Author Topic: Leave money in TSP after FIRE?  (Read 3341 times)

Beach_Stache

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Leave money in TSP after FIRE?
« on: December 06, 2015, 07:00:09 AM »
While I've still got a ways to go in my gov't career, like all of you I'm planning for the future.  I have all my 401k money from previous jobs rolled into the TSP, but I was wondering how many of you are planning to keep it in there after you've retired, or if you do plan to when FIRE?  I have heard of plenty saying they take it all out and put it in a Fidelity or Vanguard so they can manage it themselves, but IMO the performance has been decent enough and the fees are really low.  Any FIRE's out there who have left their money in TSP, or do you take it all out and put it in another place? 

Left

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Re: Leave money in TSP after FIRE?
« Reply #1 on: December 06, 2015, 07:16:58 AM »
i plan to leave it there, well as much of it as i can for the g fund.... i will probably move half or so out so i can use it for living costs

abhe8

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Re: Leave money in TSP after FIRE?
« Reply #2 on: December 06, 2015, 07:49:28 PM »
is there a cap on the G fund?

Cornbread OMalley

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Re: Leave money in TSP after FIRE?
« Reply #3 on: December 06, 2015, 09:32:53 PM »
I plan to leave my money in the TSP as long as possible until I really need it because the TSP has the lowest expense ratios of all.  They are literally dirt cheap to own, which gives them a big advantage over other investment vehicles.

sol

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Re: Leave money in TSP after FIRE?
« Reply #4 on: December 06, 2015, 10:43:18 PM »
I'll be leaving mine in until I need it.

(Which means withdrawing it in sequential large chunks starting immediately after retirement to convert them to a tradIRA so that I can make annual rollovers to my Roth IRA at 0% tax, building my 5 year Roth pipeline to allow tax and penalty free withdrawals long before age 59.5)

maco

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Re: Leave money in TSP after FIRE?
« Reply #5 on: December 07, 2015, 09:08:29 AM »
I'll be leaving mine in until I need it.

(Which means withdrawing it in sequential large chunks starting immediately after retirement to convert them to a tradIRA so that I can make annual rollovers to my Roth IRA at 0% tax, building my 5 year Roth pipeline to allow tax and penalty free withdrawals long before age 59.5)
Could you expand on this? My husband has a TSP from a previous job, and I'm confused about this 0% tax part of what you said.

sol

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Re: Leave money in TSP after FIRE?
« Reply #6 on: December 07, 2015, 10:41:24 AM »
Could you expand on this? My husband has a TSP from a previous job, and I'm confused about this 0% tax part of what you said.

It's not specific to the TSP, any 401k plan will work if it allows you to make rollovers. 

The basic idea is that after you stop working and your earned income drops to zero, you make annual rollovers from your 401k to a Roth IRA.  This is a taxable event, but if you stay in the 0% tax bracket then you don't pay any income tax.  The 0$ tax bracket for a family with two kids is usually in the ballpark of $50k/year, so if you rollover amounts of that size or smaller you effectively transfer funds from your 401k to the Roth IRA without paying any taxes or penalties.

The Roth IRA has a clause that allows you to withdraw any contributions after five years, without paying an early withdrawal penalty.  Your rollover amounts count as contributions.  The Roth IRA is tax-free because you've already contributed with after-tax money but in this case that after tax money was all done in the 0% tax bracket.  So five years after your first rollover (that's five calendar years, so potentially four years and one day) you can withdraw that money and put it in your bank account.  You will have contributed it to the 401k tax free, rolled it over to the Roth tax free, and then withdrawn it tax free.  Every year you repeat the process to generate a tax-free income stream from your 401k for five years in the future.  This is the Roth IRA pipeline.

