TSP for Military

[Smhx4]

Were selling some toys and will have 50k in cash soon. We already max out the roths. Im thinking getting this money into the TSP would be the best move. DH's projected separation is December 2015. After that we dont plan to have income that we can contribute to a roth.

Assuming we put the 50k into a TSP, when he separates we move it to a traditional IRA. Can we then move it to our Roth?

 

[Khan]

Were selling some toys and will have 50k in cash soon. We already max out the roths. Im thinking getting this money into the TSP would be the best move. DH's projected separation is December 2015. After that we dont plan to have income that we can contribute to a roth.

Assuming we put the 50k into a TSP, when he separates we move it to a traditional IRA. Can we then move it to our Roth?

Move from traditional to Roth is a taxable event.

 

[samclem]

Were selling some toys and will have 50k in cash soon. We already max out the roths. Im thinking getting this money into the TSP would be the best move. DH's projected separation is December 2015. After that we dont plan to have income that we can contribute to a roth.

Assuming we put the 50k into a TSP, when he separates we move it to a traditional IRA. Can we then move it to our Roth?

The TSP is a great spot for your money--the expenses are lower than just about any other investment option. Putting money in the TSP will also reduce your taxable income (unlike a Roth). There are limits on TSP contributions (check on these), you wouldn't be able to put 50K in at once. But, you could add it over the next several years. If your tax rate right now is higher than you believe it will be when you start withdrawing your retirement money, then the TSP is actually a better choice for you than a Roth (from a tax-minimization angle. There are other factors to consider).
You could later roll your TSP money into another 401K-type product (if your husband gets another job after the military and he is offered one) or you can move it into a traditional (not a Roth) IRA without tax consequences. You probably don't want to do this--the TSP offers lower costs than you'll find elsewhere. If there are unusual investments you need that aren't offered by TSP, 1) Look very closely at them--they may nor be so great and 2) You can hold these other investments in your Roth accounts, other IRAs, etc. Definitely don't "close" your TSP account after DH separates. You can't open a new one if you aren't on the federal payroll, but you can add funds to an existing TSP account even if you aren't a federa employee (say, rolling finds from a later employer's junky 401K into the TSP) . Closing your TSP will eliminate options you guys might need later..

Stay tuned, folks with better working knowledge of this stuff will likely chime in shortly.

 

[HawkeyeNFO]

Are you going to be deployed anytime soon? (No, not a rhetorical question!) You can minimize the financial impact IF you are deployed to a combat zone, and transfer the funds during any month that you are in the tax-free location.

For example, last time I was tax-free, I ratcheted up my TSP contributions to 100%.

If you know deployment is coming up, get your take home pay early by minimizing your TSP contributions, and instead apply the funds to your Roth. Then when it's your turn in the 'stan, go to the mypay TSP page, and set your TSP as high as you are comfortable with.

I did this in 2006 and 2007, putting about $35k into the TSP, and that is tax exempt. Keep in mind that the $16.5k cap on TSP contributions doesn't apply in the year when you are in a combat zone.

Might I also recommend the Savings Deposit Program, which guarantees you 10% interest on the money you put in (up to $10k) while deployed until 3 months after you get back.

 

[Smhx4]

Thanks samclem. Lots of good info there.

If we go this route, I plan to move the money as quick as I can, which will take about three years. I don't think we will have a tax advantage, we have two homes, two teens and one E-7 income. Eventually yes, but then he's on the verge of punching.

Not planning on him earning much if any after the military, another reason to get this money into something like a Roth. Good to know we need to keep it open, don't want to close any doors.

I'm confused about not rolling it when he retires. Im under the impression that you have to transfer it to something when he is no longer active duty. I thought going into a traditional Ira then moving to a Roth would make the best sense. Then all of our retirement accounts grow tax free. This is why I'm here, still learning.

 

[Smhx4]

No HawkeyeNFO. No deployments in the future. He does occasionally fly on missions to a combat zone, maybe an hour or a few days, those give us a tax free month, hazard pay. So if he knows ahead of time he is going to a combat zone that will give us a tax free month, we should max out the contribution for that month, then that money will grow tax free?

