Author Topic: Does my roth TSP plan work or how to get $40,000?  (Read 850 times)

Left

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Does my roth TSP plan work or how to get $40,000?
« on: November 21, 2018, 07:24:32 PM »
I haven't been active on here, my goals diverted from the minimalism path, but not the FIRE part. So now I'm back to ask if my current plan would work for FIRE, leaving aside the minimalism part.

About myself: Fed employee, plan to work until I hit FIRE on my terms, won't be for another decade. Would have small deferred pension say $10,000/year, no clue what my high three would be so using current salary, but the amount is beside the point outside of having a small pension at 60.

I'm planning to do a roth TSP because from what I have read, between RMD, social security and pension; the roth route seems to be better? I realize that pension and social security would be lower due to shorter working career but if they total around $20,000/year, it already puts me into the next tax bracket so I wouldnt have the option of the 0% tax strategy that seems to be favored on FIRE blogs.

I know I could delay social security to 70, but hopefully I would have $1 million between taxable/tsp by then or my entire FIRE plan is out the window so lets say I have that much at 60 with it being evenly split between taxable/tsp. So between 60 to 70, I would have to drain $500,000 as much as I can to avoid RMD and social security at 70 but still have a pension income. How can someone do this without a large tax hit?

If I FIRE at 50 to give myself an additional decade to drain TSP, I would still have to do it at 4% swr rate and to keep taxes low, I still couldn't do a large conversion ladder each year, meaning I might have to work a few months a year to make up difference (may not have enough at 50 for a full FIRE)

So my current plan is to do a roth TSP and if I FIRE at 50, I can pull out $18,000/year from the roth TSP without any ladder since it would be considered contributions from the past years of working. This made sense in my mind because if the TSP at 4% was $18,000 anyways, I would rather take it tax free instead of a conversion ladder from traditional tap for the same $18,000 and pay taxes on it. this lets me use the other half in taxable account for long term capital gains.

Sorry for a long winded question, is there a better way to get $40,000/year as a single person at a lower tax bracket? A lot of the FIRE bloggers writing about minimizing taxes are based off deductions for a couple. If $18,000 of it were tax free from roth tsp, that would be my nonexistent "spouse's" portion, if I later marry, I will have even more play room. None of the FIRE articles I found take into account a pension, small as it might be, but it would still put me into the next tax bracket.

PS: I know roth tsp has RMD at 70 as well, but it would be tax free so I am not too concerned about it for tax planning, at least it would be less than a straight traditional tsp.

PPS: Assume I can't fire earlier than 50, what would be the best way to get my $40,000 if my egg was split evenly between tsp/taxable while avoiding a large tax penalty when social security/pension/rmd hits.

edit: I just realized I didn't post this in the tax subsection, can someone please move this if it is better there?
« Last Edit: November 21, 2018, 07:51:37 PM by Left »

Left

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Re: Does my roth TSP plan work or how to get $40,000?
« Reply #1 on: November 21, 2018, 09:03:12 PM »
My two options:
Traditional TSP
20% tax while working > FIRE for 20 years and pay 0% tax until age 70, go back to paying 20% when rmd/ss/pension kick in

Roth TSP
25% tax while working > FIRE and pay 0% tax to age 70 > 15% tax accounting for pension and rmd/ss

is saving 5-10% on taxes while working worth it if someone is planning to FIRE and only work half of a normal career length? It is kind of like taking a 30 year mortgage with a higher interest rate, but paying off the house in 15 years. The small interest rate savings from a 15 year mortgage isn't worth the flexibility of  30 year mortgage and paying it off early.

The tax savings from a traditional vs roth is the same way right? Because people aiming for FIRE have fewer tax paying years, does saving 5-10% now negate the retirement years where you spend more time in than you did during the working years?

the GoCurryCracker article I found saying why Roth sucks... did not seem to account for fewer working years, is this important to factor in? I can see why roth sucks if someone worked 30-40 years because it adds up, but given FIRE, does it still play as big of a difference? His last dollar in and first dollar out argument didn't work for me because RMD/SS/pension is first dollar in retirement.
https://www.gocurrycracker.com/roth-sucks/
« Last Edit: November 21, 2018, 09:27:10 PM by Left »

Dragonswan

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Re: Does my roth TSP plan work or how to get $40,000?
« Reply #2 on: November 26, 2018, 07:11:18 AM »
I say do the Roth.  You'll get regular step increases over the next decade that will increase your high 3 for pension and possibly push you into the next tax bracket.  Because of the new tax laws, taxes are on sale until 2025.  We don't know if Congress will extend them, but we do know the default is the taxes resetting higher.  So by paying taxes now while they are on sale, if they go back up you win.  Plus what previous posted said.  Lastly, you can get around the RMD for TSP by rolling your Roth balance to a Roth IRA when you turn 70 if you think the RMD will be more than you need/want to withdraw.

simonsez

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Re: Does my roth TSP plan work or how to get $40,000?
« Reply #3 on: November 26, 2018, 07:45:32 AM »
PS: I know roth tsp has RMD at 70 as well, but it would be tax free so I am not too concerned about it for tax planning, at least it would be less than a straight traditional tsp.
Roth IRA does not have RMD.  You could move Roth TSP to Roth IRA when you separate.

A lot in the news this past year about the pro rata withdrawal aspect going away (starting Sep '19) in case you had both traditional and Roth in TSP if you wanted to treat them as independent accounts moving forward.  Tax brackets and rules always change, I like to hedge a little.  YMMV.

