Author Topic: military/TSP question for early retirement  (Read 3292 times)

Grunt

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military/TSP question for early retirement
« on: February 27, 2016, 03:23:56 PM »
Hello all, budding mustachian here (first post).  I am 5 years into active duty service (15 to go!) 26 years old.  Dual income, no kids, high savings (as of recently).  I have extensively been studying Roth IRA conversion ladders and am convinced this is the way to supplement my pension when I retire at 20 years.  I understand the sequence is  401k----->rollover----->IRA---->conversion ladder---->Roth IRA---->live off precalculated conversions since they are "contributions, and therefore not taxed.  My question is, Is there a way to do this if the bulk of my portfolio at early retirement time is in a Roth TSP(the rest being taxable index funds)?  Would I just roll my entire Roth TSP into a Roth IRA when I retire? Would the entire rollover be viewed (for tax purposes) as a contribution and therefore not taxed.  Any special/recommended tips or tricks regarding the 5 year rule here?  The plan (roughly) is to have a $40k annual expense at retirement, pension will cover half of that, have 1/2 mil in Roth TSP at retirement age(41), have roughly 200k in taxable accounts by retirement to fund a potential 5 year gap.   Can anyone provide an answer/advice/sources on the Roth TSP to Roth IRA rollover/"ladder".  Any further/general guidance on my overall plan would also be greatly appreciated.  Thanks.

MDM

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Re: military/TSP question for early retirement
« Reply #1 on: February 27, 2016, 05:36:05 PM »
Hello all, budding mustachian here (first post).  I am 5 years into active duty service (15 to go!) 26 years old.  Dual income, no kids, high savings (as of recently).  I have extensively been studying Roth IRA conversion ladders and am convinced this is the way to supplement my pension when I retire at 20 years.  I understand the sequence is  401k----->rollover----->IRA---->conversion ladder---->Roth IRA---->live off precalculated conversions since they are "contributions, and therefore not taxed.  My question is, Is there a way to do this if the bulk of my portfolio at early retirement time is in a Roth TSP(the rest being taxable index funds)?  Would I just roll my entire Roth TSP into a Roth IRA when I retire? Would the entire rollover be viewed (for tax purposes) as a contribution and therefore not taxed.  Any special/recommended tips or tricks regarding the 5 year rule here?  The plan (roughly) is to have a $40k annual expense at retirement, pension will cover half of that, have 1/2 mil in Roth TSP at retirement age(41), have roughly 200k in taxable accounts by retirement to fund a potential 5 year gap.   Can anyone provide an answer/advice/sources on the Roth TSP to Roth IRA rollover/"ladder".  Any further/general guidance on my overall plan would also be greatly appreciated.  Thanks.
Grunt, welcome to the forum.

Some reading that might be helpful:
 - https://www.kitces.com/blog/understanding-the-two-5-year-rules-for-roth-ira-contributions-and-conversions/
 - http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/
 - http://the-military-guide.com/

Two thoughts:
1) If you don't have a Roth IRA already, start one so that five year clock will have run by the time you retire
2) Didn't see an expected amount in a traditional TSP at retirement.  With dual income now, it is likely that at least some (if not most) of your TSP contributions now should be traditional.  You might look at http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/ and links therein.

Grunt

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Re: military/TSP question for early retirement
« Reply #2 on: February 28, 2016, 10:38:42 AM »
Thanks for the links MDM!  Sorry for not doing a complete case study format, I wanted to keep things simple to focus on the question of rolling a Roth TSP to a Roth IRA.  The Kitces article was quite helpful, and showed me the importance of opening the Roth IRA now as you recommended.  I have read a ton of Nords' articles from the military guide. (paging Nords if you're reading this...any insight on rolling Roth tsp to Roth IRA for early (age 41) retirement?)  I have read that rolling a Roth TSP to Roth IRA is doable, I just haven't seen any sources cited to be sure.  Assuming it is doable. Could I just contribute to Roth TSP for the next 15 years, then (at age 41), roll it into a Roth IRA and be able to draw the funds before age 59 1/2 since the rollover would be a "contribution"?

As for the Traditional vs Roth TSP, roughly 1/2 of my income is not taxed, and the wife has a 529 and 403b that are both traditional, no Roth option.  We stay in the 15% bracket and I already have my TSP contributions set for Roth.  So if sticking with Roth is doable for FIRE, I will do so; if not, I need to know now so I can switch to traditional and get ahead of things.

