on your TSP contributions--you will have already started the clock.
Here is a link to an article that explains the ramifications for taking distributions from a non qualified Roth IRA: https://www.rothira.com/blog/understand ... tributions

*edited to add: the conversion to Roth assumes you do not have a traditional IRA that would involve the pro rata rule. (If you do have a traditional IRA, you should roll that over to TSP before doing any conversions to Roth.)
Last edited by 2cents2 on Tue Sep 10, 2019 9:59 pm, edited 1 time in total.

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Re: Too late for a Roth?

Post by 2cents2 » Tue Sep 10, 2019 9:52 pm

JKChic wrote:
Tue Sep 10, 2019 3:32 pm


I do not currently have a Roth of any sort and I think I have learned that I make too much to contribute to TSP's Roth option. I believe I'll have to backdoor the Roth which is cool with me. I can always roll that outside Roth into the TSP--even after I am already retired. I'm probably going to stay with the TSP after I retire as well since their rates are super low and there are more withdrawl options, etc. on the way starting this month.

Thank you all again for your input, I think I'm going to go with a Vanguard Roth and backdoor it. I might not be able to accumulate 100s of thousands in it the next 5 years, but you've all convinced me that something is better than nothing! :)
I just wanted to point out that there is no income limitation to making TSP Roth contributions if you decide that is the path you want to take.

TSP expenses are super low, but I believe I pay higher expenses on my TSP than some of the index funds at Fidelity. (Hurray for low expense index funds! :) )

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Re: Too late for a Roth?

Post by Dregob » Tue Sep 10, 2019 9:58 pm

I was at a nursery and saw this sign:
"The best time to plant a tree was 20 years ago. The second best time to plant a tree is today."

Insert Roth and follow that advice.

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Stinky
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Re: Too late for a Roth?

Post by Stinky » Wed Sep 11, 2019 8:55 am

JKChic wrote:
Tue Sep 10, 2019 3:32 pm

Thank you all again for your input, I think I'm going to go with a Vanguard Roth and backdoor it. I might not be able to accumulate 100s of thousands in it the next 5 years, but you've all convinced me that something is better than nothing! :)
Welcome to the Forum!

You're making a good choice. One never knows what twists and turns the future might hold, and your Roth balance may ultimately be a lot higher than you currently anticipate.

There's no time to start like the present!
It's a GREAT day to be alive - Travis Tritt

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