I have heard of the SDP but his career field rarely deploys. Will keep that in mind just in case.

 

[HawkeyeNFO]

It only takes a day, and then that entire month is tax free and may qualify for hazardous duty pay.

The rumor in the Navy is that the MCPON leaves the Pentagon 6 times a year to go to the Middle East (31Jan-1Feb, then back about 30Mar-1Apr, etc...)

 

[samclem]

I'm confused about not rolling it when he retires. Im under the impression that you have to transfer it to something when he is no longer active duty. I thought going into a traditional Ira then moving to a Roth would make the best sense. Then all of our retirement accounts grow tax free. This is why I'm here, still learning.

Nope, he can keep it in the TSP after he retires (that's what I'm doing). The low costs are unbeatable.

The question about Roth vs Traditional IRA (or TSP--which for this discussion is like a TIRA) is complex. All this stuff grows tax free (that is, it's not taxed as it grows). The big difference (as you likely know already) is that you have to pay tax on the Roth money before you put it in. For the TIRA or TSP money you don't pay tax on it before it goes in. When you withdraw the in a TIRA or Roth, you pay tax on everything: what you put in plus the gains. For a Roth, you don't pay tax on anything. From a dollars-and-sense standpoint, which is "better" depends on whether you believe you'll be in a higher bracket after retirement (choose Roth) or if you're in a higher bracket when you put the money in (choose TIRA). Plus, now there are Roth TSP options, which add another element of fun, but the same basic choice: If you'll be in a higher bracket later, pay the tax now and choose Roth options.

Are you guys at Scott AFB? We were assigned there and liked the area.

 

[samclem]

The rumor in the Navy is that the MCPON leaves the Pentagon 6 times a year to go to the Middle East (31Jan-1Feb, then back about 30Mar-1Apr, etc...)

Maybe some folks are getting away with this, but USCENTCOM used to make a public example of anyone they caught doing it, which is entirely correct.

 

[Smhx4]

Samclem, yeah were at scott. Nice area, like everything but the taxes.

I dont think we need the tax advantage, not for a few years and by then I would have all of the 50k put in the TSP. Dont plan to withdraw any of the funds til we can penalty free. Not sure what our tax bracket would be then. So if I have no tax advantage what would you say. Still sounds like a good deal considering it grows tax free. Assuming we live on his pension only when he separates, our income should be pretty low, therefore not paying a ton in taxes if we transfer to a roth.

I guess I could analyze transferring it later.

 

[av8er]

Are you going to be deployed anytime soon? (No, not a rhetorical question!) You can minimize the financial impact IF you are deployed to a combat zone, and transfer the funds during any month that you are in the tax-free location.

For example, last time I was tax-free, I ratcheted up my TSP contributions to 100%.

If you know deployment is coming up, get your take home pay early by minimizing your TSP contributions, and instead apply the funds to your Roth. Then when it's your turn in the 'stan, go to the mypay TSP page, and set your TSP as high as you are comfortable with.

I did this in 2006 and 2007, putting about $35k into the TSP, and that is tax exempt. Keep in mind that the $16.5k cap on TSP contributions doesn't apply in the year when you are in a combat zone.

Might I also recommend the Savings Deposit Program, which guarantees you 10% interest on the money you put in (up to $10k) while deployed until 3 months after you get back.

For TSP & Roth contributions, I'd actually recommend the opposite...maximize your TSP contributions before your deploy (to minimize your tax burden during the taxable part of the year) and then maximize your Roth contributions while you're deployed (funding an after-tax account with tax free money). I would then fund the SDP to get the guaranteed 10% if able and, if I had money left over to invest while I was deployed, I'd put the remainder into the TSP.

This method works especially well if you deploy during the middle of the year for the standard 12 month tour because essentially you won't pay taxes for two full tax years...if you're having to spend a year in combat, you might as well take advantage of the financial benefits.

 

[ChrisC]

Are you going to be deployed anytime soon? (No, not a rhetorical question!) You can minimize the financial impact IF you are deployed to a combat zone, and transfer the funds during any month that you are in the tax-free location.

For example, last time I was tax-free, I ratcheted up my TSP contributions to 100%.

