TSP to RothIRA rollover

[voidstar]

My wife worked for the VA for a few years, many years ago (over 10 years ago). She's largely ignored that account. We checked recently and it has grown to $15k.

Her RothIRA is currently at $120k and she is 5-10 years to retirement. (our 401ks are larger, so this TSP and her RothIRA are just "extras")


She has switched (medical) jobs a couple times since then (hospital getting new owners and changing staff). Years ago we went thru that process of rolling her old employers 401k to the new employers 401k plan, so we're familiar with that.


I assume a TSP to RothIRA is a similar process - the two organization confirm each other, the TSP manager cuts a check, and we have 60 days or so to forward that check onto the RothIRA managers (Vanguard in this case). Something like that.


I realize the TSP withdrawal will count as income, while the RothIRA will grow tax-free. So there will be some cross-over point where whatever we pay now in the TSP taxes (~20%? not sure) will eventually be more than covered by the growth in the RothIRA (maybe in 1-year, certainly within 5-years) - and thereafter any further growth remains tax free. At least, that's the hope.


Just polling for thoughts. Is this a "no brainer" and she should do the TSP to RothIRA rollover? Or are there other benefits to keeping the TSP?

 

[Out-to-Lunch]

I realize the TSP withdrawal will count as income, while the RothIRA will grow tax-free. So there will be some cross-over point where whatever we pay now in the TSP taxes (~20%? not sure) will eventually be more than covered by the growth in the RothIRA (maybe in 1-year, certainly within 5-years) - and thereafter any further growth remains tax free. At least, that's the hope.

I cannot speak to the issue of any benefits of TSP in particular. But I think you are not thinking about tax-deferred vs. Roth correctly. (This is common.)

What is important is whether your tax rate is higher now (when converting) than it would be when you withdraw from tax-deferred. If your marginal rate** is lower now than later, it is better to convert. If your rate is higher now, then it is better to leave it in tax-deferred and convert later. There is no "cross-over point."


**I use the term "marginal rate," but it is hiding a lot of factors, like taxability of SS, IRMAA tiers, filing MFJ vs. single after the death of a spouse, etc.

 

[SnowballCamper]

Or are there other benefits to keeping the TSP?

I think the one, possible benefit of the TSP is that the G-fund holds government securities that aren't marketable. They're only sold between the Government and the TSP, and so there is no market pricing risk, as with treasury bills, etc. But with only 15k, I think it makes more sense to just close it out for convenience.

I think the main things to consider in the Roth conversion question are

If you believe your future tax rate will be higher, then convert.
If you want someone else to get the money when you die, then convert.

Depending on our individual situations, there are a lot of ways those two things can happen...

 

[voidstar]

... If your rate is higher now, then it is better to leave it in tax-deferred and convert later. There is no "cross-over point."
...

I see, you're right. Say we're taxed 20% or $3K of $15K - we could "earn back" that $3K eventually (3-4 years minimum), but it's not like we've caught up to what the original TSP balance would have gained in that same amount of time. Well, except possibly by luck -- i.e. Vanguard has a lot more investment options than what the TSP has (BTC, for example; but that's the luck/gamble part).


Most likely yes, our income and tax rate will be lower in retirement. So you're right, just letting the $15K grow as it has been, and we can convert later as needed (i.e. same question as now, just at a higher balance).
EDIT: But if anyone knows - do they convert the full $15K and then we get the income-tax bill next April? Or do they convert $12K and withhold $3K in anticipation of the income-tax to come? ("they" being the TSP government site)


OTOH - I'm not sure how the inheritance policy between the TSP and RothIRA differ. I think the RothIRA can be inherited basically as-is. While we're in good health now, and hopefully so in 5-10 years, but things certainly can happen. My gut feel is it would be easier for our daughter to deal with Vanguard than the TSP government site.


But yes, my main thought was just the convenience of one-less-account to deal with. I've always wondered about that: we spread assets across brokers, such that if any one brokerage is compromised (internally or externally), were aren't completely screwed. Except having more accounts is increasing the chances of being compromised.


And tentatively that's my wife's thought on this: we don't work for the government anymore, maybe we should keep one government account as a kind of "backup." But my thought is kind of exactly for that reason that we no longer work for the government, they could be inclined to "erase" that account at any time and nothing we could do about it.


The decisions' hers of course, but I'd say roll it over now while we're young, get it consolidated into an account we more actively monitor -- or I fear we might forget about it, and "oops" we had a new-car sitting there, or a way to pay some medical expense, and forgot about it if we ignore it for another decade.


I'll check more into the beneficiary and inheritance policy. If a TSP can basically automatically go to our daughter should anything happen to us, then sure, I'd say just let it sit there.
EDIT: Looks like the TSP beneficiary policy is that it is just a "forced" roll-over to an IRA owned by that beneficiary. Sounds reasonable.

 

[zinger1457]

And tentatively that's my wife's thought on this: we don't work for the government anymore, maybe we should keep one government account as a kind of "backup." But my thought is kind of exactly for that reason that we no longer work for the government, they could be inclined to "erase" that account at any time and nothing we could do about it.

That's not going to happen. In fact the recent big changes made to the TSP were to encourage people who no longer work to leave their money in the TSP and not roll it over to an outside account. Definitely worth keeping the TSP open, at some point in retirement you'll want to keep some of your funds in a fixed earning account, you'll be hard pressed to find something better than the G Fund.