ROTH TSP option

[powersmo]

Hi all. I have been searching thru the archives about information on the TSP to ROTH TSP conversion. I haven't seen any real clear thoughts or recommendations for those of us that are 6 to 12 months from active duty retirement (mandatory based on years of service). I will retire in July 2013 and have a bit less than 200K in the account while my wife has already retired and only about 30K in hers. Does it pass the common sense test to convert either or both of these to the ROTH TSP or leave the way it is? We already max out our other ROTHs with VG and the remaining of our investments go to our taxable account. TIA.

 

[HawkeyeNFO]

I have about 5 years to go until retirement, unless they promote me unexpectedly. I have the same questions as you. I haven't done any homework on the Roth TSP yet, so I'm curious about what others add to this discussion.

Can I put only my current TSP savings into the Roth? Or can I add other funds (in addition to the annual deductions from my paycheck)? The low fees of the TSP are attractive.

 

[samclem]

Does it pass the common sense test to convert either or both of these to the ROTH TSP or leave the way it is?

I think the situation with the TSP --> ROTH TSP conversion decision is much the same as the tIRA --> ROTH IRA conversion. It makes the most sense if you expect to be in a higher tax bracket when you withdraw the money than you are in right now. If you are in your peak earning years, then it probably doesn't make much sense to convert right now. After you retire (not just from the military, but from paid employment) you might find that you are in a lower tax bracket and it makes sense to convert some of your money (say, right up until you reach the top of the 15% bracket) each year into the ROTH TSP.

What you might want to investigate right now (before you get off active duty) is whether you'll be able to start a new ROTH TSP account once you've retired. I know you can't set up a traditional TSP account if you aren't on active duty (or otherwise employed by the government). I'd guess the rules are the same for the ROTH TSP--if so, it would probably make good sense to put a very minimal amount in one before you get off active duty, just so you'll have the option to roll funds into it later.

You can also roll (some or all) funds from your TSP to a tIRA account, or from your Roth TSP to a Roth IRA. That would give you additional investment options, but nothing will beat the low costs of the TSP and the availability of the unique G Fund.

 

[painterbill]

I don't believe you can convert current or regular TSP funds to TSP Roth according to the TSP website. There is information in the TSP:Forms & Publications section(upper right hand location) on TSP Homepage. The only way to fund the TSP Roth is from pay or by moving funds from an outside Roth account.

 

[powersmo]

Samclem: Not sure but your probably correct about not being able to open a TSP ROTH account after retirement. You can't with the TSP and your not allowed to put new money in either except for rollovers from tIRA's. I had a LTC that worked with me that rolled over his tIRA into the TSP about 10 years ago. Was the best thing he had ever done according to him.

I may take some time off after retirement to just relax...maybe 3-6 months. The DW is egging me on to do this since she seems to think I am pretty stressed out over the pending date. Did I forget to say how intelligent she is? . With that break, our overall earnings for the year will be about 50% year over year for 2012 to 2013.

 

[martyb]

I don't believe you can convert current or regular TSP funds to TSP Roth according to the TSP website. There is information in the TSP:Forms & Publications section(upper right hand location) on TSP Homepage. The only way to fund the TSP Roth is from pay or by moving funds from an outside Roth account.

I'm kind of thinking along those same lines. Seems like I read this on the TSP site awhile back.

 

[Nords]

Hi all. I have been searching thru the archives about information on the TSP to ROTH TSP conversion.

I haven't looked for it, but I wonder if such a thing even exists.

The reason I doubt its existence is because I read the blogs of about 75 personal-finance geeks who, if this idea was in effect, would be endlessly debating it.

I haven't seen any real clear thoughts or recommendations for those of us that are 6 to 12 months from active duty retirement (mandatory based on years of service). I will retire in July 2013 and have a bit less than 200K in the account while my wife has already retired and only about 30K in hers. Does it pass the common sense test to convert either or both of these to the ROTH TSP or leave the way it is?

As SamClem says, it's a question of "Pay taxes now or pay more taxes later." If both of you are receiving pensions then when you reach RMD age then you'll probably be in the 25% tax bracket, and it might make sense to start converting a little every year now from TSP--> tIRA--> Roth IRA to the top of the 15% tax bracket.

You could guess that future taxes are more likely to be higher than current taxes. But a couple of years ago if you'd asked me to predict interest rates then I would've assured you that they'd be higher today.

I think it makes sense to leave your funds in the TSP and pay only the 0.025% expense ratio. The downside is RMDs and higher taxes. But one of the ideas on my 10-page list of blog posts is an analysis of when (if ever) it makes sense to leave the TSP to roll over and convert to a Roth IRA in an asset with a higher expense ratio.

If your asset allocation includes bonds (which is not necessarily a good idea) then you could move all of your TSP assets into the "G" fund, freeing up your other accounts to hold other asset classes. I'm pretty sure the "G" fund will be a good fixed-income investment no matter where interest rates move.

 

[powersmo]

Well, I spoke with a TSP rep on the telephone and found out some intersting points. First, you can not roll over a tTSP into the ROTH TSP and pay the taxes. It is structured so that when you want to invest in the ROTH TSP, they set-up a new ROTH TSP section on your TSP account and you can only put in new money thru payroll deduction. Unlike rolling over a tIRA into the tTSP, you are not allowed to rollover a tROTH into the ROTH TSP. Your are only allowed to rollover a ROTH TSP to a ROTH IRA. Didn't really grasp that detail before but I do now. Hope that that helps someone else as well.