TSP to ROTH

[Fixious]

Hello everyone, first time posting for me. Well little background, I've been in the military for about 10 years, currently 28 y/o and have been with TSP for 4 years and currently contribute 7% of my gross pay each month. My questions and many other people within my unit are curious about switching to ROTH IRA. What are the implications of switching? Can you get around paying taxes and taking all of your TSP money and rolling over into the ROTH? What puts or keeps the most money in my pocket? I guess Im looking for some good ideas on my options and advantages and disadvantages of those choices. I like the fact the ROTH grows tax-free and that I would rather have that money available for me then rather than now. Thank you for your assistance in this matter.

 

[Show-me]

You active guy is different than use civilians. Here is a link you may have already seen.

http://tinyurl.com/s7nzn

What are the implications of switching? Can you get around paying taxes and taking all of your TSP money and rolling over into the ROTH?

I don't know if you can do that but I know you would have to pay the taxes.

What puts or keeps the most money in my pocket?

A lot of variable to consider. How long to retire. Your tax bracket. And so on. Do you believe taxes will go up or down? If you think taxes will go up you can get out of paying taxes immediately in the TSP. It will lower you "taxable income". If you think taxes will be higher after your retirement pay the tax now put the money in the ROTH and never pay taxes on it again.


I guess I'm looking for some good ideas on my options and advantages and disadvantages of those choices. I like the fact the ROTH grows tax-free and that I would rather have that money available for me then rather than now.

This is the place to be for answers. Use the search function for the forums. We have all talked of this many times. I don't know where all the posts are. Goggle "Roth advantages" or something like that. Ton of info on the web to help you out.

I like the ROTH for this reason:
1. $4k a year plus $4k for a spouse.
2. Pay tax on it now but never again.
3. Use it as an emergency fund for EMERGENCIES ONLY. Takes discipline.
4. Lot of investment choices.

Also I believe for you active folks in a "tax free area" you get the double whammy. Pay no income tax and you can use that "tax free money" to fund your ROTH. Wish I had that when I was in.

I'm sure I left something out but someone will take up the slack when they see this. Hope this helps and welcome to our little community.

 

[Fixious]

Thanks I will be checking and pass along your info and site too. Thanks again.

 

[Birchtree]

You cannot roll directly to a Roth from TSP - remember TSP is a tax deferred program. You can however when you retire begin a process of adding TSP funds to a regular IRA without tax or penalty consequences. Then you can transfer from the IRA to the Roth on a concurrent basis and pay the tax as you go. It just requires strategy and timing. For example, the first year you retire don't take any money that will show up on a 1099 - use money from a savings account or previous Roth - that way you don't have an AGI (adjusted gross income) that sets your tax bracket. When you move money from a regular IRA to the Roth the tax consequences are muted. Strategy - beat the IRS legally.

 

[pyriel]

Hello everyone, first time posting for me. Well little background, I've been in the military for about 10 years, currently 28 y/o and have been with TSP for 4 years and currently contribute 7% of my gross pay each month. My questions and many other people within my unit are curious about switching to ROTH IRA. What are the implications of switching? Can you get around paying taxes and taking all of your TSP money and rolling over into the ROTH? What puts or keeps the most money in my pocket? I guess Im looking for some good ideas on my options and advantages and disadvantages of those choices. I like the fact the ROTH grows tax-free and that I would rather have that money available for me then rather than now. Thank you for your assistance in this matter.