If you know deployment is coming up, get your take home pay early by minimizing your TSP contributions, and instead apply the funds to your Roth. Then when it's your turn in the 'stan, go to the mypay TSP page, and set your TSP as high as you are comfortable with.

I did this in 2006 and 2007, putting about $35k into the TSP, and that is tax exempt. Keep in mind that the $16.5k cap on TSP contributions doesn't apply in the year when you are in a combat zone.

Might I also recommend the Savings Deposit Program, which guarantees you 10% interest on the money you put in (up to $10k) while deployed until 3 months after you get back.

My son is deployed to Afghanistan for a second tour. He's taken care of the Savings Deposit Program and on his first tour he made TSP contributions; I'm fairly certain he didn't increase his TSP contributions during his first deployment; he has a ROTH. I have his POA; do you know who I would need to contact to increase his TSP contributions while he's deployed? I don't have any access to his mypay TSP account and I have limited contact with him during these deployments when he's at a forward operating base.

 

[check6]

Samclem, yeah were at scott. Nice area, like everything but the taxes.

I graduated from Mascoutah High School. Small world.

Ck 6

 

[HawkeyeNFO]

For TSP & Roth contributions, I'd actually recommend the opposite...maximize your TSP contributions before your deploy (to minimize your tax burden during the taxable part of the year) and then maximize your Roth contributions while you're deployed (funding an after-tax account with tax free money). I would then fund the SDP to get the guaranteed 10% if able and, if I had money left over to invest while I was deployed, I'd put the remainder into the TSP.

This method works especially well if you deploy during the middle of the year for the standard 12 month tour because essentially you won't pay taxes for two full tax years...if you're having to spend a year in combat, you might as well take advantage of the financial benefits.

You are correct, that is better advice. I think that's what I actually did. Enlisted members who are re-enlistment eligible and due a bonus for doing so should ensure that they can get it done while it's tax free. Unfortunately for the officers, you always get taxed on a bonus.
Note however, that you still pay taxes during months you are not in the combat zone; the tax-free does not apply to the entire year.

 

[av8er]

Note however, that you still pay taxes during months you are not in the combat zone; the tax-free does not apply to the entire year.

Very true. If you max out the TSP during the taxable part of the year before and after you deploy for a standard 12 month tour, though, your tax burden will be practically zero for both years.

 

[Nords]

Assuming we put the 50k into a TSP, when he separates we move it to a traditional IRA. Can we then move it to our Roth?

You might want to look at doing it the other way 'round: we seriously considered moving my spouse's IRA into her TSP.

And when the Roth TSP plan is implemented next year, it'll be great for people who want to contribute even more to an index fund with a 0.03% expense ratio.

But you're interpreting the rules correctly. At separation you could roll some or all of the TSP to a conventional IRA and then, as a second (taxable) step, convert it to a Roth.

 

[Smhx4]

You might want to look at doing it the other way 'round: we seriously considered moving my spouse's IRA into her TSP.

And when the Roth TSP plan is implemented next year, it'll be great for people who want to contribute even more to an index fund with a 0.03% expense ratio.

But you're interpreting the rules correctly. At separation you could roll some or all of the TSP to a conventional IRA and then, as a second (taxable) step, convert it to a Roth.

Ok thanks. We have about 70k in a Roth with USAA, target retirement 2040. Would it be a smart move that to the TSP Roth option?

 

[Nords]

Ok thanks. We have about 70k in a Roth with USAA, target retirement 2040. Would it be a smart move that to the TSP Roth option?

Compare the USAA Roth expense ratio to the TSP's expense ratio, which is about 0.03% or less. The TSP has broad index categories so it may not exactly match the USAA fund's niche/benchmark, but I don't think you'll miss USAA.

As a financial management company, USAA sells great car & home insurance.

 

[Smhx4]

Compare the USAA Roth expense ratio to the TSP's expense ratio, which is about 0.03% or less. The TSP has broad index categories so it may not exactly match the USAA fund's niche/benchmark, but I don't think you'll miss USAA.

As a financial management company, USAA sells great car & home insurance.

Thanks. I'll look into that. I forgot what the expense ratio was but they weren't charging it til last dec 31, haven't checked since then.