Rollover TSP IRA into TSP Roth A wise plan?

[Wishful]

@okboomer
@brewmeist
@AROTC-dad
@raimius

This post is related to my post about Max contributions to TSP Roth & outside Roth..., link below.
I'm interested in DD rolling over her existing TSP IRA, to her TSP Roth account. Reasoning that her income tax rate level is low, the rollover will allow her the advantages of a Roth. I know the rollover funds would have to be reported as income this year & the reduction of tax deferred income is lost.
My understanding is as follows:

• For 2020, the max. TSP IRA contribution is $19,500, Roth is $6,000.
• These are separate amounts so the total retirement contribution amount could be their total, 25.5K.
• The “matching” TSP 5% for BRS is in addition to these amounts
• The article linked below points out the following:

“Before you roll your TSP into a Roth IRA, you should be aware of certain differences between the two types of the above accounts:

• The TSP requires minimum distributions beginning at age 70 1/2, (now 72 ) for both traditional and Roth accounts. A Roth IRA has no required minimum distributions.
• The TSP plan requires that a spouse, if one exists, is automatically the sole beneficiary of the plan. To change beneficiaries, the spouse must give written consent. No such requirement applies to a Roth IRA”. My commentary: Sadly, I can tell stories about abusive, ex-spouses where this would be a nightmare...& that’s an understatement. Hard to imagine when you’re young & in love but those of us older posters have seen it, unfortunately.
• “There are no income limits that restrict contributions to a Roth TSP, but such limits exist for a Roth IRA. (Income limits not a problem for military).
• A Roth TSP can be rolled into a Roth IRA. A Roth IRA cannot be rolled into a Roth TSP or any account other than another Roth IRA”.

I wanted to ask the posters who have commented on the previous post as well as others for their opinions on the following plan. Rollover existing TSP IRA into TSP Roth IRA. With the exception of payroll deductions necessary to have the govt. match 5%, all future contributions go into the Roth account.

Is it doable? Does it make sense? Would you advise to do this rollover yearly so essentially, your TSP Roth is your primary retirement vehicle?


https://finance.zacks.com/roll-over-tsp-roth-ira-2244.html

Maximum Yearly Contributions to Both TSP IRA & Outside Roth- Separate & Independent?

My financial adviser says that since TSP is an employer sponsored retirement plan for 2019 you can contribute a maximum of $19,000.00 annually from your salary to your TSP account through the government and up to a maximum of $6,000.00 annually to your Roth IRA account. The maximum contribution...

www.serviceacademyforums.com

 

[Capt MJ]

@okboomer
@brewmeist
@AROTC-dad
@raimius

This post is related to my post about Max contributions to TSP Roth & outside Roth..., link below.
I'm interested in DD rolling over her existing TSP IRA, to her TSP Roth account. Reasoning that her income tax rate level is low, the rollover will allow her the advantages of a Roth. I know the rollover funds would have to be reported as income this year & the reduction of tax deferred income is lost.
My understanding is as follows:

• For 2020, the max. TSP IRA contribution is $19,500, Roth is $6,000.
• These are separate amounts so the total retirement contribution amount could be their total, 25.5K.
• The “matching” TSP 5% for BRS is in addition to these amounts
• The article linked below points out the following:

“Before you roll your TSP into a Roth IRA, you should be aware of certain differences between the two types of the above accounts:

• The TSP requires minimum distributions beginning at age 70 1/2, (now 72 ) for both traditional and Roth accounts. A Roth IRA has no required minimum distributions.
• The TSP plan requires that a spouse, if one exists, is automatically the sole beneficiary of the plan. To change beneficiaries, the spouse must give written consent. No such requirement applies to a Roth IRA”. My commentary: Sadly, I can tell stories about abusive, ex-spouses where this would be a nightmare...& that’s an understatement. Hard to imagine when you’re young & in love but those of us older posters have seen it, unfortunately.
• “There are no income limits that restrict contributions to a Roth TSP, but such limits exist for a Roth IRA. (Income limits not a problem for military).
• A Roth TSP can be rolled into a Roth IRA. A Roth IRA cannot be rolled into a Roth TSP or any account other than another Roth IRA”.

