Retirement Planning

[Spaf]

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Retirement

From: Spaf

As I've stated before my retirement date from the US Government is July 2006.

I have reviewed IRA plans from many companies i.e., Vanguard, USAA, Fidelity, Bank Brokers, and etc.

My top two (2) choises to date, is to let the funds ride with TSP, or move them to my internet discount broker (ST). I seem to lose control of the "funds" when placed with other folks. Something I do not like in todays market.

If someone has a better strategy/plan, please post! Otherwise, I'll manage my own funds, good, bad or whatever, but at least, I'll be in charge!

Agree/disagree! Let me know! Rgds! Spaf

 

[Guest]

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I certainly wouldn't roll my funds out of TSP to an IRA type account. I've always read that the costs of maintaining an account, manager fees, etc. out way the benefits. Heard the paper work is outlandish also!
Just My

 

[pyriel]

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Wonder Woman wrote:

I certainly wouldn't roll my funds out of TSP to an IRA type account. I've always read that the costs of maintaining an account, manager fees, etc. out way the benefits. Heard the paper work is outlandish also!
Just My

It is a good idea... However I would like to raise this issue to you WW... I am not really privy with your status whether you are single, married, with children etc. etc... However, I can tell you that if you are married with children, rolling it over to a traditional IRA (and later to ROTH IRA) is a better choice. Especially for someone like yourself that have a portfolio that could easily encompass $1 mil is something to think about.It is unfortunate thatmany of us thinks about our current investment as isright now but we also have to think aboutthe future. IRS is hard to fight when you are dead. If not done correctly, you canloseeverything to IRSwithout any of your love ones gettinga penny of the hard earned money that your worked for throughout your entire life.

I am not saying that leavingsomeone's TSP account intact after retirement is a bad idea. In fact, I plan to do the same. However, I also plan an exit of transferring my TSP to traditional IRA then to ROTH IRA.I know that we always say that we plan to livelonger after we retire and leaving it to TSP will allow us to play the market and hopefully makeour retirement grow even more. Butnobody can tell me on this board that they know when are they going to die. And because of this, we need to be concern about the love ones who will inheritthe money that we worked so hard for.

Grandma suggested a book by Ed Slott (?) in one of the topics within this board. I urge people to read that book... It is not only a good read but also an informative one. For me, I would like to be able to pass on my TSP funds to my kids while at the same time letting the money grow even more. I also hope thatwith proper planning, they can then passit on to their children as well.Leaving your retirement in TSP without a proper exit could causeyour children and their children not to take advantage of tax deffered and reinvesting compounding interest thatonly IRA could offer.

I would like someone to answer this question I am going to post with hope that people will think about estate taxes... If you have a million dollars now in TSP vs. traditional IRA, and you die a year from now. How much of that money do you think you are going to pass on tax deffered to your children or love ones (besides spouse) and to their children for the next generation. Imagine the possibility of passing your hard earned money through generations is more than enough for me to take the risk of transferring my TSP to a traditional IRA (and later to a ROTH IRA). If you know the answer to my question, please put it in excel worksheet and attach it here so that people can see the difference. For the sake of argument, lets say you are 60 years old, your spouse is 65, and your 2 children are 20 and 25 years old... Thanks...

P

 

[Guest]

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As usual Pyriel your contribution is generous. I was just trying to address Spaf's question and state what I have determined is best for me. As soon as I finished writing it I realized that all the 'what if's' were going to follow - so let's just for this thread, this time, for Spaf's sake, stick to Spaf's question, needs and situation.
And please don't get carried away with the million $$$ thing for me - I'm no where near that, nor will I ever be. I really don't like to repeatedly strut my stuff, nor do I like it when others repeatedly strut theirs.

IMHO

 

[pyriel]

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Sorry, didn't mean to offend you. My post is merely to increase level of knowledge and discussions with our readers. I did agree with your plan and had said that I will most likely do the same (with a little variation).I really do like seeing people here mention what they have for it tells me that these are the people that we need to be listening to and reading their advice since they've been there and done that.

Get carried away sometime, to the point that I don't watch what I write. Need to tell myself to be more carefulso others maynot perceive it the wrong way. Now about your fonts... Could you make that a little bigger. My age is catching up to me and my eyes are not doing too well. ThanksWW... Here is a hug from me to you... P

 

[Guest]

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Pyriel, you did not offend me in any way.
Gee, I wish I knew what the problem with the fonts is. What I see on my screen is your font is smaller than mine. Let me f/uthis discussion in the Problems Category.