MDM

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Re: military/TSP question for early retirement
« Reply #3 on: February 28, 2016, 04:09:49 PM »
Could I just contribute to Roth TSP for the next 15 years, then (at age 41), roll it into a Roth IRA and be able to draw the funds before age 59 1/2 since the rollover would be a "contribution"?
You will be able to draw funds you contributed to the 401k.  Earnings must wait until 59 1/2 (unless you don't mind paying the regular plus 10% tax).

Quote
As for the Traditional vs Roth TSP, roughly 1/2 of my income is not taxed, and the wife has a 529 and 403b that are both traditional, no Roth option.  We stay in the 15% bracket and I already have my TSP contributions set for Roth.  So if sticking with Roth is doable for FIRE, I will do so; if not, I need to know now so I can switch to traditional and get ahead of things.
If you expect your withdrawal marginal rate will be less than your current marginal rate (probably 15%, although "bracket" is not always the same as "marginal rate"), you should put more into traditional now.

There is certainly guesswork involved in estimating your withdrawal rate.  If you want to make an educated guess at what you should do now, however, I don't know any other way.

Nords

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Re: military/TSP question for early retirement
« Reply #4 on: February 28, 2016, 05:53:24 PM »
Thanks for the links MDM!  Sorry for not doing a complete case study format, I wanted to keep things simple to focus on the question of rolling a Roth TSP to a Roth IRA.  The Kitces article was quite helpful, and showed me the importance of opening the Roth IRA now as you recommended.  I have read a ton of Nords' articles from the military guide. (paging Nords if you're reading this...any insight on rolling Roth tsp to Roth IRA for early (age 41) retirement?)  I have read that rolling a Roth TSP to Roth IRA is doable, I just haven't seen any sources cited to be sure.  Assuming it is doable. Could I just contribute to Roth TSP for the next 15 years, then (at age 41), roll it into a Roth IRA and be able to draw the funds before age 59 1/2 since the rollover would be a "contribution"?

As for the Traditional vs Roth TSP, roughly 1/2 of my income is not taxed, and the wife has a 529 and 403b that are both traditional, no Roth option.  We stay in the 15% bracket and I already have my TSP contributions set for Roth.  So if sticking with Roth is doable for FIRE, I will do so; if not, I need to know now so I can switch to traditional and get ahead of things.
Thanks for paging me.  I'm a little slow on searching this week.

Yes, Michael Kitces' advice is valid for Roth TSPs.  Once you roll it over to a Roth IRA then you can withdraw the amount of the rollover (but not the gains since the rollover).  I'd check this next claim with a CFP to be absolutely sure, but I think if the Roth IRA has already been in existence for five tax years then you can start withdrawals from the rolled-over Roth TSP as soon as it's in the Roth IRA.  If you roll the Roth TSP over to a new Roth IRA then I'd wait five tax years.

But keep in mind that when you retire from active duty you'd first spend down your taxable savings/investments, then your Roth IRA contributions, and the principal of any traditional IRAs or 401(k)s that you converted into a Roth IRA.  Only after you use up all of those other choices would you tap the funds that were compounding in your Roth TSP at the world's lowest expense ratios. 

And now a behavioral finance tip:  all of this conversion and penalty-free early-withdrawal advice is legal and it works.  However I doubt that you'd end up needing it before age 59.5 because you're saving enough in taxable accounts (while you're on active duty) that those taxable funds (along with your pension) will bridge most of the gap.  Military retirees have tremendous human capital, and while you're ER'd you're almost certain to find some sort of income from part-time work or an interesting bridge career or an entrepreneurial hustle.  But when someone is in their 20s it's a lot easier to persuade them of the wisdom of Roth TSP rollovers than it is to convince them that they'll have more money than they need.

So now you're good either way. 

Keep up the high savings rate-- if you can invest 40% of your gross income for up to 20 years then you won't even need the active-duty pension to be financially independent.  The reason I bring this up is because I think planning to stay on active duty for 15 more years is a ludicrous fantasy.  Instead you'll make life easier on yourself if you take it one obligation at a time.  As long as you're feeling challenged & fulfilled, then stay on active duty.  But when the fun stops, whether that's at 10 years or 18 years, then be ready to leave active duty for the Reserves or National Guard.  You'll still be able to earn a Reserve/Guard pension at age 60, and in the meantime your quality of life in the Reserves/Guard will take a huge leap upward.  You'll earn enough from your drill pay and any part-time bridge career to cover the savings gap until your pension starts at age 60.  It's also a lot easier to enjoy the Reserve/Guard for 30 than it is to stay on active duty for 20.