I wanted to ask the posters who have commented on the previous post as well as others for their opinions on the following plan. Rollover existing TSP IRA into TSP Roth IRA. With the exception of payroll deductions necessary to have the govt. match 5%, all future contributions go into the Roth account.

Is it doable? Does it make sense? Would you advise to do this rollover yearly so essentially, your TSP Roth is your primary retirement vehicle?


https://finance.zacks.com/roll-over-tsp-roth-ira-2244.html

Maximum Yearly Contributions to Both TSP IRA & Outside Roth- Separate & Independent?

My financial adviser says that since TSP is an employer sponsored retirement plan for 2019 you can contribute a maximum of $19,000.00 annually from your salary to your TSP account through the government and up to a maximum of $6,000.00 annually to your Roth IRA account. The maximum contribution...

www.serviceacademyforums.com

I am definitely not a financial professional, read this several times, but admit I am stumped.

In the TSP program, there are Roth and non-Roth employer-sponsored investment accounts that operate similar to civilian employer 401k rules, such as yearly amount that can be invested, RMDs down the road, rollover rules, ability to withdraw for certain reasons, etc.

An IRA, whether Roth or non-Roth, is an Individual Retirement Account, independent of the employer. The investor designates a mutual fund or other eligible account as an IRA account at some financial institution and invests separately from their govt TSP ”401k-type” account, following IRA rules. Many mids and cadets already have IRAs upon arrival at an SA, or start one with USAA, Fidelity or others. They then start their TSP “401k” after they are commissioned, and use those two vehicles as part of the foundation of their long-term investing.

I keep hanging up on the mention of “TSP IRA” in the title and text - am I behind in some new development in the TSP program? Are there IRA vehicles inside TSP now?

When I left AD, I rolled my TSP Roth into one of my personal Roth IRAs, per rollover rules applicable to change of employer.

I will be interested in what our licensed fiduciary whiz posters have to say.

 

[Capt MJ]

I’m still pondering this, still hung up on what a “TSP IRA” is. Focusing on the final paragraph, I am guessing TSP, the Fed govt’s Thrift Savings Plan or “401k” type plan, is somehow being conflated with “traditional” IRA, the one where the tax is paid when funds are withdrawn down the road, and the IRA we are talking about has nothing to do with the Fed TSP program. If the question is, can a traditional IRA be converted to a Roth IRA, yes, with the accompanying tax bill, which might make sense in this presumably lower tax bracket. Down the road, when the military member gets out, they can rollover their TSP Roth into their personal Roth IRA account, or into their new civilian employer’s Roth 401k Plan, which might make sense with a strong suite of 401k options and to lay a strong foundation for civilian salary contributions and employer matching at the new job. I have done that in corporate-to-corporate moves.

Again, I am no licensed expert, just trying to tease out the actual question and share my own experience.

My very best advice: consult a licensed financial advisor, my personal preference are the ones who do not also sell investment products, for this kind of strategic planning. And the investor themselves should get smart about these things, learn about it, understand how to manage their finances, and take control of it. One of the best practical gifts my parents ever gave me, were the tools and knowledge to manage my finances myself at around age 20. I had already managed my college budget, first credit card and HS job incomes and savings with their coaching.

 

[Capt MJ]

Final comment.

When I was a JO back in the 20th c., one of my collateral duty jobs was Command Financial Education Officer, responsible for conducting personal financial management training, counseling sailors and referring them to base resources. JO’s are also frequently involved in their troops’ personal financial management work-affecting outcomes (payday loans, repos, etc.) and need to know the basics. I learned by teaching others.

Back then, I went to a non-profit 501(c)3 educational foundation by telephone to order free publications on every aspect of personal financial management to use as teaching material. They provide individual and bulk publications, and have added videos on topics such as the BRS, and articles on many pertinent topics, all free, of course.

None of their material mentions any specific for-profit company’s products or services, sells anything, or puts anyone at risk of solicitation. All of their material is free, downloadable or orderable in some cases.

https://usaaef.org/

I highly recommend them as a safe resource for teaching yourself as young adults, for parents to help launch DS and DD awareness.

