Military retirement and TSP to ROTH and mortgage payoff questions

[Mr Gadget]

Hi, wanted to see if I could get any sage advice. I’ve read several of the FAQ’s and lurked for about a year and a half. Most of the advice is great but NORDS is the MAN.

I have a couple of questions on TSP to ROTH and mortgage payoff after my background info;

42 YO single military finally going to put in the retirement letter for next September. The new GIBILL is the last part that helped, I’ll be transferring 2 years of my benefits to my daughter for college (her part is to contribute scholarships or loans for the rest) so it is a huge paycheck that really enabled me to do this early.

I will be at an E-8’s 25 year pension level (basically a $1.4M nestegg over 40 years) with an annual COLA (4.4% average over the last 35 years) and I currently only spend about ½ my take home (after taxes) pay, so I think I will be ok with my projected retirement income and budget (this includes my current mortgage/child support/utilities and planned medical and dental insurance cost increase) once I’m retired. I’ve got 40K in TSP and 15K in a Roth IRA. And I will have 46K and 20K by next year with my normal additions. (Only able to start after paying off the divorce costs ) Once I retire, additions will probably stop or be minimal unless I find a hobby that pays.

First option; Should I shift the TSP to the ROTH and pay the taxes when I retire? Can I since it’s over the 5K limit per year? Additionally, not sure if it’s worth doing the SEPP afterwards, I looked at Retire Early: Can I withdraw money from my IRA before age 59½ ? I don't need the money, but might be nice, still not sure.

Second option; I’ve got about 30K equity that I put in to my current (new in 07) house when I bought it two years ago, but I cannot sell due to the current market. I like where I live, and military pension will be non taxable in IL so that helps, but I will be looking to relocate back to AZ where my family is in a few years once the local market recovers. I just refinanced in January from a 20 year mortgage to a 15 year and dropped two points on the interest rate. I could pay off the remaining mortgage (65K) with just about all of my liquid savings (currently a money market at NFCU, normally laddered CD’s), that would leave me with just the TSP and/or Roth as back up funds and no other cash except about 5K in INTEL stock, but it would eliminate a $600 a month mortgage payment (and save about 28K on interest). Not sure if I should pay off the mortgage and then use that difference for building back up a safety account and then investing. (Since I don’t have to really worry about losing my job/income, I’ll be living on my pension)

I have no other debt, (car, CC, etc) and my car is a 06 Toyota, so don’t anticipate any major costs there for a few more years.

Thanks for reading.

 

[Boxkicker]

I retired in Dec 08 (Navy Chief) and have left my TSP alone. I don't see the advantage of shifting it to an IRA. I like playing the market, even if I lost $14K in TSP in 2008. In the almost 6 years I have had TSP, I have "only" lost $3,000. I figure in 20 years I can still recoup the losses. Heck, just the 1Q in 2009, I made $5,000 in the TSP.

I would leave the TSP alone.

Also, get into hobbies like me...I work at the base golf course and make around $600/mo "working" 2-3 days a week. There are many perks and its flexible! And if you like sports as much as I do, get into umpiring!!! I made $2,500 in 6 weeks umpiring high school baseball/softball. Easy money and its fun!

And in the fall, I will be supplementing my income with the MGIB. I will be pocketing $700/mo by taking 1 class every 8 weeks!

Welcome to the retired world. It is the best thing I could have done!

 

[Nords]

Welcome to the board, Gadget!

First option; Should I shift the TSP to the ROTH and pay the taxes when I retire? Can I since it’s over the 5K limit per year? Additionally, not sure if it’s worth doing the SEPP afterwards, I looked at Retire Early: Can I withdraw money from my IRA before age 59½ ? I don't need the money, but might be nice, still not sure.

I don't know if there's any advantage to leaving the TSP until you need the money. For example, you could always roll it over to a conventional IRA and start a 72(t) when you need it, or you could roll over/convert it to a Roth as late as your 60s before taking Social Security. In the meantime you'd have it in the world's lowest-cost mutual fund compounding away during a slowly recovering economy. The 2-3 basis points (0.02-0.03%) expense ratio beats even Vanguard's best.

