Anticipating Roth Conversion Transactions - I have Questions

[CuriousMark]

I am getting started researching how and when to go about this Roth conversion process in TSP now that I know it is coming. In my research, I stumbled upon this forum, which seems like a very good omen for me. In looking at the Roth conversion announcement, I saw this disclaimer.

When you convert pre-tax money from your traditional TSP balance, your Roth in-plan conversion amount will become part of your taxable income for the year. This means that you’ll pay income tax on the conversion amount based on your income tax rate. You must pay the income tax on the conversion amount using personal funds from another source, such as a savings account. You cannot use part of the conversion amount in your TSP account to pay taxes.

Emphasis is mine.

There are a couple of ways to read this, and I am looking for guidance on the right interpretation.

1. The literal interpretation says that no money originating from TSP can be used to pay taxes. This would prevent me from taking a large withdrawal, paying taxes, putting that money in a savings account, and then using it later (the same year or a later year) to pay taxes on a subsequent Roth conversion. Alternatively, the literal interpretation also seems to forbid making a Roth withdrawal after conversion, putting that money in savings and then using it to pay taxes.
2. The non-literal interpretation takes into account that the restrictions are about keeping things simple for TSP administration and that TSP does not want to be responsible for figuring or helping people figure their taxes owed. In that case, both of the above scenarios of taking money out of regular TSP before converting or from the Roth after converting, should be fine.

I did do some poking around on the IRS website, but since TSP is a qualified plan and not a true traditional IRA or Roth IRA, I can't be sure that there are not rules somewhat unique to TSP that prevent money originating in the plan from being used either before or after. If that is the case, then interpretation 1 would make sense.

I hope TSP will clarify this so I know whether I can do the in-plan or will need to do it the old-fashioned way with an external Roth IRA account. Even better, someone here has already asked the question and gotten an answer.

I am looking forward hearing what those of you here at this very interesting site have to say.

Respectfully,
CuriousMark

 

[tsptalk]

Thanks for joining us CuriousMark! Good discussion.

Have you tried posing this to Grok or ChatGPT?

I can do it for you if you can narrow the question down something more precise - like does the TSP and IRA have the same qualifications for converting to a Roth, etc.?

 

[CuriousMark]

No, I have not used ChatGPT or Grok. I don't want to get a hallucinatory reply and run with it. I trust the people here much more than that. I am hopeful that the TSP staff will be getting this question a lot and provide a clear answer. Or better, someone who already knows will reply. Thank you for your suggestion, I will give it a try, but reserve the right to not believe it.

Thanks,
Mark

 

[tsptalk]

hallucinatory reply

Funny! If you find anything, please keep us posted.

You probably saw James' Roth thread, which was updated today.

Post in thread 'TSP Roth Conversion update'

Today at 12:36 AM

I was able to find a really good article on FedSmith about how Required Minimum Distributions really can affect the price of your Medicare premium, particularly as you get older, and why it’s good to calculate where you are each year, before the end of the year, if you want to take a distribution, or a Roth conversion, for a chunk of that money each year.

For me, it works out that I will want to do at least $25-$50k a year convert to Roth even before I hit the age to need to do required minimum distributions. Understanding your options can save you tens of thousands each year!

Here is...

• James48843

• 

 

[CuriousMark]

Funny! If you find anything, please keep us posted.

You probably saw James' Roth thread, which was updated today.

Post in thread 'TSP Roth Conversion update'

Today at 12:36 AM

I was able to find a really good article on FedSmith about how Required Minimum Distributions really can affect the price of your Medicare premium, particularly as you get older, and why it’s good to calculate where you are each year, before the end of the year, if you want to take a distribution, or a Roth conversion, for a chunk of that money each year.

For me, it works out that I will want to do at least $25-$50k a year convert to Roth even before I hit the age to need to do required minimum distributions. Understanding your options can save you tens of thousands each year!

Here is...

• James48843

• 

I asked Windows, I got a nice chart covering obvious differences (TSP requires spousal consent), but nothing specific to this question. At least it stuck to widely known facts and didn’t hallucinate.

I read through James’ thread before posting, it is very good information. I have already been hit by IRMAA by taking a pension at 65 before retiring at 66, the appeal process worked, I got the IRMAA repealed, but it was a bit convoluted. Thanks for the interest.