Roth TSP or Build Cash

[Nuke]

I have the option of contributing to a traditional TSP, a Roth TSP, or I could stop contributions and put money which would have gone into the TSP into a HYSA in order to build up some cash to pay taxes on Roth conversions.

Current me actually has the discipline to save the money and use it as described. Younger me would not have.

I can save $60K into cash this way prior to retirement in June 2026 or I can put that much into the Roth TSP and let it sit until I need it. $60K at a marginal tax bracket of 24% would support a Roth Conversion of $250K which is a sizeable chunk. I think that's a better deal than putting the same $60K into a Roth TSP and letting it ride.

As an added bonus, if I do this while on active duty, then I will not have to pay CA state income taxes on the conversion. I am still a resident of TN and there is no income tax there. I might also consider doing another one based on how much cash I can scape together this year. So some amount this tax year, likely whatever conversion $20K worth of cash will support (some at 22% and some at 24%) . Still need to run the numbers on that, back of the napkin says about $85K this year.

So I could convert $335K without paying CA state taxes out of a $1.17M TSP.

Please let me know where I am wrong or missing something. Thanks!

 

[ransil]

we are currently in the similar situation, wife is a reservist and will be on active duty orders most of next year.
our plan is to do the Roth TSP , but we already have the cash set aside for the Roth conversions .

 

[Nuke]

I never considered that I might want to do conversions and have focused on fully funding all retirement accounts, paying off the mortgage, and funding the kids' 529s. Had I known, I would have put more into savings. I mean, we had more, we just didn't worry about what we were doing with it after we had done the adult things like retirement and debt paying.

First world problems and all that. Worst case my wife has to pay more taxes on the money in the TSP once I die and maybe she settles for just one pool boy or two slightly less hot ones. We will figure it out or not. Probably won't be eating cat food either way.

 

[jazz4cash]

Can you really put $60k into a Roth TSP in less than 2 yrs? I would probably use all of the above plus contribute the max to a Roth IRA (which could get you to $60k in Roth accounts by June ‘26). I think the Roth TSP more restrictive than Roth IRA which permits access to contributions at any time.

 

[Nuke]

Can you really put $60k into a Roth TSP in less than 2 yrs? I would probably use all of the above plus contribute the max to a Roth IRA (which could get you to $60k in Roth accounts by June ‘26). I think the Roth TSP more restrictive than Roth IRA which permits access to contributions at any time.

I'm over 50, so the limits are $23K plus $7.5K catchup per year. I will have all of 2025 and 5 months of 2026 to put that money into a Roth TSP. Since there is no match available to me, there's no issue with putting all of my base pay into a TSP if I want to do so. $30.5K across 5 months is $6,100 a month; across the year it's $2,542. Well within my base pay of $14k per month.

 

[pb4uski]

I don't get the attraction of doing a huge Roth conversion in a single year and paying so much in tax (24%). Why do you think this is favorable?

In my experience it is better to do regular smaller conversions at lower tax rates. Since I retired I have converted over half a million and only paid 10.5% in tax on average.

The cherry on top is that over the last 4 years we have lived in no income tax states so no state income tax on the last 4 years of conversions.

 

[CardsFan]

I don't get the attraction of doing a huge Roth conversion in a single year and paying so much in tax (24%). Why do you think this is favorable?

In my experience it is better to do regular smaller conversions at lower tax rates. Since I retired I have converted over half a million and only paid 10.5% in tax on average.

The cherry on top is that over the last 4 years we have lived in no income tax states so no state income tax on the last 4 years of conversions.

I don't know. Sounds like OP can do this while a TN resident, so no state tax. Also sounds like OP will be in the 22-24-or higher bracket when all is said and done.

I regret not making one or 2 of these mega conversions, right after retirement. Even being a little more aggressive than you suggest above, I still have a TIRA that is almost 50% more than I started with, and will generate way more RMD's than I would like. Yeah, first world problem, but I think it is a good idea for OP.

 

[Nuke]

I don't get the attraction of doing a huge Roth conversion in a single year and paying so much in tax (24%). Why do you think this is favorable?

In my experience it is better to do regular smaller conversions at lower tax rates. Since I retired I have converted over half a million and only paid 10.5% in tax on average.