Having a TSP account complicates things a little bit, because you can't make annual rollovers from the TSP.  You can only withdraw from the TSP twice in your life, and the second time has to empty the account.  So you take out some chunk of your TSP money (maybe half?) and convert it into a traditional IRA instead.  This is a tax-free and penalty-free event because the accounts are of the same type.  Then you follow the above plan making annual rollovers from the traditional IRA to the Roth IRA.  When you've depleted the trad IRA, you can convert the rest of your TSP funds to the trad IRA if necessary.
« Last Edit: December 07, 2015, 06:10:40 PM by sol »

maco

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Re: Leave money in TSP after FIRE?
« Reply #7 on: December 07, 2015, 11:09:43 AM »
Ok, so you have two assumptions I did not:

1. don't transfer money to Roth until after FIRE starts
2. transfers will be less than deductions

I figured you start your transfers 5 years before FIRE, so that when FIRE hits you have money ready to withdraw from the Roth account. I guess your intent is to have 5 years worth in a taxable account and figure on the earnings being less than standard deduction?

For a couple without kids, standard deduction is $12k. Just to cover the mortgage each year (for the first 10 years or so), we'll need to transfer $18k.

sol

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Re: Leave money in TSP after FIRE?
« Reply #8 on: December 07, 2015, 01:03:37 PM »
I figured you start your transfers 5 years before FIRE, so that when FIRE hits you have money ready to withdraw from the Roth account.

If you do it that way, your're effectively paying your marginal tax rate on the Roth conversions because they count as additional income.  That sucks.  Much better to wait until after your income drops to zero, assuming you have some other source of income for the first five years (or four years and a day).

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For a couple without kids, standard deduction is $12k. Just to cover the mortgage each year (for the first 10 years or so), we'll need to transfer $18k.

Sure the MFJ standard deduction is $12k.  Then personal exemtions are another $4k each on top of that, so a married couple with two kids gets another $16k in tax free income.  Then your property taxes.  Then maybe your health insurance premiums.  Then the college credits, if your kids are the right age.  Then capital losses and tax loss harvesting.

If you need more than that, remember the capital gains tax rate is 0% if you make less than about $75k/year, and your Roth contributions can come out tax and penalty free at any time. These easily get me to far more than we spend per year, and if I really need more than that then remember that the next ~$18k is only taxed at 10% and then the child tax credit will offset even THAT amount of taxes due.  Generally speaking a family has to make around $50k before they actually owe any (federal income) taxes.  And most mustachians live on less than that.

Go read about how RootofGood made $140k and paid 0% taxes after contributing to his retirement accounts for a pretty thorough breakdown.
« Last Edit: December 07, 2015, 01:12:37 PM by sol »

maco

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Re: Leave money in TSP after FIRE?
« Reply #9 on: December 07, 2015, 01:24:10 PM »
I figured you start your transfers 5 years before FIRE, so that when FIRE hits you have money ready to withdraw from the Roth account.

If you do it that way, your're effectively paying your marginal tax rate on the Roth conversions because they count as additional income.  That sucks.  Much better to wait until after your income drops to zero, assuming you have some other source of income for the first five years (or four years and a day).

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For a couple without kids, standard deduction is $12k. Just to cover the mortgage each year (for the first 10 years or so), we'll need to transfer $18k.

Sure the MFJ standard deduction is $12k.  Then personal exemptions are another $4k each on top of that, so a married couple with two kids gets another $16k in tax free income.  Then your property taxes.  Then maybe your health insurance premiums.  Then the college credits, if your kids are the right age.  Then capital losses and tax loss harvesting.
The reason I said "for a couple without kids the standard deduction is $12k" is because I'm not gonna go and get pregnant just to get a larger tax deduction! (putting an addition on the house to accommodate a child would outweigh that anyway) I always forget there's a personal exemption aside from standard deduction, though. I guess it's still novel to me that I get to claim myself instead of my dad doing so.

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If you need more than that, remember the capital gains tax rate is 0% if you make less than about $75k/year,
I knew capital gains had stupid-low taxes, but I didn't know they were THAT stupid-low! I thought it was like 15% instead of 25%. Yeesh!

