Is it possible for one to withdraw, say $100K and reinvest the $50K traditional money with another investment vehicle to continue the tax deference until RMD kicks in and enjoy spending the other $50K tax free?
It’s always good to check with professionals.
And here’s one, John Grobe, who’s directly addressed the question posed:
http://www.fedsmith.com/2013/08/27/taxe ... p-account/
Note the last paragraph in the article, which reads:
“They [any federal employee who has a Roth balance in their TSP and is planning to retire and begin withdrawals from the TSP either before they reach the age of 59 ½ or before they have had the Roth balance for at least five years] can also roll-over or transfer their TSP to an IRA. The following also appears in a discussion of single or partial withdrawals in the TSP publication Withdrawing Your TSP Account After Leaving Federal Service. “If you have both traditional (non-Roth) and Roth balances in your TSP account, you can direct all or a part of the traditional (non-Roth) portion to one IRA or plan, and all or part of the Roth portion of the payment to either another IRA or plan or to the same IRA or plan…” This allows an individual to separate their Roth and Traditional TSP balances into separate IRAs that can be withdrawn from separately and allows them to leave the Roth account alone until it is entirely tax free.”
Note that that advice comes directly from the TSP publication Withdrawing Your TSP Account After Leaving Federal Service.
Note also this sentence:
“[Lenny] will be paying tax on the part of his payments that are considered as coming from the growth of his Roth contributions until he has had the Roth balance for at least five years.”
In other words, Lenny, even if he chooses to withdraw from his TSP account and roll none of that withdrawal into into an IRA, will only have to pay taxes on the growth in his Roth account until he has that account for five years. After the 5-year limit, no taxes are owed whatsoever. And the longer he waits to withdraw his account, the less time he pays taxes on Roth growth.
The author of the linked article, John Grobe:
“… is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.”
And worthy of another thread.
More critically, are you implying that IRAs in brokerage accounts are not subject to minimum required distributions?
Or penalties thererelated?
That most certainly is true for Roth IRAs:
http://www.rothira.com/roth-ira-require ... bution-rmd
Sadly, though, TSP is NOT IRA – but horse of totally different color: Mindless, rigid, bureaucratic concoction.
As crondanet frequently notes.
Recall Gman’s post, which started this thread: “Understand the 50/50 rule of TSP withdrawal, don't like it, but understand it.”
That rule, regrettably, is THE problem, iron-clad and predominant.
From “Your Withdrawal Options” in Withdrawing Your TSP Account After Leaving Federal Service:
“If you have both a traditional (non-Roth) and a Roth balance in your TSP account, any withdrawals you make will be paid proportionally from each balance.”
“While you are receiving monthly payments, you can change the proportions of your account balance that are invested in various TSP investment funds by making an interfund transfer. However, if you have both a traditional (non-Roth) balance and a Roth balance, you
cannot allocate your traditional (non-Roth) balance and your Roth balances differently. The allocation you choose when you request your interfund transfer will apply to both your traditional (non-Roth) and your Roth balances pro rata (i.e., proportionally).”
From https://www.tsp.gov/planparticipation/w ... ions.shtml
“Required minimum distributions apply to both traditional and Roth balances and are paid proportionally from both balances.”
Also from http://www.myfederalretirement.com/public/1032print.cfm
“Roth TSP and Required Minimum Distributions (RMDs).
“The year after you turn age 70½, the IRS requires you to begin receiving a minimum amount of money from your account (unless you are still working). This is your RMD, and it is calculated based on your account balance and IRS life expectancy tables. IRS requirements for RMDs apply to employer-sponsored retirement plans like the TSP with no exceptions; therefore, RMDs will apply to Roth money in your TSP account, even though they do not apply to Roth IRAs.”
Crondanet’s shrill criticism of TSP, sorry to say, is, once again, spot on.
BTW, MyFederalRetirement.com and FedSmith.com provide excellent coverage of issues like this.
It’s sad that we have to rely on such sources, but at least we have them!
First, there is a website devoted to 72(t) distributions:
Second, it's clear that there is no difference between traditional and ROTH IRAs on this matter.
See also Chapter 2, Roth IRAs, in IRS Publication 590-B, “Distributions from Individual Retirement Accounts.”