The cherry on top is that over the last 4 years we have lived in no income tax states so no state income tax on the last 4 years of conversions.

My pension will start at $128K a year and it is a COLA pension. I am firmly in the 22% marginal tax bracket. Again, first world problem.

The reason I am considering doing conversions at all is to limit my RMDs later on. This will be advantageous should either my wife or I die earlier than we hope. The most limiting case is if my wife predeceases me, as her survivor's pension is 55% of mine. If I am left alone, I will get my full pension plus I will no longer pay the 6.5% pre tax to fund her pension.

The large conversion while on active duty allows me to avoid the 9.3% CA state tax on the conversion amount.

 

[FlaGator]

If the decision is which non-tax deferred account it should go in, my reaction is to put that $60K it into the Roth 401K to give yourself more flexibility later. Earnings/return will be tax-free, unlike the HYSA.

Could use it for conversion taxes, the inevitable unexpected expenses, or whatever. If everything aligns and you hold it forever, it's tax free to your heirs, including the growth. The difference between 22 and 24% later wouldn't move the needle for me. But avoiding the CA tax at 9.2% is significant.

You're relatively young (by my 60+ POV), so you have some time to see how your life as a civilian plays out. Good to be planning ahead, respectfully suggest you don't think you need to make every decision before you get off the boat. Financial options are your friend, and the more $$ you have in accounts with varying tax treatment the more options you have created for yourself.

 

[Nuke]

Agreed that not all decisions need to be made before I get off the boat, but some do. I want to be sure that I actually choose to do or not do a certain money move. I don't want to pass up an opportunity inadvertently.

I don't regret how my wife and I have saved; I do realize that some of our decisions were made without fully understanding the impacts.

So, I will continue to expand my knowledge and ask questions. This board has helped tremendously.

 

[Nuke]

Whelp, I stopped the TSP contributions yesterday, effective for 1 October. Easy to do in the sense off logging into my account and then just a couple of clicks to turn it off; very hard to do in the sense of having prioritized maxing our retirement accounts for so long it seems strange to stop doing it.

The math works out, my wife is onboard with the plan, and it will help us avoid paying state income tax on about $130K this year and just as much next year.

But, it was hard emotionally.

 

[Exchme]

Assuming that converting to the top of the 24% bracket is right for you and you do not have enough in taxable to pay the taxes, the way to fund the conversion taxes out of the tax protected accounts is irrelevant, all methods lead to the same spot.

Let's say you are over 59.5 so there is no penalty for withdrawing from a tax deferred account and that you have a Roth that has enough money in it that using it to pay taxes was also an option.

If you contribute $30K to the TSP, then your taxable income goes down $30K, making room for a bigger Roth Conversion. However, you need to divert $30K of the tax deferred withdrawal to pay taxes, and that adds $30K back to your taxable income and deducts $30k from the Roth (if you are under 59.5 you could put it in the Roth and then take it back out to avoid a tax penalty). So it ends up the same as if you had not contributed to the TSP and just did a smaller Roth Conversion to begin with.

If you do a Roth TSP, it also works out the same as you have made a $30K Roth contribution, but have the same taxable income as you had in the no TSP case, but don't have the cash to pay the taxes. Since you need $30K to pay taxes, you have to divert $30K of the tax deferred withdrawal to taxable to pay taxes or pay the money out of Roth, again leaving you at the same spot.

 

[Nuke]

Assuming that converting to the top of the 24% bracket is right for you and you do not have enough in taxable to pay the taxes, the way to fund the conversion taxes out of the tax protected accounts is irrelevant, all methods lead to the same spot.

Let's say you are over 59.5 so there is no penalty for withdrawing from a tax deferred account and that you have a Roth that has enough money in it that using it to pay taxes was also an option.

If you contribute $30K to the TSP, then your taxable income goes down $30K, making room for a bigger Roth Conversion. However, you need to divert $30K of the tax deferred withdrawal to pay taxes, and that adds $30K back to your taxable income and deducts $30k from the Roth (if you are under 59.5 you could put it in the Roth and then take it back out to avoid a tax penalty). So it ends up the same as if you had not contributed to the TSP and just did a smaller Roth Conversion to begin with.