 

[mlk_man]

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What's wrong with 50/50? :^

The main difference is that with ST you have sooooooooo many more options. The fun part, and let's face it don't we all wanna have fun when we retire, is putting a little into a developmental company and watching it take off. Of course, it doesn't always work. :shock:

Then again, TSP has that new "L" fund coming out and so you can just give them your money and they can make you rich.........er..........

Good luck,

M_M

 

[SkyPilot]

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I have about a decade to go before I retire, however, I think I will probably keep most or all in TSP. I can easily change allocations, daily if I choose. There is no assessed cost per transaction, and the management fees are extremely low, as funds go.

So, my only draw back is limited choices. However, the choices I have seem to offer enough potential to accomplish my basic goals. Also, I understand the funds pretty well, which is of some value in it's own right.

If the daily deadline ever gets moved to the end of the day rather than the middle, I will really be pleased. Theremay be more fund options in TSP as time goes by as well, like a REIT and maybe some addittional international funds.

In any regard, good luck and good fortune...

 

[Birchtree]

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Spaf,

I've been thinking about your retirement question on and off for a few days - hate to rush into giving free advise, especially if it's of limited value.

The first thing you have to do is go back to square one - and consider how much you will have coming in yearly that you can't control. That figure is what sets your AGI -adjusted gross income - that is your tax bracket. Everything else you do is impacted by that tax bracket- no way out of it as long as you have a defined benefit retirement program. You will get that check every month as long as you live. Depending what options you select for payment as well as your primary beneficiary selection will all impact the end amount. Generally speaking the least amount you take the lower the tax bracket. An example would be covering your sp[ouse for her remaining life -if she happens to be younger you will be forced by default to take a smaller amount.

At some point you will apply for social security - the longer you can wait the greater the amount provided. This money is added to your AGI.

If your wife has her own retirement plan - that may be more family money you cannot control- it all adds up to either help you or hurt you depending upon you future plans.

Capital gains are another option to consider. They are generally taxed at 15% unless you have maneuvered your fiscal situation into the 15% tax bracket which is AGI of $56,800. Capital gains are then taxed at 5%.

The TSP could continue to provide valuable income that is deferred. Depending upon how aggressive you might want to invest the opportunity is wide open I think for several years going forward even if the Fed ends up engineering a shallow recession. I think they will stop shortly and we'll have an economy that is slow to moderate with low inflation and continued low interest rates. Goldilocks.

When you turn 70and one half you will be required to take a required minimum distribution from TSP that will be set by regulators. You can also take monthly payments - the amount of your choice - and these payments can be sent anywhere to include traditional IRAs. When you pass all funds go the the primary beneficiary that is usually the wife. If children are named as eventual beneficiaries then TSP will send the remaining funds in a lump sum which require higher taxes. Remember you cannot transfer money from a traditional IRA to a Roth IRA if yourmarried income is more than $160,000/year. There is much more- but this should give you some ideas. Ask and you will find the answers.

I justremembered you can give children or anyone up to $15,000/year without enacting any kind of estate type tax. I believe the current estate tax policy may be eliminated entirely in the not to distant future. Currently there is no estate tax on any funds that pass to the spouse. After that the first exemption is 1million, and is set to rise to 3 million by 2008.

 

[Mike]

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Giving money to children has consequences, though. It will count against them dollar-for-dollar in financial aid calculations when they apply for college (i.e. whatever assets the kid has will be expected to be used to pay for college). Money in the name of parents, on the other hand, is only counted at ~35% I believe. Money held by relatives/grandparents is not counted at all. This makes a huge difference in eligibility for state and federal aid.

 

[pyriel]

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Birchtree wrote:

At some point you will apply for social security - the longer you can wait the greater the amount provided. Sorry but I have to disagree. Please look at the excel worksheet attached to show that it is more beneficial to start taking money out of SS at age 62.

If your wife has her own retirement plan - that may be more family money you cannot control- it all adds up to either help you or hurt you depending upon you future plans. Sorry but I have to disagree about this scenario hurting them rather than helping them. Having more retirement plan is always better than having less, even if you have to pay taxes on them...