The way you do a 72(t) distribution from a 401-k plan like TSP is described in:
It is evident that you can do that through TSP upon retirement, even before age 59 ½:
http://money.federaltimes.com/2014/01/2 ... ributions/
http://www.tsptalk.com/mb/retirement-ir ... p-72t.html
http://www.fedsmith.com/2012/10/08/acce ... etirement/
In the latter, see especially the section “Special Considerations for Employees Retiring Before Age 59 ½.”
“The 10% penalty is not imposed on withdrawals from the TSP if the employee retired ‘during the calendar year that they turn 55’ or later. That means that many retired federal employees can make their withdrawals from TSP penalty-free if they meet the requirement. A consideration should also be made of this exception if an outside IRA is to be used, either for investments or to purchase an annuity. In that instance, it will typically make sense to leave enough money in the TSP to cover all needed expenses until age 59 ½. Those calculations should be based on a complete retirement income plan, so that they are accurate and any unnecessary penalty can be avoided.”
Once rolled into a Roth IRA, the principle of one’s account can be withdrawn freely (evidently even under the five-year rule):
“Most financial planners do not like advertising the fact that money that you invest in a Roth IRA is yours to do with as you like. If the need arises, you can withdraw the principle that you put into a Roth IRA penalty free. You are not allowed to touch any interest, dividends, or capital gains that have accrued without triggering an early withdrawal penalty from the IRS, but the amount that you contributed is free for you to withdraw.”
You can even do 72(t) distributions from within TSP:
“Within the TSP, the simplest way to make 72(t) withdrawals is to select the life expectancy monthly payment option. Those TSP-determined amounts will automatically qualify. If the amount is self-determined, it is up to the participant to verify that the amount is correct. It is not recommended to use the self-determined method, as the margin for error is great. Also, if there is an error at any point, all withdrawals made over the entire 72(t) period are subject to the 10% penalty retroactively.”
http://www.fedsmith.com/2012/10/08/acce ... etirement/
But if you do that, you’re still subject to TSP’s proportionate rule for account withdrawal: You’ll be taking from both your traditional and Roth accounts proportionately (if you have both).
And, of course, all of the above moves remain subject to the IRS’ 5-year rule re withdrawals of gains obtained in Roth accounts:
“A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements.
“It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and …”
Whether TSP or other sponsor, the 5-year rule applies to gains in ALL Roth accounts.
Additionally, there IS a “tax,” or “penalty,” incurred in taking early distribution from one’s retirement account:
“Once you start taking the withdrawals from your Roth IRA, you are stuck and cannot stop them from occurring. Rule 72(t) withdraws are a great way for those retiring early to have access to their money without the early withdraw penalty, but they are not something to be started or taken lightly. While there are ways for an investor to tap into your Roth IRA money before the typical age of retirement, that does not mean that you necessarily should.
“Rule 72(t) provides early retirees a way to tap into their retirement investments but lock them into a distribution schedule of those funds. Withdrawing the principle from your Roth IRA, while an option, is not always the best idea. You are sacrificing a lot of future gains by not letting your investments grow. A Roth IRA was not created to ultimately be a type of savings account that you can dip into when the going gets tough, the best way to use them are for retirement funds to be drawn on late in life.”
In other words, “there is no free lunch.”
Recommended Reading: http://tspcenter.com/forums/viewtopic.php?f=14&t=13474
"It's not what happens to you, but how you react to it that matters" Epictetus
Or is it the concept of “rollover” that’s problematic?
If the latter, try these links:
Especially this paragraph:
“TSP (Thrift Savings Plans) ‘Rollovers’!
“YES these plans can be rolled into an IRA for potentially increased investing options,
continued tax-deferred growth, and/or penalty-free distributions (INCLUDING a 72T
at ANY age).
P. 6, “Transferring Your Withdrawal,” says:
“Your TSP account is a portable retirement benefit. This means that when you make a full or partial withdrawal of your account after you leave service, you can have the TSP transfer part or all of your single payment or certain monthly payments to an IRA or an eligible employer plan…. Any tax-deferred amounts that are transferred will retain their tax-deferred status until you withdraw your money.”
A TSP account rolled over into an IRA becomes precisely that: An IRA.