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changr555  
#1 Posted : Thursday, April 23, 2009 12:54:06 PM(UTC)
changr555

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I am 66 and will be 67 by the time I retire on 31 Jul 09. I will receive my federal annuity and plan on taking Social Security benefits. Between the both of them and my wife's federal annuity and SS we will have enough to live day-to-day. I have $260K in TSP which I am trying to decide what to do. I think the stock market and economy is down so now would be a good time to invest about 65% in stocks. I am looking at a horizon of 15 - 20 years. My current tax bracket is 28% filing as married/jointly. (1) Should I withdraw 65% of my TSP and roll it over into IRA or Roth IRA and leave 35% in TSP G fund. I will have a little room this year since my salary stops at Aug although I will earn annuity and SS for taxes being lower so may consider partial Roth IRA, then next year transfer the greater percentage into Roth IRA. (2) Could the transfer of TSP to a private Roth IRA in 2010 be treated as a "conversion" which allows unlimited amount? I am concerned about tax rates rising starting 2011 and the MRD for me at age 70.5 and of course i must take higher risks to achieve a higher return at the same time want to keep taxes down.
The HalfBreed  
#2 Posted : Friday, April 24, 2009 1:39:39 PM(UTC)
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Why not leave it in the TSP, as the fees are MUCH less than anything out there. Your Risk Tolerance will dictate how much to put into the Stock market.
RETIRED 12/19/2012 !!! Good Bye Tension !!! Hello Pension !!!
EWGuy  
#3 Posted : Saturday, April 25, 2009 12:53:16 AM(UTC)
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You can pay taxes now, or pay later on any withdrawals from your TSP account. You need to consider how any withdrawal, or Roth conversion, would impact the total taxes you pay now. Would it cause you to move into a higher tax bracket (e.g. 28% or 32%)? There is legislation in Congress of adding a Roth TSP feature, but this would not likely be added for years. It’s also uncertain if the TSP board would allow conversion from Traditional TSP to a Roth TSP.

You could do a "one time" transfer from TSP to a traditional IRA this year. You are allowed a single one time transfer from TSP, unless you already did a in-service withdrawal. It appears that a Roth conversion this year is not possible since you are already in the 28% marginal tax rate for a married joint return. Roth conversions have a $100 thousand income ceiling this year, but this limitation is removed next year. Then next year you could convert the traditional IRA to a Roth IRA, and pay the taxes due in 2011 and 2012. You really need to calculate the taxes due, and how you will pay the taxes. All I have read on Roth conversions makes them less desirable for people already retired, because you save nothing by paying the taxes now.
Knight  
#4 Posted : Saturday, April 25, 2009 3:13:49 AM(UTC)
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Is my opinion. You will pay more to the commercial investment planners. But in the end, you have to decide what works for you.
changr555  
#5 Posted : Saturday, April 25, 2009 4:04:32 AM(UTC)
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Thanks for all your comments. I am reading each commment and weighing the options. I have one additional question. Would it be better for me to delay receiving SS (and let it grow at 8% per year up to age 70 - even without continue working)and withdraw an equivalent amount from TSP per month given the stock market at these levels?
MaleMan  
#6 Posted : Saturday, April 25, 2009 4:18:06 AM(UTC)
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Ahhh, but, but, but . . .

In this situation, as the original poster indicated he didn't need the TSP money for the foreseeable future, I think the Roth may be a good choice. Of course the additional incentive is the lifting of a couple of the Roth restrictions next year (2010). This would make it a good year to transfer the funds into a Roth, then getting to delay the paying of taxes into the 2011 and 2012 tax year (actually making your final tax payment in the spring of 2013).

Its not just a tax issue question but the fact that with the Roth there are never any minimum required distributions to be concerned with. So, if the money is never needed, the Roth is about the easiest way to pass it along to your heirs, and never any further taxes due.

If the market ever starts to go upward, this could be a very profitable move to receive the growth without ever getting taxed. And, as the original poster indicated, he feels the market is close to the bottom (I hope he is correct). So, if it is near bottom that means you would be taxed on a lower amount of funds than if the balance starts climbing.

And the other ingredient is what the tax rates will be in the future. If you believe (as I do) that tax rates will have to be higher for several years down the road; Well, once again, why not pay those taxes now while the rates are lower?

Of course, as I mentioned some of these ideas are based on what you or I assume or expect to happen in the future - clearly, our assumptions certainly could be wrong.

Simply my 2¢ worth on the matter.
<font color=RED><em> <center> Just Because You're Paranoid - Doesn't Mean They Aren't Out To Get You. </em> </center></font>
changr555  
#7 Posted : Saturday, April 25, 2009 4:46:09 AM(UTC)
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Maleman, your advice is right on - this is what I was looking for - essentially what concerns I should be evaluating. Nothing is a given so for future planning we must make certain assumptions and you are right about taking a chance (risk). Yes I believe the stock market will turn but dont know when - my sense is within 6 months (it should lead the economy).