When you turn 70and one half you will be required to take a required minimum distribution from TSP that will be set by regulators. You can also take monthly payments - the amount of your choice - and these payments can be sent anywhere to include traditional IRAs. Sorry but I have to again disagree. Once you reach 70 1/2 years, you reach your RMD. This means that Uncle Sam gotta get paid. You have no more recourse. You have to at least take out an Minimum Required Distribution (MRD). You can't send any of your TSP to an IRA. It is the end of the road for you once you reach 70 1/2...

When you pass all funds go the the primary beneficiary that is usually the wife. If children are named as eventual beneficiaries then TSP will send the remaining funds in a lump sum which require higher taxes. This is the reason I advocate transferring TSP to traditional IRA then later ROTH IRA.When to do it is anyone's option but it should be done nonetheless. Not doing it will cut off the possibility of passing your hard earned money to yourchildren and to their children etc.by having your fund continue to earn tax deffered withcompounding interest. Only IRA can do this. TSP, 401K, 403b can't.

Remember you cannot transfer money from a traditional IRA to a Roth IRA if yourmarried income is more than $160,000/year. There is much more- but this should give you some ideas. Ask and you will find the answers.$160,000.00 is AGI per year not actual. This means that you can be earning $200,000.00 and still have an AGI of $100,000.00. You can easily beat this if you have real estate through phanton income such as depreciation and deductible expenses.

I justremembered you can give children or anyone up to $15,000/year without enacting any kind of estate type tax. This is per person so a couple can actually give out $30,000.00 (I thought limit is $10k but it might have been increased). And it is not limited to your children.

I believe the current estate tax policy may be eliminated entirely in the not to distant future. Currently there is no estate tax on any funds that pass to the spouse. After that the first exemption is 1million, and is set to rise to 3 million by 2008.If you want to planto maximize going around estate tax, please plan to dieon 2010.This is theyear the cap for estate tax is eliminated. However, it goes back again on 2011. Weird huh?

 

[Birchtree]

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Pyriel,

I'll have to double check on the required minimum distribution - but I think if you already have a monthly payment plan in place it remains in place - you may be required to increase the amount to comply with RMD. If you have a monthly payment plan set up you can have funds sent to an IRA - the longer it is drawn out the better. That way you keep TSP money working - some people will actually prefer to take the annuity program. Now the problem you are going to have is how to control all that rent income - you can only depreciate so much. Even when we all convert to a Roth IRA we are still going to have certain complexities to deal with - like RMD for the heirs. We'll get to the bottom of the subject eventually.

Now some employers will start offering a Roth 401k program - if the Gov ever offers a process to go from a defined benefit program to a defined contribution program this would be nirvana for me. My wife made the conversion as a State of Florida employee - a whole new set of retirement parameters- especially choosing a beneficiary. And she is in complete control of her funds - the money belongs to her. We can discuss this option at a later date. And by the way - waiting longer gives you a larger payout on social security.

 

[pyriel]

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Birchtree wrote:

Pyriel,

I'll have to double check on the required minimum distribution - but I think if you already have a monthly payment plan in place it remains in place - you may be required to increase the amount to comply with RMD. If you have a monthly payment plan set up you can have funds sent to an IRA - the longer it is drawn out the better. hmmm... this confuses me for you are jumping into different aspects of RMD. Let me break it down... 1) "if you already have a monthly payment plan in place it remains in place." This is not true. Once you reach 70.5 RMD starts. Your required RMD is based on your remaining life cycles. However, there is nothing that stops you from taking out more than the RMD. 2) "you may be required to increase the amount to comply with RMD" Again RMD is set according to your remaining life cycle. You can't increase to meet RMD since you are not allowed to go below that.If you draw below RMD,you will get hit with multiple taxes. 3)"if you have monthly payment plan set up you can have funds sent to an IRA."This isnot true and I am positive about this. Once youstart taking RMD upon reaching 70.5 this means that you are drawing distribution. Distribution from a retirement account is not eligibleto be invested into an IRA.If youshould put it in another IRA, you must rollit over. However, as I stated earlier, you lostout on that once you reach 70.5."the longer it is drawn out the better" This is true, however, you can not make that longer when your retirement is in TSP. If you die at age 75 and you have 1mil in your account, your heir must take them all out within 3-5 years. However, in IRA or ROTH IRA,your heir can draw out an RMDaccording to their life cycle. So if the heir is only 25 years old, then they only have to take out RMDand make that money last throughout their life cycle. Any left over after that can be given to their heir as well...