 

[Wishful]

@Capt MJ I apologize for using the term TSP IRA. In the article linked, the author describes TSP like an employer sponsored 401 (k) plan. I interpreted that to mean IRA. So TSP& IRA are saying the same thing. Sorry to all for the confusion.
I do have a call into my financial advisor & will advise when he gets back to me.

 

[Capt MJ]

@Capt MJ I apologize for using the term TSP IRA. In the article linked, the author describes TSP like an employer sponsored 401 (k) plan. I interpreted that to mean IRA. So TSP& IRA are saying the same thing. Sorry to all for the confusion.
I do have a call into my financial advisor & will advise when he gets back to me.

Absolutely no problem at all - I kept coming back to this to try and answer the questions I thought were being asked.

The Thrift Savings Plan (TSP) has long been the Federal civilian employees’ employer-sponsored retirement investment vehicle, which is structured pretty much like a civilian employer’s 401k plan. The TSP was opened up to military members, as I recall, in the early 2000’s, as a way to save for retirement if they weren’t staying for 20 years. The IRA has always been an individual investment account, with its own set of rules, and independent of the employer.

I am sure your financial advisor can clear away the mud. I suspect you will hear about “qualifying events” that allow you to rollover a 401k/TSP into an IRA. It’s usually when you are leaving that employer that you then have options, not something you can do on a regular basis while still with the 401k/TSP employer, but I’ll leave that to your licensed advisor.

 

[okboomer]

@Capt MJ I apologize for using the term TSP IRA. In the article linked, the author describes TSP like an employer sponsored 401 (k) plan. I interpreted that to mean IRA. So TSP& IRA are saying the same thing. Sorry to all for the confusion.
I do have a call into my financial advisor & will advise when he gets back to me.

No, TSP and IRA are completely different concepts, as Capt MJ has said. TSPs typically have set investment options - mutual funds, bond funds, money market, etc. with varying levels of risk. As noted, higher contributions allowed annually. IRAs are non-employer sponsored accounts that have unlimited investment options - you pick from all investments available to you including any individual equity or bond rather than fund options in the TSP. As far as Roth or traditional, I like the Roth version myself as I want to believe that I will be in a higher tax bracket later in life so I want to pay lower tax on the income now and zero tax on the wealth that accumulates. Sometimes budgeting after-tax $ now can be a challenge so the traditional account may be the best option to provide financial flexibility needed today. As far as converting from a traditional format to a Roth format, if you can swing the tax bill now, in my opinion it’s worth it to gain the tax advantages of the Roth rules. Do consult a financial professional. I’m just a self-taught CPA when it comes to personal financial planning.

 

[Jeepman]

The TSP will contribute to the traditional TSP when it matches, not the Roth TSP (you seem to understand this). Since what each person's situation is unique, there is no cookie cutter answer. One thing to consider regarding her contributions is how much liquidity does she have available? Retirement accounts in general are not available for withdrawal until 59 1/2 (yes, there are exceptions but one should have this mindset when planning with such accounts). Sometimes, people have very little in personal non-qualified accounts but rather large retirement accounts at a relatively young age. Make sure there is a balance between non-qualified and qualified accounts, otherwise she may run into liquidity issues for simple things like cars and major purchases. That said, make sure she at least puts up to what is matched since that is a guaranteed 100% return.

If her AGI is low enough, also have her contribute to her own Roth IRA. There is a five-year rule with Roth IRAs, so open the account and get the clock ticking.

Lastly, it is probably best to have some money in the Roth and some in the traditional (50-50?), since there is no guarantee taxes will be higher or lower later when she retires. The idea is for her to hedge her bets both ways. Roth accounts are great, no question.

I hope this helps a little.

 

[raimius]

What is the calculated advantage of doing the rollover? Is she willing to pay the tax hit for that calculated advantage?

 

[okboomer]

What is the calculated advantage of doing the rollover? Is she willing to pay the tax hit for that calculated advantage?

Complicated equation with assumptions that must be made but 6% annual return over a long-term investing horizon with tax-free earnings typically more than offsets cash tax now.

 

[Wishful]

I called TSP who advised that they do not allow funds from their Traditional account to be moved into their Roth account. Also, my financial advisor called and said so as well. So the plan is to have future contributions go into TSP Roth.