Retirement Planning

[Aslan]

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Pyriel,

I didn't read through everything you wrote, but it is real interesting what I did read. Did you mention on the conversion to the Roth IRA(from the Traditional IRA) with what money were you going to pay the tax? If you had a million dollars in your TSP (then IRA), that is a HUGE amount of tax to pay out when converting to a Roth. I just thought I'd ask in case someone else was wondering the same. Thanks

 

[Spaf]

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Ok Mr. Pyriel and U2 Birch (Dennis)(not the hurricane)

RE: I'm retiring in 1yr+20 days.

What I did (years ago) was to set up two investment accounts. One tax deferred which is TSP. The other was in mutual funds which was tax paid.

Mutual funds kind of soured out after the NASD bubble in 2000. Fund managers were not very appreciative of folks moving funds. Therefore, I changed to a online discount broker to handle my tax paid funds. This way I can change positions at will!

Using my tax paid funds, I have paid off the bigger bills. However, my Accountant advised that I take out a minimum mortgage, together with (on going with age)medical expenses to minimize IRS dues.

Leaving Tax deferred funds in TSP or going with USAA on a concervative IRA investment strategy seems to be good options at the present time.

I know that everone's financial position is different. I do question the position of maximizing TSP funds vs alternate investments. Reasoning that alternate investments that are tax paid are readily available for the ups and downs of later years. Mainly, the practice of "diversification" comes to mind. Granted, TSP has both good and bad points. But, why put all of your eggs in one basket?

Just my 2 cents. Gotta get a new boat to chase them croppie! Rgds Spaf

 

[pyriel]

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Aslan wrote:

Pyriel,

I didn't read through everything you wrote, but it is real interesting what I did read. Did you mention on the conversion to the Roth IRA(from the Traditional IRA) with what money were you going to pay the tax? If you had a million dollars in your TSP (then IRA), that is a HUGE amount of tax to pay out when converting to a Roth. I just thought I'd ask in case someone else was wondering the same. Thanks

We are looking at around max of about 40% ($400k). There are two ways to do this. Rollover the 600k and pay the 400k. Ouch... There goes 40% that you made over the lifetime of managing your TSP. If you don't do it, your heir will get hit with it. Second option is to slowly transfer your TSP to IRA then ROTH. You will still pay the 40% (sorry, can't get away with it). For me (and this is what Pyriel will do) is to start transferring 100k a year to ROTH. I can manage to pay 40k a year but i can't do 400k at one time. I figure that it will take me ten years to make this happen starting at age 60 (if i have 1 mil). I plan to roll over 100k at a time and give Uncle Sam 40K (from my own pocket every year). Now, why shouldn't I just roll over 60k and let Uncle Sam take away the 40k? The reason is compounding interest and the reality of not having to pay (and my heir) any taxes on my ROTH IRA once I die and it is passed on to them. It is much easier to let Uncle Sam take the 40k but to me this is 40k more that can be compounding year after year. Tryingdoing the math ofsocking away 40k tax free for ten years then add that up withmy heir's lifecycle of 65 years (if I was to die and they were only 25 years old). That plus what I have in my TSP will grow tax deferred and my heir (and theirs) will never have to pay taxes ever again... Like what I said earlier, I can't get away from paying taxes so the next best thing is to maximize with tax deferrment and compounding interest... Where am I going to get 40K a year? I'll let my tenants take care of that...;-)

 

[Aslan]

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How did you come up with the 40% for a tax base? Is that your tax bracket, I guess? Also, you come out with 40K positive cash flow from your tenants? That is impressive. You obviously taken a lot of thought to this. Thanks

 

[pyriel]

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Aslan wrote:

How did you come up with the 40% for a tax base? Is that your tax bracket, I guess? Also, you come out with 40K positive cash flow from your tenants? That is impressive. You obviously taken a lot of thought to this. Thanks

I'm actually looking at around 36% but I am not good with math so I rounded it off to 40%. In 2002, I read a book that changed my life and i've decided that I want to retire at a time where I can still enjoy the fruits of my labor. I created a 10 yearexit plan. A mapwhich I use as a guideto get to my goal.I'm attaching a copy of it. I've revised it many times for as I got wiser with my investments, i'm able to create more opportunity by using OPM. My goal is to have no less than 10k monthly passive income (after allexpenses paid for) and with my military retirement check(I have about9 years remaining) I should be able withstand any downturn in theeconomy for the rest of my life.By having this in place, I can then leave my TSP and ROTH intact until such time that I have need of them or I pass them to my children...I believe in havingwritten goals, for it keeps me focus on where I want to be ten years from now.