If you do a Roth TSP, it also works out the same as you have made a $30K Roth contribution, but have the same taxable income as you had in the no TSP case, but don't have the cash to pay the taxes. Since you need $30K to pay taxes, you have to divert $30K of the tax deferred withdrawal to taxable to pay taxes or pay the money out of Roth, again leaving you at the same spot.

Your reasoning matches mine, thanks for the backup.

 

[Nuke]

The bad news is, that I cannot convert my TSP while on active duty.

The good news is that DW's TSP can be converted since she left active duty a few years ago.

The bestest news is that by digging into our finances and rooting through the couch cushions, we can save enough to convert about $100K of her $225K TSP into her Roth this year AND contribute the remaining TSP amount this year into the Roth TSP option.

As an added benefit, the money hitting our main checking account will be just a smidge above my expected pension check. So that will help condition us to working with that amount.

So, I'm going to chalk this all up as a win.

 

[ejw93]

I have the option of contributing to a traditional TSP, a Roth TSP, or I could stop contributions and put money which would have gone into the TSP into a HYSA in order to build up some cash to pay taxes on Roth conversions.

Current me actually has the discipline to save the money and use it as described. Younger me would not have.

I can save $60K into cash this way prior to retirement in June 2026 or I can put that much into the Roth TSP and let it sit until I need it. $60K at a marginal tax bracket of 24% would support a Roth Conversion of $250K which is a sizeable chunk. I think that's a better deal than putting the same $60K into a Roth TSP and letting it ride.

As an added bonus, if I do this while on active duty, then I will not have to pay CA state income taxes on the conversion. I am still a resident of TN and there is no income tax there. I might also consider doing another one based on how much cash I can scape together this year. So some amount this tax year, likely whatever conversion $20K worth of cash will support (some at 22% and some at 24%) . Still need to run the numbers on that, back of the napkin says about $85K this year.

So I could convert $335K without paying CA state taxes out of a $1.17M TSP.

Please let me know where I am wrong or missing something. Thanks!

Shipmate -
In general, since you don't know future tax brackets (much less YOUR future tax brackets) I generally recommend half your retirement account $$ in Roth, half in Traditional.... Extract from each account every year in Retirement to optimize lower tax brackets in each Tax Year.

If you want to do Roth conversions, make sure you understand all the 5-year rules, and in general, don't convert an amount that pushes you into a higher bracket for the tax/calendar year.

 

[Nuke]

Shipmate -
In general, since you don't know future tax brackets (much less YOUR future tax brackets) I generally recommend half your retirement account $$ in Roth, half in Traditional.... Extract from each account every year in Retirement to optimize lower tax brackets in each Tax Year.

If you want to do Roth conversions, make sure you understand all the 5-year rules, and in general, don't convert an amount that pushes you into a higher bracket for the tax/calendar year.

Why do you recommend keeping it 50/50 Roth/Traditional? We are about 40/60 Roth/Traditional right now. Converting my wife's TSP to a Roth IRA would put us right at 50/50.

With my pension, I do not expect to need to tap into my IRAs.

I've been reading up on the Roth 5-year rules and I think I have a good grasp of them. Both of our Roth IRAs are over 20 years old, so no issues tapping into the money in those accounts once we turn 59 1/2. If we just convert in the next two years, then it'll be 6 years until we turn 59 1/2, so again, no issues using that money.

As for tax brackets, I'm firmly in the 22% bracket now and will remain so once I retire. I do understand that the tax cuts may nor may not be continued for 2026. but, no matter what the tax brackets change to, I will have a solid floor of taxable income from my pension which should start out at around $128K and then COLA every year. There's no way to no pay taxes on that amount, minus any deductions of course. Unless I suddenly become disabled and I'd prefer to pay taxes, thank you very much.

I am considering converting enough to get near the top of the 24% bracket, while I am on active duty and will not pay CA state income tax. That saves me 9.3% and makes money sense to me. Otherwise, I will see how the tax cut expiration affects the brackets and adjust my conversion accordingly.

Converting more to lower RMDs also makes sense to me. The worst case, tax wise, is DW passing before me as I will then be in a higher bracket because of filing single. I will have my full pension and RMDs to consider. If I pass before she does, then she will get 55% of my pension (the max survivor benefit available) and her taxable income will be lower. Of course, I may elect to move out of CA if she's no longer with me and that would save some tax money.

Thanks for your points; they made me think.