10-Step Plan for an Optimal TSP Withdrawal Strategy

[galveston1]

I recently came across an interesting article by David Redden, Federal Benefits Specialist. He lays out a plan for withdrawing from TSP upon retirement. I have about 9 years to go until I retire from Federal Service. If anyone has a few minutes, could you read through his article and give me your thoughts? Thanks.

The link is:

http://www.nitpinc.com/August-2015-newsletter.php

[ngood2345]

Well...First let's assume you are retired. There are no more contributions to ROTH. However, you can convert. I don't like taking my own money to convert IRA to ROTH money. Think about it, you are paying taxes to take money from your IRA, then pay taxes to convert money to ROTH. If somehow you come into money you MAY want to use that money to convert IRA to ROTH money. If you are not making 100% contributions into the 401K ROTH now, you need to change that TODAY. Try to contribute the maximum per year $25,000?

Second, make a phone call to your TSP counselor. Ask them how much money you can withdraw without paying the 20% federal taxes. It will shock you. It is very small. When you take money from your TSP it will be a proportion of IRA and ROTH. You cannot take out only IRA unless you move from the TSP. Also the TSP does not take out state taxes, that is on you.

If you do move your money to a broker, then only withdraw from your IRA. This will help reduce your RMD at 70 1/2. Then you can leave some ROTH money to your kids.

How much money do you need in retirement? Only replace your take home pay. It is not 70% or 80% of your salary. Try to be debt free before retiring in 9 years. Put together a plan.

Good luck,

[crondanet5]

Terrible advice. Roll the whole thing into a rollover IRA and be done with TSP. Never leave money in an ex-workplace 401k account. And kiss the 2 IFT rule goodbye.

[evilanne]

If you are going to transfer money to an outside IRA, it should not be buying index funds similar to what is available within TSP. Many funds outside of TSP also have limitations or penalties on frequent trading...make sure you understand the rules and expenses associated with each fund before transferring money. Idea of leaving some amount in TSP is good because once account is closed you can't move money back if you later regret your decision.

If you are concerned about converting Traditional funds to a Roth, you should really fund an outside Roth IRA each year now, in addition to your TSP contributions, if you are able to do so. If you have both Roth & Traditional within TSP everything is done proportionally, which complicates everything. If you retire prior to the year you turn 55 your withdrawal options are more limited unless specific exemption applies--you pretty much have to use life expectancy method.

[mjedlin66]

Well...First let's assume you are retired. There are no more contributions to ROTH. However, you can convert. I don't like taking my own money to convert IRA to ROTH money. Think about it, you are paying taxes to take money from your IRA, then pay taxes to convert money to ROTH. If somehow you come into money you MAY want to use that money to convert IRA to ROTH money. If you are not making 100% contributions into the 401K ROTH now, you need to change that TODAY. Try to contribute the maximum per year $25,000?

Second, make a phone call to your TSP counselor. Ask them how much money you can withdraw without paying the 20% federal taxes. It will shock you. It is very small. When you take money from your TSP it will be a proportion of IRA and ROTH. You cannot take out only IRA unless you move from the TSP. Also the TSP does not take out state taxes, that is on you.

If you do move your money to a broker, then only withdraw from your IRA. This will help reduce your RMD at 70 1/2. Then you can leave some ROTH money to your kids.

How much money do you need in retirement? Only replace your take home pay. It is not 70% or 80% of your salary. Try to be debt free before retiring in 9 years. Put together a plan.

Good luck,

Man, you straight up got your terms all mixed up.

There are two different accounts:
IRA - Individual Retirement Account
TSP - Equivalent to 401(k)

EACH of these accounts has two investment options:
Roth - Pay tax now
Traditional - Pay tax at withdrawal

So you can have Roth TSP, Traditional TSP, Roth IRA, and Traditional IRA.

Most of my TSP is roth. A small portion of it is Traditional because the government match is always deposited as traditional. All of my IRA funds are roth.