For some, they might think that this is risky. Yes, it is risky (for other people). However, this is the reason why I took the time to learntaxation (taxes is one of the highest expenditure of people who earns income), leveraging OPM by creating money without money, managing money responsibly by being familiarized with financial statement (this is what the bank looks for), knowing good debt vs. bad debt, estate planningand having an exit plan.

 

[Rolo]

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Spaf wrote:

...move them to my internet discount broker (ST).

Are there any reasons to not do that?

 

[Spaf]

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Rolo,
please do not edit what I say out of context! Rgds Spaf

 

[Rolo]

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Spaf wrote:

...edit...

I did not edit, I quoted the portion to which I was speaking. I even provided an ellipsis!


Are you getting enough fiber lately?

 

[Spaf]

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Spaf wrote:

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

Then here is the entire post!

Rolo. Please stop. This ain't getting us anywhere!

Tom, please DELEATE these posts!

 

[Rolo]

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Spaf wrote:

Then here is the entire post!

Yourentire postnever left, Spaf. We don't need to see it in every reply; that is poor netiquette because it is annoying.



Posting and netiquette from Borland's site:

Keep quoted text to a minimum. When quoting a previous post, edit out the non-relevant parts of the message. Remove salutations and signatures. A good rule of thumb is, there should not be more quoted text than new text.

Spaf wrote:

Rolo. Please stop. This ain't getting us anywhere!

I didn't start it. I was asking you if you could think of any reason not to plop your TSP into a Scottrade IRA. You decided to ignore the conversation and get NET-PICKY. (baha! I just made that wordup...wonder if I'm the first?)

Spaf wrote:

Tom, please DELEATE these posts!

DaaaAAAAAaaaaaD!?!?!!? Good grief, how old are you? (that was rhetorical)


Now forget about this and decide what are you gonna do with your TSP?

 

[pyriel]

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Rolo wrote:

Spaf wrote:

...move them to my internet discount broker (ST).

Are there any reasons to not do that?

There is a reason to do it but it varies fromeach retirees. For me, I'd probably be swtiching my TSP (little by little) to a Traditional IRA then to ROTH. But that is a long time from now. I like the idea of managing my TSP (plus its low maintenance fee)butit will not make sense for me to leave it thereif my main focus is to leave my retirement savings to my children. The possibility of my children being able todraw using their own RMDafteri'm gone is my driving force. Others may not see it that way...;-)

P

 

[Spaf]

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Thanks pyriel,

RE: Retirement

The retirement sinerio is a little bit confusing to me. And, I'm getting there kind of fast!

Sorry Rolo, I misinterepted your question! My apology!


On retirement we have the option to let the TSP funds stay in TSP, or move them.

Now here is where I don't know all the details!

1. If we let the funds stay in TSP, the status quo stays like it is. However, paycheck allocations stop. Around December we can make a one time transfer (withdrawl) of funds. Say 4%. And, we are still able to conduct IFTs, etc during the year, just like we do now. But, if the member dies, the funds have to be moved within 5 years.

2. We can opt to transfer funds to a different account. If not a Traditional IRA then we have to pay the taxes. If we go for a traditional IRA the deferred taxed TSP stays pretty much the same. However we now have a delima. If the new IRA is with a mutual company, we are back in the buy-and-hold status. However, if we transfer the funds to an online broker IRA, we can trade funds within the IRA account.

pyriel this is where you come in. We can also have a Roth, where gradually we could transfer funds from the Traditional to the Roth.

Now here is where it gets more complicated.