I like your comments about taxes - it supports my planning assumption that taxes will rise and how should I prepare for it in regards to TSP. Will I be allowed to transfer all $260K into a Roth IRA directly in 2010 or do I have to roll it over into traditonal IRA, then convert it to Roth? This will help me determine whetehr I should do anything with my TSP now or at retirement or wait until 2010.
TamySossa  
#8 Posted : Sunday, April 26, 2009 3:54:44 AM(UTC)
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GoodMan888,

You may also check out http://www.rothirarules.net/roth-ira-investments.htm

They have good information on Roth IRA investment options, taxation, basic roth rules, etc.

Good Luck.
changr555  
#9 Posted : Sunday, April 26, 2009 4:04:03 AM(UTC)
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Just what I needed - will check it out.
MaleMan  
#10 Posted : Sunday, April 26, 2009 6:31:32 AM(UTC)
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GoodMan888,

Yes, the way I understand it you would be able to transfer any amount directly to a Roth. And if you were going to do this, it would be certainly to your benefit to wait until 2010 to do the transfer. Because to take advantage to the "spreading the taxes over two tax years" the transfer has to be done in the year 2010. Then no taxes are due for the 2010 tax year. In the 2011 tax year you will be expected to pay 50% of the taxes due from the transaction. And the other 50% will be expected in the 2012 tax year.

Of course due to the nice size of your Roth, it would create quite a bump in your taxes for the years they are due. Keep in mind the possible state income taxes that would also increase (at least in my case). Since the market killed my TSP I won't have such a large bump. So, there are some good sides to owing a lot of tax, that means there is a nice reason for owing!

And with that thought, if I had a larger balance such as yours, I would consider the fact that you don't have to transfer the total TSP balance. (Assuming you haven't made any partial withdraws yet). You could leave a portion of the balance in the TSP thus keeping the "best of both worlds". That way if any of our assumptions are incorrect, you would be sorta hedging your bets.

Just keep in mind, if you do decide to leave a remainder in the TSP you will have to withdraw the entire remaining TSP balance upon your second withdraw.

Because of these restrictions, the Roth looks better because you have far more options as there are fewer strings attached to your money. But, I do like the low management costs of the TSP. The financial experts I read claim that the TSP is the best managed/lowest cost 401-type program on the planet.

It sounds like we are at about the same spot on trying to make the market conditions and the tax opportunities work to our advantage if possible. Although it's kinda like hitting a moving target to assure that you make the correct decisions based on the unknown future.

When you figure it out, come back and let us know what you decided would work best for you.

Good luck
<font color=RED><em> <center> Just Because You're Paranoid - Doesn't Mean They Aren't Out To Get You. </em> </center></font>
changr555  
#11 Posted : Sunday, April 26, 2009 10:30:26 AM(UTC)
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I really appreciate all the comments. It tells me I have some ways to go before making decisions - more research required - and I now have some tools from the advice given.

Here is what I found so far:
1. Roth IRA is definitely in my plans - I will need to contend with the self-directed nature (I manage the money) so I will need to understand and study the market more than I have by relying on the few TSP choices. I would like to minimize my future taxes even though I will have to pay taxes when I transfer to Roth IRA.
2. TSP fees are low so if I intend to allocate my investments between stocks and G fund, then it will probably be better to leave that portion with TSP (also for tax considerations after I transfer to Roth 2011/2012). Con - There is a limit on how long it can remain after leaving service (after making a partial withdrawal).
3. I have been trying to stay on top of the stock market and luckily I shifted all my TSP into G fund before the downfall (sorry about the many who took hits) because I was nearing retirement and felt I had to play it safe. But my outlook is getting favorable and although am still in G will get into stocks within six months. This market does not look like it will blast off - too many problems - so it may slowly get back to decent levels.
4. There are many unknowns on the horizon - tax rules may change; SS may change; as well as the stock market. I have to deal with them as it comes. I have to stay tuned to the important issues impacting finances - will take up some of my time when I retire. One of my objective is to retire on the money I make on the money I have saved for retirement.
5. I am a newbie and have much to learn and apreciate a site like this where good ideas are abundant and to share what problems/questions we have (many times its not easy to do own search).
daves  
#12 Posted : Sunday, April 26, 2009 10:45:30 AM(UTC)
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Whether to withdraw or not is a personal decision. The TSP is about as good, or slightly better, than any other IRA.