And don't mind cron. He means well but he doesn't like restrictions placed by the TSP. I, for one, think the 2 IFT rule is a good rule. Anyway, the advice in that article is sound advice as far as I am concerned. I was not aware that you could transfer funds back to the TSP post retirement. I was also not aware that Roth IRAs are exempt from minimum withdrawals. I was THIRDLY not aware that I could convert traditional balances to roth every year by claiming it as income after I retire. All three of those points will change the way I handle my retirement. Considering I have read a lot of retirement articles and none of them have covered those three points, this is a damn informative article.

[crondanet5]

mj I knew you would try to brush me off. The issue is accessibility after you leave federal service. Investigate that issue. Tell me how you get a chunk of your TSP cash out of the TSP if you need it. Tell me. You can't. And that is a problem.

[mrmaxd]

TSP for LEO's? I believe I will have to leave money in the TSP to access it "penalty" free before age 59.5. If I retire at age 50, I can access my TSP money with no penalty. If I roll it over into an IRA then I will incur a 10% penalty on anything I withdraw before taxes until I reach age 59.5.

This is the most important reason for me to at least leave all of the money in the TSP I think I may want/need before age 59.5. Congratulations to all of you were smart/disciplined/lucky enough to plan accordingly so that you won't need TSP before 59.5. Unfortunately, barring a massive ship coming in I don't think that will be me.

If you are over 59.5 when you withdraw any TSP money, Then I guess this would be a moot point.

[crondanet5]

Are you sure you would incur a 10% penalty? Am I correct you are leaving federal employment? If so, can you not roll your TSP Account penalty free into a rollover IRA? That would give you access to it even if there was a 10% penalty on any withdrawals. Withdraw only what you need and make the rest grow. Talk to a Fidelity/Vanguard/TD/Schwab/etc. representative to get the straight story about rollovers and TSP penalties. Let us know what you find out.

[Aitrus]

I recently came across an interesting article by David Redden, Federal Benefits Specialist. He lays out a plan for withdrawing from TSP upon retirement. I have about 9 years to go until I retire from Federal Service. If anyone has a few minutes, could you read through his article and give me your thoughts? Thanks.

The link is:

http://www.nitpinc.com/August-2015-newsletter.php

I like his approach. However, two potential problems jump out at me.

1 - This plan assumes that the rules for Roth IRAs won't change during retirement. Politicians have already proposed changing the rules regarding Roths (Source: http://www.marketwatch.com/story/president-obamas-2016-budget-targets-retirement-accounts-2015-02-05). We all know how politicians hate to leave any potential revenue source untapped. It's only a matter of time until they get their way, IMO. It would suck to pull out all but 10 years' worth of TSP money into an IRA, be in the middle of moving it to a Roth IRA, only to have the rules change in the middle of your plan. They could change the RMA or contribution rules as proposed in #s 2 and 3 in the link I provided above. They could extend taxation to include some or all of the interest growth. They could begin taxing the account whenever it's signed over to an heir. Who knows how politicians would want to twist the rules in an effort to "improve" the program. It would be better to leave your funds in TSP to take advantage of the lower fees if such changes were made.

2 - The TSP Board could change the rules to not allow somebody to put money back into TSP once they withdraw a chunk or are receiving payments. While this wouldn't torpedo the plan of converting to a Roth IRA entirely, but it would be a circumstance where once your TSP funds are depleted you are no longer able to take advantage of the lower fees.

Oh, and cron's question about making a withdrawal being a limiting factor has been answered at least twice that I know of.

Source: http://tspcenter.com/forums/viewtopic.php?f=14&t=12642&p=50975&hilit=emergency#p50975 (several replies in this thread answer his question adequately)

Source: http://tspcenter.com/forums/viewtopic.php?f=14&t=12419&hilit=proposed (in reference to the TSP Board's acceptance of the idea of allowing more than one lump sum withdrawal from TSP accounts during retirement as well as allowing changes to monthly payments in retirement)

[evilanne]

TSP for LEO's? I believe I will have to leave money in the TSP to access it "penalty" free before age 59.5. If I retire at age 50, I can access my TSP money with no penalty. If I roll it over into an IRA then I will incur a 10% penalty on anything I withdraw before taxes until I reach age 59.5.