It sounds like you are winning the game no matter what you choose (perfect is enemy of good).  Congrats!

Boofinator

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Re: Does my roth TSP plan work or how to get $40,000?
« Reply #4 on: November 26, 2018, 08:13:42 AM »
For early retirees (the FIRE crowd), Traditional has a very high chance of beating the Roth over the long term.

First off, Traditional and Roth have equivalent expected final values when pulling distributions only if the marginal tax rates are equal when contributing and withdrawing (assuming of course the same investment strategy for both). To illustrate, let's say you have $1000 to invest and a 25% marginal tax bracket. Let's say you put it into Traditional, it doubles over 20 years to $2000, then you pull it out at a 25% tax bracket you end up with $1500. Now consider Roth: your $1000 is taxed initially so you can only put in $750, but then it doubles over the next 20 years and you end up with $1500. Thus, these two are equivalent at equal marginal tax brackets.

The thing with FIRE, you are very likely to have lower tax brackets in retirement than you have in your working career. Let's say you roll the Traditional TSP into an IRA, then you begin a Roth conversion ladder to support your early FIRE years without having to pay the IRS penalty for early withdrawals. Your effective tax bracket during these years is almost guaranteed to be lower than today (unless the government makes major changes to the tax code). By the time you hit RMD stage, you should have much lower savings in the IRA, but you'll also start receiving your pension and social security to cover the gap.

Left

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Re: Does my roth TSP plan work or how to get $40,000?
« Reply #5 on: December 02, 2018, 11:59:42 AM »
Thanks for the replies

I think the traditional TSP might edge out, but it still seems like a lot more work than I wanted :(, at least for this next year, while the tax rates are slightly lower, I will put money into the roth TSP for now.

I know, I asked advice and didn't take it :( But I was playing on excel and I find it hard to make work without a lot of micromanaging the finances. To stick to the 4% rule, I'd have to take out $40,000 entirely from the traditional TSP side if my goal was to drain it by RMD. I didn't see an easy way to "prime" the IRA pipline at $40,000/year conversion while also generating $40,000 to live on from taxable account. This would put my income near the same tax bracket (minus standard deduction/capital gains) so I'm not coming out ahead. To keep taxes down, I'd have to do smaller conversions, and I don't see how I can do it smaller while being able to drain the traditional IRA enough.

If I were to FIRE earlier, this maybe possible, but I don't see how to do it "that late" in the game. It takes 5 years to prime IRA pipeline from my understanding, so it would already take up half the years until pension kicks in. Can I really drain that much money in 5 years and stay in a lower tax bracket? This was what I couldn't figure out playing in Excel.

So my thinking was if I went roth, that would be me "priming" it before FIRE, since I can take out contributions directly.  Because the only way I could come up with to make the IRA pipeline work was somehow having $200k (5 years of waiting) in a savings account and not equities not generating so not much income for taxing purposes. But that brings up the issue of do I want to keep that much money out of play? Keeping that much money on the bench would delay the portfolio growth by that much on the taxable side

If I went the route as the articles I found did, IE IRA conversion to the 10% income tax bracket, then sell stocks at 0% long term cap rate to make up the remaining $40,000. When I factored in the pipeline waiting period, the amount I would be able to convert wouldn't let me drain the IRA enough by RMD. And after pension kicks in, that conversion amount would be that much smaller to stay in a lower tax bracket, making draining the IRA that much harder. I couldn't get around the 5 year waiting period while in the lower tax bracket. Since I couldn't stay in a lower bracket, is there a point to doing a traditional IRA?

Or could someone else run the numbers if they have a handy calculator/excel pre-made? I don't know if anyone has this much time to tinker with someone else's FIRE plan that isn't their own
« Last Edit: December 02, 2018, 12:25:24 PM by Left »

Boofinator

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Re: Does my roth TSP plan work or how to get $40,000?
« Reply #6 on: December 02, 2018, 12:28:32 PM »
Another option that avoids the five year pipeline and penalties is the SEPP:

https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-substantially-equal-periodic-payments

That being said, I don't know how your spreadsheets came out with a minimal difference between Traditional and Roth. Traditional will help you put thousands of dollars extra per year into your taxable account. (If you have $24k pre-tax to invest, you can either (1) put $18k in Roth and $6k to taxes or (2) $18k in Traditional, $4500 in taxable, and $1500 to taxes.) I don't know how old you currently are, but that amount of money can fund a good chunk if the pipeline.

MDM

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Re: Does my roth TSP plan work or how to get $40,000?
« Reply #7 on: December 02, 2018, 01:07:55 PM »
So between 60 to 70, I would have to drain $500,000 as much as I can to avoid RMD and social security at 70 but still have a pension income. How can someone do this without a large tax hit?
Note that you don't need to "avoid RMD" completely.  E.g., if you take $200K net out of the traditional account, the RMD on $300K is less than $15K/yr for the first 8 years.

Dragonswan

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Re: Does my roth TSP plan work or how to get $40,000?
« Reply #8 on: December 03, 2018, 08:24:40 AM »
Also something to consider:  What you pay for Medicare part B is based on income from the previous year.  So if you go traditional, whatever you withdraw gets counted for Medicare premium purposes.  Roth, since it's not taxed, doesn't count as income and won't push you into higher Medicare part B payments.