I withdrew mine and rolled it into an IRA. A small nagging voice keeps telling me to not completely trust Congress. Twice in the past the government 'borrowed' the G fund. They paid it back (less a very small amount lost to compounding). But there is no guarantee future government bureaucrats will borrow and not repay. Given the now stratospheric deficit, all that money sitting there in the TSP may (will?) prove too much of a temptation. So I wanted it further from the government hands.

As far as the Roth question goes -- remember both Ted Kennedy and Pelosi have already raised the issue of means testing the tax exclusion of Roth withdrawals. So far the idea never went anywhere, but time will tell if it ever gets serious attention...
MaleMan  
#13 Posted : Monday, April 27, 2009 6:16:51 AM(UTC)
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quote:
Originally posted by GoodMan888:

2. TSP fees are low so if I intend to allocate my investments between stocks and G fund, then it will probably be better to leave that portion with TSP (also for tax considerations after I transfer to Roth 2011/2012). Con - There is a limit on how long it can remain after leaving service (after making a partial withdrawal).




GoodMan888,

Hey, in reference to that second sentence - about a limit on leaving funds in the TSP after retirement and partial withdraw. . .

I haven't run across mention of this, please explain more about any time limits for the TSP balance. If this is the case, it makes my suggestion of "leaving a remaining balance in the TSP for an undermined timeframe" invalid and obsolete.

Speaking of restrictions, there is some restriction on withdrawing from a Roth within so many years after establishing your first Roth account. This may not apply after you have reached a certain age, don't recall off the top of my head. But it would be something to be aware of in your planning. Of course, if the restriction does apply to you this means you won't be able to pay the due taxes from the Roth funds, so you will need a source for that money.

I like your plan, the part about living on the money that the money makes! That is beautiful when it can work out that way. Until the market turned, I think I would have been able to swing that. Now, I will be living on the pension money and not touching (hopefully) any TSP or my various Roth accounts. Kinda like your plan in reverse!

Even though I took a seriou***** with the market, at lease I had these other savings to keep as a backup. I really feel sorry for the recent retirees that were counting on the TSP balance to remain close to level. If they were counting on living on those funds, it could have really changed their possible style of living. Or at least limit the number of years they will be able to maintain.

And yes, you are correct about the information exchange within these message boards. With so many people interested in the same issues, and swapping the information they found, the total volume of information gained is hard to beat.

Good luck
<font color=RED><em> <center> Just Because You're Paranoid - Doesn't Mean They Aren't Out To Get You. </em> </center></font>
changr555  
#14 Posted : Monday, April 27, 2009 6:22:59 PM(UTC)
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Hey, in reference to that second sentence - about a limit on leaving funds in the TSP after retirement and partial withdraw. . .

I haven't run across mention of this, please explain more about any time limits for the TSP balance. If this is the case, it makes my suggestion of "leaving a remaining balance in the TSP for an undermined timeframe" invalid and obsolete.

------------------------
I found it in the TSP Civilian Features, Chap 13, Getting Your Money Out: The remaining amount must be withdrawn by the withdrawal deadline - generally, when you reach age 70.5 (See "How long can I leave my money in the TSP?"). Need to look into this more.

Second clarification: Will I be allowed to transfer all $260K into a Roth IRA directly in 2010 or do I have to roll it over into traditonal IRA, then convert it to Roth?
Ths answer is no according to a thread in Mr Ed Zurndorfer's response to a question. The correct answer is I can rollover into an IRA, then convert to a Roth in 2010, to use the two year spread of payment of taxes due.

You got it right about living on the pension (thankfully we as federal workers have a good pension system) and using the money earned from retirement (TSP) to grow to make your money last longer. I think we are on the same channel - to retire on the money I make on the money I have saved for retirement.

Happy Days Ahead (with the stock market going up)!
cg150  
#15 Posted : Monday, April 27, 2009 10:53:20 PM(UTC)
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You do have to begin withdrawals by a certain point in time. I believe the required minimum distribution (RMD) is recomputed each year by dividing your account balance by your life expectancy from IRS tables.

From the TSP website:

quote:
If you do not want to withdraw your account when you leave Federal service, you can leave your entire account balance in the TSP. However, you must withdraw your entire balance (or begin receiving monthly payments from the TSP or from the TSP annuity vendor) by April 1 of the year following the year you turn 70½ (or following the year you separate, if you are already over age 70½ when you leave Federal service).

If you do not make a withdrawal by the required deadline, your TSP account must be paid to you in the form of an annuity, as required by law. If you do not provide the necessary information for the TSP to purchase an annuity for you (and your spouse, if applicable), or if you cannot be located, your account will be declared abandoned. You may later reclaim your account and choose a withdrawal option; however, you will receive no earnings from the date your account was declared abandoned.
MaleMan  
#16 Posted : Wednesday, April 29, 2009 4:16:14 AM(UTC)
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Okay, cool . . .