Outside of TSP, the security of the G-fund doesn't seem to exist, for like a recession or a bad down turn in the market. The safest haven would be a long term bond fund, or some online brokers do pay the same interest as banks (savings) for non invested trading cash.

At present, if I wanted to be able to manage the TSP funds after retirement then I will need to leave them in TSP or transfer them to a broker with a Traditional IRA. If I chose not to manage the funds, then I can select a reputable company handling mutual funds.

Now TSP throws a curve. The Life-cycle funds. Why not leave the funds in the L-Income fund and if a desaster approaches, move them to the G-fund?

So, I guess for right now I'm thinking to make sure my "will" is up to date, and stay with TSP through retirement.


Rgds, and be careful! Spaf

 

[Mike]

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You can't beat TSP's low fee structure... so keep your money there.

A few recommendations, though:

If you can do so, increase your distributions and put the extra money into a Roth. Tax rates at the present time are relatively low (hard to believe but actually true), but that will not be the case indefinitely. Rising medicare and social security costs combined with the problematic deficit and national debt will force the government to cut back on services eventually *and* raise taxes. This means you are probablybetter off paying taxes on larger sums of money right now in order to shelter some of it for later.

Ask yourself: "will I need the money I'm putting into the Roth?" If you don't - if it's going there for beneficiaries - then aggressively invest it into a stock fund or perhaps even a 2040 type fund. If you think you might need the money, then you should remain at least somewhat defensive with it - invest anywhere from 60% stocks / 40% bonds to 100% bonds (you can afford to be a bit more aggressive in the Roth since the annual contribution is a small fraction of your TSP balance). That range of allocations isn't very volatile and should do an adequate job of preserving your balance regardless of what happens to the market.

As for your distributions themselves - if you don't have a high yield money market account, get one ASAP. If you're comfortable with internet-based accounts (which I assume you are based on your ownership of a Scottrade account), there are plenty of banks out there offering 3% or more APY. I know that Netbank pays this amount. Also, ifyou buy things on Ebay once in awhile and use Paypal, they are paying 3.5% APY on money that sits in there. :^

Hope this helps. Good luck.

 

[pyriel]

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Spaf wrote:

Now here is where I don't know all the details!

1. If we let the funds stay in TSP, the status quo stays like it is. However, paycheck allocations stop. Around December we can make a one time transfer (withdrawl) of funds. Say 4%. And, we are still able to conduct IFTs, etc during the year, just like we do now. But, if the member dies, the funds have to be moved within 5 years. The beneficiary has to move them within 5 years. This means that you can leave the funds alone but you must totally withdraw them allwithin 5 years. However, if you transfer the funds to a traditional IRA before you die, your beneficiary will have to zero it out in accordance to his/her RMD age. If he/she is 25 years old,RMD is 56 years (somewhere there). This will allow the inheritance (if they only take the RMD) to grow tax deferred for 56 years. The formula is 100k/56 for the first year X .10 (I just used 10 percent as my basis of yearly return). To get the consequent years just deduct one year for year RMD is taken out (sum + % return / (56-1, 55-1, 54-1 etc.) )See attached worksheet so you can better see the comparison. Actually, there is no comparison if you plan on leaving something behind to your loved ones.;-)


So, I guess for right now I'm thinking to make sure my "will" is up to date, and stay with TSP through retirement.Spaf, your will is useless for retirement account. TSP, Traditional IRA, and ROTH IRA will always go to the form that you signed telling them who is your beneficiary. So even if you put Aunt Ethel in your will, she will not get the money from those three retirment system I mentioned. ;-) (What about putting me as one of your beneficiary? ;-))

 

[Rolo]

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Spaf wrote:

Sorry Rolo, I misinterepted your question! My apology!

Cool, we're cool!

Spaf wrote:

We can also have a Roth, where gradually we could transfer funds from the Traditional to the Roth.

Yes, this is stretching my brain. Why would you want to do this?

Spaf wrote:

Outside of TSP, the security of the G-fund doesn't seem to exist, for like a recession or a bad down turn in the market.