The key is keeping up the high savings rate until you retire, because then when the assignment officer makes that unrefuseable offer you don't have to feel obligated to grimly clench your jaw and stick it out to 20.


One final point:  your total military compensation is lightly taxed, and it usually makes more sense to pay your taxes now and contribute to the Roth TSP (and Roth IRA).  But if your spouse's income skews your income up into the 25%-28% personal income tax bracket, then it may be better to contribute to a traditional IRA and save a little on taxes.  When you retire (whether or not you have an active-duty pension) then you can convert a little of the traditional TSP or IRA to a Roth IRA each year as part of the ladder.

But if you're in the 15% tax bracket now, even after Roth TSP and Roth IRA contributions, then I think you're doing "good enough".
« Last Edit: February 28, 2016, 05:57:19 PM by Nords »

Grunt

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Re: military/TSP question for early retirement
« Reply #5 on: February 28, 2016, 07:08:26 PM »
Thanks Nords for the help, expert behavioral finance tip, and all you do for the military community! I definitely hear you on not chasing the pension; although that is like asking someone to avoid looking at an elephant in a room.  Ironically, if I do leave the military, my dream job would be to become one of the civilians that teaches military finance classes and newcomers briefs.  That way I could get through to the thick skulled people like I was when I came in...Wish I had known 5 years ago.  The pension is a factor, but not the end of the world if I don't make it that far; wife is working on her Masters and loves her job, says she would be equally happy retiring early or not. 

Well now that  I have my retirement side of the house "figured out", it's time to navigate the wife's...she is a teacher and has a hybrid retirement plan which means twice the information to digest...and a 403b as an additional option. We just got done paying off $44k in student loan debt (took 11 months from the time I found MMM blog until freedom) so now I am voraciously trying to figure out the best places to throw all that extra money. I will get a good start, then probably submit a full case study to refine things in a while.  Thanks again Nords and MDM!

mgnhrvth

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Re: military/TSP question for early retirement
« Reply #6 on: June 21, 2016, 08:27:06 AM »
Below is the latest Air Force message. I just took the on-line BRS JKO course - it was well done and value-added. This course and future courses will also be available at the Military OneSource website to facilitate access by Service members and their families.

On 1 January 2018, the Department of Defense will implement the new Blended Retirement System (BRS) enacted by Congress in the Fiscal Year 2016 National Defense Authorization Act.  As this implementation date gets closer, it’s extremely important for Airmen at all levels to begin familiarizing themselves with the new BRS as it will impact everyone.  All Airmen accessed after 1 January 2018 will automatically be enrolled in the new BRS and those Airmen with 12 or less years of service as of 31 December 2017 will have the opportunity to “opt-in” to the new system if they choose.  Whether you fall into one of these categories or supervise someone who does, education on the new system is paramount.

The first step will provide education for leaders at all levels on the basics of the BRS.  This training is now available through the Joint Knowledge Online (JKO) BRS Leader Training Course (http://jko.jten.mil).  We highly encourage all supervisors to take this 30-minute training to familiarize yourself with the BRS.  Although geared towards leaders, the Leader Training course is available to all Airmen and we encourage anyone looking for additional information to take the course.  Specific courses targeting newly accessed Airmen and Financial Counselors will be available in the future.  A specialized course for Airmen eligible to opt-in to the BRS will be mandatory and will be available starting in 2017.

Airmen are our most important asset and preparing them for these impactful changes is a leadership priority.  We are counting on and thank each of you for leading the way and taking care of our Airmen.  For additional background information on BRS, please visit http://militarypay.defense.gov.

mcneally

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Re: military/TSP question for early retirement
« Reply #7 on: June 21, 2016, 11:09:01 AM »
I don't expect this matters much, but when you rollover your TSP to an IRA, you'll have to rollover all of it. The reason being that for a TSP (or 401k) distribution when part of your account is roth and part is traditional, you do not get to decide which you want to distribute from, it is done proportionally based on the balances. Once you roll it over to separate roth IRA and traditional IRA, you can make the distributions from each as appropriate.