See https://www.tsp.gov/whatsnew/Content/index.html#fpse Update: Information for Federal Public Safety Employees — (November 23, 2015) re: Changes for LEOs @ age 50

http://www.fersguide.com Dan Jamison offers 1 year subscription to his FERSGUIDE for $10 which includes access to his web site, the guides and you can email/call him with specific questions.

The guide comes in two versions, one for regular FERS employees & the other for Federal Firefighters, Law Enforcement Agents and Officers, and Air Traffic Controllers (who encounter some special situations due to a mandatory retirement age, earlier retirement eligibility and enhanced annuity calculations).

[evilanne]

Note: Based on Aitrus' post, I'm not sure that if you have Roth TSP, whether or not you might get in trouble with Roth portion meeting definition of "qualified distribution" under 59.5 with 5 year rule. Technically if you are withdrawing only contributions, it really shouldn't matter, but it could cause an issue that would result in penalty in certain situations. I don't like TSP proportional distribution rules.

[galvestoni]

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[RGEN]

Not being able to independently withdraw from the TSP IRA and ROTH accounts is a big disadvantage. In retirement you are going to want to manage the withdrawals to stay in a lower tax bracket. For example, you would withdraw from the IRA until you reach the top of the 15% tax bracket then withdraw any additional funds required from the ROTH. This will keep you from rolling into the next higher bracket.

[crondanet5]

galvestoni, do you have a will? Have you legally designated a health care advocate? Have you established a Living Trust? Are you actively discussing the quality of your health with a general physician? In the event of your death does your wife know to sell your primary residence within 364 days of your death? These all count for a secure financial retirement besides having access to your total TSP balance if needed.

[galveston1]

I appreciate everyone’s input. Ngood you are absolutely correct that TSP withdrawals are proportional. That is covered at length in the article. As far as state taxes, I’m not planning to pay any upon withdrawing money from my TSP. Right now I’m living in Maryland so I DO have to pay state income taxes, but those are minimal since I am maxing out my TSP contributions ($18,000) as well as my Catch Up contributions ($6000) annually. I also make contributions to my Vanguard IRA. We are going to buy a home in a state without income taxes a couple of years before I retire, so the state tax on my retirement income is not a concern. Besides a mortgage, we are and will be debt free. As far as putting together a plan, that’s what I’m doing and was the purpose of getting some feedback on the article I posted. Cron the 2 IFT rule is not really an issue for me. Although I know others hate it. But I agree with you on the concern about accessibility. And that’s the main reason I will most likely roll over into a mostly stock-based traditional IRA after I retire. I currently have a Vanguard traditional IRA (Vanguard 500 Index Fund Admiral Class) (VFIAX) that’s earned 11.3% since I opened it 3½ years ago. This fund has an expense ratio of 0.05% versus the TSPs C Fund of 0.028%. The annual difference is about $110 on a balance of $500,000. However I like the idea of keeping my TSP account open as a source of income in the G Fund as explained in the article. Evilanne I’m curious why you advise against rolling over into an index fund other than your concerns about the “limitations and penalties on frequent trading”? Just to clarify, I would not be a frequent trader. I consider my IRA to be a long term investment. My income would come from my (1) government retirement, (2) SS at 62 years old, and (3) monthly payments from what I left in my TSP G Fund. My current plan is to retire at 62 years old and I will not touch my TSP before I retire. Mjedin66 I am glad you found the article useful. I was also enlightened by the points you referenced in the article. When I mentioned these to some of the people I work with, they were also unaware of these options. Hopefully others will weigh in with more opinions. Thanks.