Second option; I’ve got about 30K equity that I put in to my current (new in 07) house when I bought it two years ago, but I cannot sell due to the current market. I like where I live, and military pension will be non taxable in IL so that helps, but I will be looking to relocate back to AZ where my family is in a few years once the local market recovers. I just refinanced in January from a 20 year mortgage to a 15 year and dropped two points on the interest rate. I could pay off the remaining mortgage (65K) with just about all of my liquid savings (currently a money market at NFCU, normally laddered CD’s), that would leave me with just the TSP and/or Roth as back up funds and no other cash except about 5K in INTEL stock, but it would eliminate a $600 a month mortgage payment (and save about 28K on interest). Not sure if I should pay off the mortgage and then use that difference for building back up a safety account and then investing. (Since I don’t have to really worry about losing my job/income, I’ll be living on my pension)

How 'bout that Intel this week, huh? I'd hold onto those shares for a while.

What's the cash being saved for and when would you need it? Is it an emergency fund, or is it a down-payment fund, or is it extra money looking for an asset allocation?

Liquidity gives you choices. A paid-off mortgage gives you... a large illiquid depreciating asset sitting on illiquid appreciating land. If you can live within your pension then you probably won't miss the liquidity, but you'd have trouble coming up with a down payment for the next home. If you feel that the cash is just losing to inflation in the NFCU account, keep in mind that a cash home buyer (or at least a large down payment) will get a lot of discounts and easier mortgage financing. Instead of chasing yield, console yourself with the thought of the bargains you'll be picking up with cash negotiating power.

But if paying off the mortgage helps you sleep better at night, then perhaps you could see how you feel about a more measured approach-- paying it biweekly or making an additional principal payment each year. Either technique will cut years off the amortization.

Or you could review your asset allocation and put a third or half of the cash to work for you in the market. That would be a long-term goal of 5-10 years, though.

 

[av8er]

Gadget, welcome to the board and congratulations on your upcoming ER. Here are my .02 cents.

Should I shift the TSP to the ROTH and pay the taxes when I retire? Can I since it’s over the 5K limit per year? Additionally, not sure if it’s worth doing the SEPP afterwards, I looked at Retire Early: Can I withdraw money from my IRA before age 59½ ? I don't need the money, but might be nice, still not sure.

My understanding is that there are no limits on roll overs from 401ks to IRAs. Having said that, I'm not sure if the cost of rolling over your TSP account into a Roth IRA would be worth it. The Roth generally benefits folks that will be in a higher tax bracket in retirement. Since you indicated that you do not plan on working after the service, this will likely not be the case for you. And, rolling over your TSP account into a Roth would also create a big tax bill for you right after you retire. If you really want to roll over to a Roth, though, is it possible to roll over a smaller amount each year (small enough to not push you into the next higher tax bracket)? I don't know if that option exists, but it might be worth asking the good folks at the TSP.

I just refinanced in January from a 20 year mortgage to a 15 year and dropped two points on the interest rate. I could pay off the remaining mortgage (65K) with just about all of my liquid savings (currently a money market at NFCU, normally laddered CD’s), that would leave me with just the TSP and/or Roth as back up funds and no other cash except about 5K in INTEL stock, but it would eliminate a $600 a month mortgage payment (and save about 28K on interest). Not sure if I should pay off the mortgage and then use that difference for building back up a safety account and then investing. (Since I don’t have to really worry about losing my job/income, I’ll be living on my pension)

Personally, I would maintain a fully funded emergency fund (3-6 months living expenses) as you get ready to retire rather than immediately paying off the mortgage. You'll have the security of your pension, but there may be some increased costs in retirement that you won't really know about until you get there and don't currently have budgeted...I've read a few posts on this board from folks that experienced that when they retired. Having a good emergency fund will give you some wiggle room/budget flexibility. And, it is always nice to have some cash on hand when Murphy rears his ugly head...little emergencies are always going to pop up, and having a cash cushion, in my opinion, makes them a lot more manageable.

Again, welcome to the board and congratulations on your retirement.

 

[jimnjana]

I would err on the side of liquidity...after you've been retired for a few years and you find you don't "need" it then you can pay down etc.

Jim

 

[Nords]

I don't know how much it adds to everyone's level of knowledge, but I rediscovered this TSP vs Roth newsletter while I was looking through some old bookmarks:
http://www.tsp.gov/forms/highlights/high08c.pdf

 

[Mr Gadget]

Thanks to all, I think it does make more sense to keep the TSP separate and just pay of the mortgage incrementally ahead of time. Since I've got a 4.625% rate, I don't think I'll see that again.