Converting Traditional IRA to Roth IRA?

[pilotric99]

I am strongly considering converting my personal IRA investments (appr $130k) to Roth IRAs. If this is also possible with my TSP, I would consider doing this as well. Not sure if they allow that. I've always been 50/50 in my traditional/Roth contributions but now I'm currently 100% Roth.

I have 15 years to mandatory retirement (Im a 13/4) with no additional income, am sole provider for a family of five, and have a fairly low tax rate (.

I can only imagine as my income increases, I lose my children as dependents, and my taxable investments gain in value (thank you TSPCalc), my tax rate will increase dramatically. Im thinking that taking the tax hit now and allowing my investments to grow tax-free might be a wise move. Plus Roths have no RMDs, I believe, and no income limits on conversion amounts (correct me if Im wrong).

I don't expect my overall tax liability to change over the next 5 years, so any conversion would probably be in a phased approach per year to limit my taxes owed due to the conversion.

Thoughts appreciated.

[Bubba823]

Unfortunately you can't convert Traditional TSP money to Roth TSP. You can only change where your future TSP contributions go. Roth TSP money IS subject to RMDs. Roth IRAs are NOT subject to RMDs. If you're converting Traditional IRA money to a Roth IRA, just don’t convert any more than you can pay in taxes in any one year. In addition, Roth IRAs are not taxed as income to beneficiaries so they become extremely useful tools in estate planning.

[pilotric99]

Good info Bubba, thank you.

If you were in my shoes and paying the extra tax was NOT an issue, would you convert to Roth IRA?

[evilanne]

I would recommend converting now while you have dependents. It is also beneficial for married couples as they get older if you look at the difference in tax brackets between MFJ & Single, there is a big difference in taxes for the surviving spouse.

You can transfer the assets and they will be valued on the day of the transfer. If you can do it on a day the stock or fund is down, there is less of a tax impact.

Are your contributions in Roth TSP?

[pilotric99]

Thanks, Evilanne.

About a year ago, I switched to 100% Roth contributions in my TSP. I had been mostly 50/50 prior.

[Bubba823]

Good info Bubba, thank you.

If you were in my shoes and paying the extra tax was NOT an issue, would you convert to Roth IRA?

Yes. In fact I've converted over $100,000 from Traditional IRA to Roth IRA in my Vanguard account over the past few years. Now I only keep the minimum amount required in my Vanguard Traditional IRA. Once I retire I'll be moving my Traditional TSP money to my Vanguard Traditional IRA and converting portions of that to my Roth IRA each year. I'm 58 years old and plan to retire in the next 18 months. So I'll have plenty of years left before hitting 72 where RMDs would kick in on my Traditional IRA. Hopefully by that point, I'll have nearly everything converted to Roth. There are no RMDs on Roth IRAs.

[anomadtoo]

Unfortunately you can't convert Traditional TSP money to Roth TSP. You can only change where your future TSP contributions go. Roth TSP money IS subject to RMDs. Roth IRAs are NOT subject to RMDs. If you're converting Traditional IRA money to a Roth IRA, just don’t convert any more than you can pay in taxes in any one year. In addition, Roth IRAs are not taxed as income to beneficiaries so they become extremely useful tools in estate planning.

During a recent TSP class the instructor stated TSP possibly has in the works a plan for us to be able to convert our Traditional TSP to a Roth IRA, before retirement. No idea when but that's the rumor. Might be good for some folks, and to start planning the tax burden strategy.

[Bubba823]

Unfortunately you can't convert Traditional TSP money to Roth TSP. You can only change where your future TSP contributions go. Roth TSP money IS subject to RMDs. Roth IRAs are NOT subject to RMDs. If you're converting Traditional IRA money to a Roth IRA, just don’t convert any more than you can pay in taxes in any one year. In addition, Roth IRAs are not taxed as income to beneficiaries so they become extremely useful tools in estate planning.

During a recent TSP class the instructor stated TSP possibly has in the works a plan for us to be able to convert our Traditional TSP to a Roth IRA, before retirement. No idea when but that's the rumor. Might be good for some folks, and to start planning the tax burden strategy.

What we need more than anything else is the ability to withdraw our TSP money from a specific fund. Roth Conversions would simply be the cherry on top.

[IRQVET]

I (kinda did that) as when I rolled over my private industry IRA into the TSP I put it into the ROTH. But any future contributions have to be assigned manually, so they can't be moved around once they're in the TSP.

Moving forward my contributions have been 10% Roth and 5% traditional TSP. The addition of the ROTH TSP was one of the biggest benefits of late IMHO.

[Scarfinger]

Moving forward my contributions have been 10% Roth and 5% traditional TSP. The addition of the ROTH TSP was one of the biggest benefits of late IMHO.

Agreed.

I was 20% traditional for 10 years. I got a big raise this year so I switched in January to 15% Roth and 4% traditional. Hopefully retiring in 12 more years.

[Snapdragon]

I was logged in to TSP today and was just thinking I wish I could convert some of my traditional to Roth (I'm still working). Could there be an option for the 5% matching, that if you want Roth you would get like 4% instead? Just thinking "out loud".
I am still working for the gov and I'm in my early 40s. Hubby is retired fed LEO, late 50s. Last year we talked to our tax guy about doing a conversion. Our tax guy referred us to a financial guy he works with. Long story short, most of my hubby's TSP money got moved out to be with the financial guy, which is great because the hubby doesn't manage his own stuff. And we are currently in the process of converting his traditional money to be Roth, $200,000 I think. The financial guy and tax guy estimated we'll end up paying about 10% taxes on what we convert. We decided to do a bigger chunk this year because 1) We have a lot in our tax favor with child credits and what not and 2) I will probably get a promotion soon and make more money. Also for consideration is how are you going to pay those extra taxes? If you have to pull more money out of the IRA to pay taxes, that's also additional income. We have some inheritance money to pay the additional taxes, so that is helpful. I also have extra money taken out of my paychecks to help pay for the extra taxes over the course of a year.
We decided to convert because we wanted tax free growth, we think taxes are going to be higher in the future, there is a big age difference between my husband and I and Roth is part of a good estate plan (as someone already said).