That way you keep TSP money working - Not after death. Your heir is required to take them out within 3-5 years. In IRA, you can prolong it to your heir's life cycle.

some people will actually prefer to take the annuity program. Now the problem you are going to have is how to control all that rent income - you can only depreciate so much. Now you are going into my realm which I am very knowledgeable about... Apparently, people's mentality is to pay off their debts. If you do that, you will be correct.However, a real estate investors will never do that. Once you start building equity,they remortgage. Why?Because it is free money. You don't get taxed for them since it's not income. And I don't pay for the increase monthly payment since my tenant will pay that off for me. Let's do the math with one of my apartment. I am paying $2003 per month. I only owe 198k. I am getting killed because I only have 12 more years to pay this. I am not maxing out in depreciation and deductible (interest pmt, repairs, etc). So I am in the process of refinancing for 300k. Monthly will go up to $2450. I'll get about 100k in my pocket without ever paying a dime in taxes. The increase in monthly pmt is almost the same and my tenant will pay for it. Hmmm... I also increased my interest and depreciation which will help me for my tax at the end of the year.

Even when we all convert to a Roth IRA we are still going to have certain complexities to deal with - like RMD for the heirs. We'll get to the bottom of the subject eventually. RMD for the heir is easy. Why? IRS created a tax table for them by life cycle. All you have to do is figure out what is your life cycle and then minus that by one for every year there after until you deplete the fund.

 

[Birchtree]

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Pyriel,

Thank you for your response - but the debate must continue. Go to the TSP Gov site and under heading - Getting Your Money Out After Separation. Also under the heading- What Are My Withdrawal Options.

Inorder to clarify from this point all my comments are essentially direct quotes from the site. A series of monthly payments can be used for full withdrawal. You can have TSP transfer all or part of any single payment or in some cases, a series of monthly payments, to a traditional IRA plan. There are 2 types of withdrawal programs - either full withdrawal or partial withdrawal. Partial withdrawals are paid only as a single payment. You can have the TSP transfer all or part of the payment to a traditional IRA.

You can request to withdraw your entire account in either a single paymrnt, monthly payments or a life annuity. For example you may withdraw your entire account in monthly payments. If you choose to withdraw your account in monthly payments, you must also choose whether you want the TSP to compute your payments based on the IRS life expectancy table or whether you would like to receive a specific dollar amount each month. If you choose to receive a specific dollar amount each month, you may be able to transfer all or part of your payment to an IRA. This would depend on the number of payments you are expected to receive. Pyriel, there is also a section that deals with the RMD- we can get to that later.

Payments to beneficiaries other than spouses cannot be transfered to an IRA.

This should be enough to keep the conversation going before we get into the age requirements for RMD and the subsequent consequences.

 

[pyriel]

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One thing I like about exchanging ideas with you is that no matter how I present the issue/comments, you always come back with more information. Other people will think of my commentsas an attack. I really appreciate you coming back and being patient with me for I can be pushy sometime (unaware). Now, lets get back to our discussion so our readers may learn from us and/or they can chime in so we can learn from them.

Inorder to clarify from this point all my comments are essentially direct quotes from the site. A series of monthly payments can be used for full withdrawal. You can have TSP transfer all or part of any single payment or in some cases, a series of monthly payments, to a traditional IRA plan. There are 2 types of withdrawal programs - either full withdrawal or partial withdrawal. Partial withdrawals are paid only as a single payment. You can have the TSP transfer all or part of the payment to a traditional IRA.This is true and I'm glad you gave me more clarification. However, although this willwork for someone who is 70.5 years old. He will not be able to escape the RMD for both TSP and IRA.Upon reaching that age, he/she gets hit with RMD. Even if you decide to transfer a full or partial withdrawal to an IRA, it doesn't change the fact that you will still have to pay taxes on them. Here is an example.. You are 71 years old. You transfer $500k to IRA on 12/31/05. On 1/1/06 you have to do an RMD for your remaining $500k in TSP and an RMD on your new IRA account. You can't escape it because you reach the magic age of 70.5.If you die at age 75. Your heir must withdrawyour TSP account within 3-5 years. Your IRA can then be passed on to your heir and they can continue to keep it according to their life cycle by only taking out their equivalent of RMD.