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and your Roth contributions can come out tax and penalty free at any time. These easily get me to far more than we spend per year, and if I really need more than that then remember that the next ~$18k is only taxed at 10% and then the child tax credit will offset even THAT amount of taxes due.  Generally speaking a family has to make around $50k before they actually owe any (federal income) taxes.  And most mustachians live on less than that.
We're looking at more like $30k for two adults, no kids. I'll have to do math to figure how that works out.

sol

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Re: Leave money in TSP after FIRE?
« Reply #10 on: December 07, 2015, 04:35:01 PM »
We're looking at more like $30k for two adults, no kids. I'll have to do math to figure how that works out.

Having no kids does make this plan harder in some respects.  As a first cut, you'll get 20k between the standard deduction and personal exemptions for two people plus maybe another $3k for property taxes.  That would leave 7k to be taxed at 10%, or $700 on $30,000 of income is an effective rate of 2.3%.  Which isn't quite zero, but can certainly be improved by tax loss harvesting, a rental property, or a variety of other tricks.

So the plan would be first to save up five years of $30k spending in your taxable accounts*.  The first year after you retire you either 1) roll over the $30k that's earmarked for five years down the road, and you pay the ~2% tax rate on it, or 2) roll over the $23k of tax-free 401k to Roth IRA conversion at 0% tax and plan to make up the other $7k with taxable accounts or old Roth IRA principal withdrawals (which are always tax and penalty free).

As to the $18k/year mortgage bill, consider the benefits of just paying it off.  If you have enough money saved up to retire, you just need to decide if you lose more money by carrying the mortgage and paying (presumably low) taxes+interest on the payments or by withdrawing the money to clear the mortgage but then losing any future returns from leaving that sum invested in the markets.

*: by "first" I do not mean at the expense of maximizing your TSP contribution.  Generally speaking you should be doing that first even if it means you can't save up 5 years of expenses in your taxable account, because the tax savings usually outweigh the 10% "penalty" for early withdrawal.
« Last Edit: December 07, 2015, 04:37:31 PM by sol »

Yankuba

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Re: Leave money in TSP after FIRE?
« Reply #11 on: December 07, 2015, 05:42:38 PM »
Some people take money out of the TSP because the TSP is very rigid when it comes to withdrawals. But they may loosen the restrictions in the future.

Ricksun

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Re: Leave money in TSP after FIRE?
« Reply #12 on: December 08, 2015, 03:54:44 AM »
I'll be leaving mine in until I need it.

(Which means withdrawing it in sequential large chunks starting immediately after retirement to convert them to a tradIRA so that I can make annual rollovers to my Roth IRA at 0% tax, building my 5 year Roth pipeline to allow tax and penalty free withdrawals long before age 59.5)

Just for your planning Sol, TSP restricts your ability to make withdrawals.   Most people move all or at least a sizable chunk to a seperate IRA initially because of this.  You only get 1 partial withdrawal after "early" retirement unless you're 59.5 years old, in which case your only other option would be 12 monthly payments of equal value.   After you use the 1 partial, your only option is to withdraw it ALL. TSP says this keeps their costs low.

Also, if you have a mix of Roth and Trad TSP, withdrawals can ONLY be made in the same proportion as the account mix.  I.e. if you have 30% Roth, any withdrawal will have to have 70% taxable withdrawals and 30% roth non-taxed.

It's this inflexibility that causes a lot of people to pull at least some of their resources out.

Ricksun

sol

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Re: Leave money in TSP after FIRE?
« Reply #13 on: December 08, 2015, 08:22:05 AM »
Just for your planning Sol, TSP restricts your ability to make withdrawals.   Most people move all or at least a sizable chunk to a seperate IRA initially because of this.  You only get 1 partial withdrawal after "early" retirement unless you're 59.5 years old, in which case your only other option would be 12 monthly payments of equal value.   After you use the 1 partial, your only option is to withdraw it ALL.

Yes, I'm aware of the two-withdrawal rules.  I even outlined the solution above: withdraw in stages from the TSP to a traditional IRA and then do the rollovers to the Roth from there.