Should I put every last dime I can into the TSP???

[smurray5991]

I am 57, and I will only be working for two months in 2013 before retiring from the federal government. Should I put all of my salary for these two months into the TSP to max out the entire annual TSP maximum prior to leaving my job, including the post 50 year old ‘catch up’ portion? Or should I just put in enough to get the maximum 5% federal match?

It seems like it would be good to buiild additional tax deferred savings, especially with the low costs and other advantages of the TSP. On the other hand, I will have to draw an equivalent amount of income from other (taxable) parts of my portfolio during 2013 to ‘replace’ that income I socked away into the TSP as I begin my early retirement (although admittedly I’ll be in a pretty low tax bracket)…. so there is a tradeoff.

(BTW, I also plan to max out my 2013 Roth IRA with other funds, so that will happen regardless….)

THANKS in advance for any advice or insights into what I should factor into the decision!

 

[target2019]

Not a deep analysis of your situation, but if this is the only income you have, maybe just do enough to reduce your Fed Tax to $0 for the year.

If there is joint income, then I suppose I'd do as you are doing, and bank the max in TSP.

 

[samclem]

- Definitely put in enough in 2013 to get the match.
- This is for 2012 (this year): Have you got appreciated assets in "regular" after tax accounts (i.e. outside an IRA. TSP, or 401K)? No one is sure what will happen regarding the tax code, but right now Cap Gains are getting very favorable treatment (0% taxes) for those in the 10 and 15% tax brackets, and cap gains get taxed at 15% for those in the 25% bracket or higher. So, if you can contribute a lot to your TSP in 2012, it makes room for you to sell off appreciated assets and avoid possibly much higher taxes in 2013 and beyond.
- Other than that, I second target2019's comment, contribute enough to the TSP to drive down your FIT to zero. But keep an eye on the tax changes--things might change quite a bit.

 

[LOL!]

I'd contribute all I could. I would live off taxable and work out the maximum amount of any traditional IRA that could be converted to Roth IRA while in a low tax bracket. Then I'd keep doing this going forward. I would use www.i-orp.com to help with decision-making along with TurboTax.

 

[smurray5991]

Thanks target 2019 and samclem --

To answer your questions - I have indeed already maxxed out the 2012 TSP (regular plus over 50 catch up). And I do have almost $600K in taxable accounts that I could sell something from either this year or next. The main downside I could see of selling in 2012 (despite the guarantee of favorable capital gains rates) is that my taxable income is going to be very high this year ($152K), so not sure I want any extra capital gains.
In 2013 I will get the first two months of salary, plus lump sum of annual leave, plus federal pension income -- so maybe more like $50K total (gross). If I sock away the full TSP, this will drop down to $27K in taxable salary and pension. I'd then need to draw (at most) $30K from my taxable assets to meet my annual income needs next year (at whatever tax rate is in play by then). Seems like even if the tax rates do change, I'd still be better off because of the lower tax bracket I'll be in as of 2013?

 

[smurray5991]

Thanks LOL! - All my IRAs (about $180K) are fortunately already converted to Roth -- I did it back when I was a graduate student, which was most definitely a low income bracket time of life!

 

[pb4uski]

I faced the exact same situation in 2012. I maxed out my 401k (similar to your TSP) so my W-2 earnings were minimal at the time I left so I could later do tIRA to Roth conversions (and have been living off my taxable accounts).

What you could do since you want to make a Roth contribution is to design your TSP contributions so your W-2 income is $6,500 and then make a $6,500 contribution to your Roth.

 

[smurray5991]

The good news is that the lump sum payment for accumulated annual leave is considered earned income for the purposes of IRA contributions, so I will be eligible to contirbute the maximum to my Roth IRA next year, even without considering the two months of regular salary. I can only contribute to the TSP through the regular salary, though. I haven't done the exact math, but I should be able to contribute the full $23000 maximum, but don't think there will be anything left over!

 

[pb4uski]

That's what I would do then. Think of it this way - the conventional wisdom is to draw from you taxable funds first and then your tax-deferred funds. What you would be doing is just accelerating the process of drawing from taxable funds and adding to your TSP. Or thought of another way, if you had an opportunity to do a dump in of taxable funds to the TSP would you do it? Its the same thing.

 

[smurray5991]

Great way to think about it pb4uski... thanks!

 

[LOL!]

Roth TSP?

 

[smurray5991]

No -- very little in Roth with the TSP, since they just started that option. So the great majority of the TSP is 'regular' ($350K). I'm not sure what the rules are for conversion once I'm no longer a federal employee.... plus whether it makes sense to do so given that I won't have a big income to pay the taxes.

 

[LOL!]

Let me rephrase that, start contributing to Roth TSP in 2013?

 

[smurray5991]

I thought about it, but thought I might not be able to max it out if I have to use after tax dollars. (I need to calculate exactly what amount I'll be earning in that time period). I also thought if taxes on a Roth TSPcontribution were an issue I might be able to increase my number of exemptions to minimize withholding from the actual paycheck, and make up what I owe at tax time with other assets.

 

[zinger1457]

I would do it but also realize that the governments matching contribution is limited to 5% of your base pay each pay period so you probably won't get the full match for the amount you deposit that you would normally get.

 

[smurray5991]

Yes, this is indeed a limitation, but hey, I'll take whatever match I can get! The main issue is whether to put my own hard cash in the TSP... and from what everyone is saying, it sounds like I should do it....

 

[Animorph]

I'd contribute whatever is required to get the match and stay within the 15% bracket or its 2013 equivalent. Stuff everything you can into Roth TSP after that. Plus the Roth IRA. You'll be in that early retirement zone where you want to fill the lower tax bracket with income or Roth conversions (can you convert TSP to Roth TSP?), and use tax-free sources for the rest.