I did already understand the RMD aspect to the TSP (70.5 years old). Perhaps I misunderstood and thought GoodMan implied that if a partial withdraw was made that the remainder had to be withdrawn by a "further restricted timeframe rule".

This, of course points out an advantage of the Roth, there is never a required withdraw timeframe. I just hope we are all lucky enough to be able to exercise the benefit, of leaving the money on deposit forever, never really needing it!

And GoodMan, I am literally banking on the comment you made about the stock market going up! I hope your comment goes from your lips to God's ears! Wink

<font color=RED><em> <center> Just Because You're Paranoid - Doesn't Mean They Aren't Out To Get You. </em> </center></font>
MaleMan  
#17 Posted : Friday, May 01, 2009 4:11:29 PM(UTC)
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quote:
Originally posted by GoodMan888:

Will I be allowed to transfer all $260K into a Roth IRA directly in 2010 or do I have to roll it over into traditonal IRA, then convert it to Roth?

Ths answer is no according to a thread in Mr Ed Zurndorfer's response to a question. The correct answer is I can rollover into an IRA, then convert to a Roth in 2010, to use the two year spread of payment of taxes due.


GoodMan,

Well, I know it wasn't always true that you could transfer the TSP funds directly into a Roth but you certainly can do so now.

Here is a link to the Q & A area of the TSP web site that gives a good overall of the TSP -to- Roth rules.

TSP To Roth Transfers Info


Of course, it is not just TSP rules that we are concerned with, but the IRS rules play an important part of the equation.

Now, perhaps the unmentioned ingredient changes the entire answer, that is the part about spreading the taxes into the two-year spread (for year 2010 rollovers).

The only language I can find discussing the IRS "two-year-spread" specifies converting a Traditional IRA To A Roth, to qualify for the 2010 IRS break in taxes.

If going straight from TSP to Roth - will you qualify for the "2-year rule"? I don't know? I can't find that specified, but I do know if you take it from TSP to traditional IRA - then a Roth in 2010 that you will comply with that part of the rules. And by the way, it would only have to be in the traditional IRA for a short period, like even one-day.

It is this kind of stuff that makes taxes so, well so, FUN . . . (sorta)
<font color=RED><em> <center> Just Because You're Paranoid - Doesn't Mean They Aren't Out To Get You. </em> </center></font>
changr555  
#18 Posted : Saturday, May 02, 2009 1:53:20 PM(UTC)
changr555

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Did a little more research and will summarize some Pros and Cons of Roth IRA vs traditional IRA. (Request comments/additions)

PROS:
1. Capital gains distribution are non-taxable.
2. No RMD
3. Your beneficiaries recieve tax-free benefits
4. In 2010 there will be no income limitations
5. In 2010, there will be atwo year perios to spread payment of taxes

CONS:
1. Must pay taxes upfront (lose investment opportunity)
2. If cannot pay the taxes with outside funds, the conversion will be more or less a wash (in general - it really depends on a persons tax bracket, how much risk one is willing to take to achieve higher returns, etc).

Bottomline - now I am not so sure about conversion to Roth.

Will address the PROs and CONs of comparing IRA to TSP in my next reply.
SharlaCerr  
#19 Posted : Saturday, May 02, 2009 2:46:24 PM(UTC)
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With regard to beneficiaries getting your left-over TSP benefits tax free, don't forget that they can have your TSP rolled over into a special "inheritance" IRA per TSP & IRS publications. I don't know the details of the inheritance IRA (which the pubs caution is not the same as a traditional IRA or Roth IRA) but presume that tax is paid as the money comes out. Might be worth checking out. Used to be that it could be done only for the spouse but now as I read it, it can be for any beneficiary.
changr555  
#20 Posted : Sunday, May 03, 2009 2:59:25 AM(UTC)
changr555

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Appreciate your reply. I noticed your post to "Magic": "I estimate my TSP balance will be at least $190,000, most likely $200,000. I am going to empty my TSP over 20 years (not an annuity, I'll choose each year, leaving it in if I have other income). The 20-year time period is based on the fact that my mortgage will be paid off in about 20 years, and the absence of mortgage payments will more than offset the end of the annuity. My TSP payments are estimated based on a 3% rate of return. At $190,000 the maximum amount per year would be $16,645; at $200,000 it would be $13,200. Of course there is always danger in relying on TSP money, but even with all in the G fund, the difference in income is not really significantly different."

Would you care to share your thought process on how you arrived at this plan (you must have given other withdrawal plans some thought). I see advantages to your approach. I too have a mortage to pay and will probably refinance to a 20 year period.
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