That's a damn good point; I never thought of that. TIPS funds or short-term bond funds not comparable? I think you can find many near-zero funds to fit the "pseudo-cash" role, no?

Spaf wrote:

...some online brokers do pay the same interest as banks (savings) for non invested trading cash.

eheh...not Scottrade... 0.5% ...but I don't put $ in ST to just sit there anyway. I'll find SOMEthing for it to do...or spend it.

 

[Spaf]

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pyriel,

Thanks for the spreadsheet comparison. Thus> I can stay with TSP for a while after retirement, and make plans to transfer it to a traditional IRA. USAA is looking pretty good right now, but I'm still researching.

Rolo,

Ok! back to the drawing board for me. I never could figure out the ST interest rate on trading cash, it did seem to be a minimum.

Been seeing a lot of boats going by with V-8 engines in them. They sure are pretty!

Rgds! Spaf

 

[pyriel]

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Spaf wrote:

We can also have a Roth, where gradually we could transfer funds from the Traditional to the Roth.

Yes, this is stretching my brain. Why would you want to do this?

I was challenged by Rolo'squestion and decided to put it in an excel worksheet so that we can all see if it makes sense to do this or not. My scenario is based on someone retiring at 60 years old with 500k in TSP. On one column, individual transferred the money to traditional IRA. The other column, individual transferred his TSP to Traditional IRA then to ROTH. I based the Tax bracket to 36% which is pretty high but not the highest.

Money left in Traditional IRA grew to about $3,363,749.97 at age 80. If individual decides to close the account, he/she will get $2,152,799.98 after the 36 taxes.

Money transferred to Traditional IRA then to ROTH grew to $1,891,069.76 PLUS $290,811.36 that is left with traditional IRA (36% tax was taken out). The premise here is that individual was taking 10% per year, paying taxes on it, then moving them to ROTH.

COUNCLUSION: transfering the money from "Traditional IRA then to ROTH"only made just as much as "leaving the money in a Traditional IRA." This means that ROLO isright about stretching his brain on why would anyone do this in the first place.

 

[Mike]

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Doesn't this depend on what the tax rates are doing? I.e. if they are stable for a long period of time, it makes no difference which approach you take, but if rates are rising over time, it would make more sense to take more out early on and shield it... right?

 

[mlk_man]

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THanks Pyriel, stop working so hard will ya!!

I think a Roth account makes the most sense if you start an IRA before you actually retire. Just keep putting the yearly max. in it and put the rest in a tax-exempt IRA.

So currently I have this going on:

TSP- 5% with govt. matching

Roth- put $4000 in this year. Goes up to $5000 next year.

Traditional IRA- all other "free" monies

In case of emergency I would set up an electonic transfer with ST to deposit money directly into my checking account using money that I deposited into my Roth. This money would be tax and penalty free. Depending on the day of the week you make the request, this should only take about a week. I believe they distribute funds on Wed. so if you fax in a form on Mon. or Tues., you should have your money in a couple days.

Also don't forget that you have until April 15th of the next year to fund your Roth for the current year. Meaning that you have until April 15th, 2006 to come up with $4000 for 2005.

M_M

 

[pyriel]

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mlk_man wrote:

I think a Roth account makes the most sense if you start an IRA before you actually retire. Just keep putting the yearly max. in it and put the rest in a tax-exempt IRA.

I did a cost analysis pertaining to your comment. Here is the scenario. Elvis is 25 years old male that is currently in the 30% bracket. For him to actually contribute 2k into ROTH, it means that he had paid $600 tax for them based on his 30% tax bracket. El visis also 25 years old and he started putting in 2k every year to his Traditional IRA.I set the return to 8% per year. At age 60, both have accumulated, $404,140.64. ROTH ended up paying a total amount of $21,600 upfront (600 per year).Elvis then decided to do a one time withdrawal with his ROTH($404,140.64 - $21,600 = $382, 540.64). El vis also decided to do a one time withdrawal with his Traditional IRA ($404,140.64 -30% = $282,898.45).

***I didn't factor inwhat 2k would do to Elvis' taxes yearly since his W2 would have shown 2k less due to hiscontribution to theTraditional IRA.