Payments to beneficiaries other than spouses cannot be transfered to an IRA. Yes this is true. The way to go around this is to assigned beneficiaries to your children instead of your spouse. Then once you are dead, your heir (not the spouse) will be able to continue with your IRA according to their lifecycle. Now, some people are thinking that this is not fair. This is where estate planning comes in. Since your IRA went to your children, once your wife dies later, they will not incur taxes for them since it is not under the spouse estate. My plan (and this is what Pyriel is doing) is to buy insurance for me and have the wife be the beneficiary. When I die, my children can get the IRA (lets say for ex. $1 mil) and my wife gets the insurance (lets say $1 mil). What this does is we just took Uncle Sam out of the picture for a possible $600k of taxes if my spouse was to get both anddecide die later. Good deal huh?

 

[grandma]

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Birchtree wrote:

When you turn 70and one half you will be required to take a required minimum distribution from TSP that will be set by regulators.

Is this documented in the TSP manual somewhere? I don't seem to be able to spot it.

 

[Birchtree]

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Grandma,

The information is located at the TSP. gov home page, and under TSP features. Select Getting Your Money Out After You Separate. Then select What Are My Withdrawal Options. Come back if you have questions of any kind. Even if you think they might be oversimplified.

 

[grandma]

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The key phrase in this is: "If you have separated from service, the IRS requires that you receive a certain portion of your account balance beginning with the year in which you become 70½, so that you can start paying taxes on that (originally) tax-deferred money. This portion, known as a "required minimum distribution," is based on your life expectancy. If you do not make a full withdrawal or begin monthly payments by the year in which you become ......"

...age is immaterial to the RMD if you are still employed. Also, under certain circumstances & you are still employed, you can receive some Social Security monies, You can call this speculative (I'll die while still working) or you can call it foolishnes (I'll live to be 90 & be in the `Pauper's home' with meager help/meds/food.)

 

[Birchtree]

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Grandma,

Thank you, you made some valuable points for all to consider - care to elaborate on your investment strategy sometime? We salty dogs can help each other.

 

[Birchtree]

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Pyriel,

The point of paying RMD was not being contested. I was trying to suggest a working strategy of using monthly payments before reaching RMD age to begin the process of shifting money to a traditional IRA. That would take time to accomplish and still leave money in TSP for continued growth because it is so cost effective. If Spaf were to move money in steps from TSP to IRA and then to Roth IRA he could conceivably save on taxes. He has already investigated the options for his IRA - whether he uses a Roth IRA also, would depend on his future plans.

We don't know what Spafs' retirement situation will be like - for all we know he may be getting ready to harvest a pine forest and declare capital gains - or he may have more rentals than you or a larger portfolio than mine. That's why AGI is so important when making fnancial decisions - taxes need to be kept as low as possible. And working toward a goal of a lower AGI is very important - especially if you can achieve that illustrious 15% barcket. All capital gains and dividends are taxed at 5%. Don't you think at some point when you liquify your real estate holdings you would want to keep your capital gain costs as low as possible?

Here is a point you may add your thoughts to if inclined. What am I saying - of course you'll be inclined. The spouse can have what is left in the TSP account as the beneficiary transfered to their own TSP account if one is available (your situation) or to an IRA. The monthly payment program should essentially remain in effect or probably can be modified to meet new time constraints. Most IRA accounts are jointly owned. Should be a smooth transition.

Staring out with a Roth IRA is so much simpler, especially when the time arrives to start the draw down. The is no RMD - only the heir will be forced to utilize RMD, and if the heir is much younger then the money coming out over that particular life cycle will be at a minimum- leaving the bulk position to continue to grow and eventually be passed on to the next heir. I think we have agreement on this issue. Spaf now has to decide on what IRA strategy he wants. My suggestion is one based on individual stocks that pay dividends every three months and are likely to increase over the years. These dividends usually are reinvested for free. Over time capital gains will be available - but don;t have to be taken until many years later if ever. I actually would prefer a program based on auto-pilot, that way the owner is always buying stock in up and down years. Let the cycles take care of them selves.

Here is another point - rather a suspicion that I have. TSP and politicians are trying to add more investing alternatives to this current plan. I suspect that at some point the program will eventually offer participants the voluntary option to convert their present defined benefit retirement plan to a defined contribution plan using the new and improved TSP plan because the infrastructure will already be in place. You will still be offered the annuity - but if you take the contribution plan the money is yours today - you don't have to worry how long you will live and the complicated beneficiary problems will be solved. You name any beneficiary you want What do you think? It would be great for somone trying to lower that AGI - you only take money you need - you are in control. Some States are doing this already.