Fixious,
First of all, i would like to congratulate you for diligently socking away money for your retirement fund. As per your question about transferring your TSP to ROTH, you may follow Birchtree's advice. Show-me also have great comments for you.
I would like to offer my own recommendation with hope in showing you another direction into making your retirement fund even bigger.
1. Open a ROTH IRA but continue to sock money away with your TSP.
2. Increase your TSP with a goal of reaching 15k.
It seems that you plan on saving for the long haul, however, you need to look at ways to increase your savings instead of finding which one is better than the other. The bottom line, if you are maxing your TSP and your ROTH contribution, then you can start thinking which one is better than the other. We have people here that have six figures in TSP, ROTH, 401K, etc. They got to where they are now because they maximize their contribution early in the game.
BTW, i did an excel analysis of which one is better between ROTH and regular IRA (or TSP). I didn't see too much of a difference between the two.
Have fun with your investing...
Pyriel

 

[Ichiro]

Folks,

This is my plan of action when I retire from the Federal Services when I become 62 years of age. I will transfer my TSP funds to my Traditional IRA account on an annual basis (depending on my AGI) and convert them to my ROTH IRA account. This will be taxable income to me in the year of ROTH conversion. I will attempt to convert most of my TSP funds to my ROTH prior to age 70 since this is when i will probably start collecting my Social security. I idont plan to collect my social security when I become 62 years old since the social security income (partly taxable) on top of my federal pension plus the converted Roth will put me into a higher tax bracket. I sure would not want to wait till I become 70 years old when it becomes mandatory to take funds out of the tSP. That is why it is so important to study the tax laws...

 

[EW_ret]

This Money article points out the advantages of a Roth account over traditional 401K or IRA accounts. In summary, if you placed the tax deferred savings from the traditional 401K or IRA into a taxable account, you will have to pay taxes on the dividends and capital gains from the contributions you make, whereas you pay no taxes at all on money withdrawn form a Roth account.

http://money.cnn.com/magazines/moneymag/moneymag_archive/2006/08/01/8382153/index.htm

 

[Birchtree]

Again the rules change for 2008. From TSP to Roth you will pay tax according to your normal backet. Put money in a savings account and live on it for the first year in retirement - that way you have a 0% AGI. The money you shift to the Roth will set your AGI and therefore the tax you will pay.

 

[robo]

This Money article points out the advantages of a Roth account over traditional 401K or IRA accounts. In summary, if you placed the tax deferred savings from the traditional 401K or IRA into a taxable account, you will have to pay taxes on the dividends and capital gains from the contributions you make, whereas you pay no taxes at all on money withdrawn form a Roth account.

http://money.cnn.com/magazines/moneymag/moneymag_archive/2006/08/01/8382153/index.htm

EWGuy,

Looks like you have two years to pay the taxes. I'm going to look into this. I expect the tax rates to go up in the future. This might be for me.

Thanks to all who post on these subjects!!!

Robo

Conversions to the Roth IRA
For many taxpayers, investing in a Roth IRA may provide significantly more after-tax income in retirement than from either a deductible or non-deductible traditional IRA. As a result, some investors choose to convert money from their traditional IRAs to Roth IRAs.

Conversions

You may convert all or part of your traditional IRA to a Roth IRA without being subject to the 10% early withdrawal penalty, provided your adjusted gross income (AGI) - whether filing a single or joint tax return - in the year you convert is $100,000 or less excluding the conversion amount. If you are age 70 ½ or older and are taking required minimum distributions from your traditional IRA, you don't have to include those distributions as income when determining whether you can convert to a Roth IRA. Starting in the year 2010, all taxpayers can convert their traditional IRAs to Roth IRAs, regardless of their AGI.

Married taxpayers who file separate tax returns are not eligible to convert a traditional IRA to a Roth IRA until the year 2010.

You will owe taxes on any contributions and earnings not previously taxed. Taxes will be due when you file your income tax return for the year in which you converted. If you convert in the year 2010, you won’t be required to pay any taxes on the conversion that year. You will be allowed to pay half the taxes in 2011 and the other half in 2012.

While conversions are penalty free, the amount you convert that has not previously been taxed must be included as taxable income and could potentially move you into a higher tax bracket. If you convert and then determine you were not eligible under the income limitations, you can move from a Roth IRA back to a traditional IRA, without penalty, until you file your federal income tax return for the year in which the conversion originally took place.