Author Topic: Roth TSP & Tax Strategy  (Read 324 times)

Beach_Stache

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Roth TSP & Tax Strategy
« on: September 19, 2017, 02:00:52 PM »
Hi all,
I have a few questions for the fed's out there that are utilizing the Roth TSP, but first a little background:
37 years old, 9 years in federal service, hoping to get to 30 years and retire at 58, unless I get an early buy out at 50 and want to retire.  I enjoy my job and could see myself doing it for a while.  I max out my TSP at $18k/year and then the matching, as well as my Roth IRA at $5500/year.

DW is going to be 39 in a few months and she maxes out 401k as well and just started maxing out her Roth IRA this year. 

We both plan to continue maxing out both as long as we are working.

We have 3 kids so saving in 529 plans as well and our investment accounts look like this:
TSP - $450k (my account) - contribute $18k/year and get $5.5k/year in matching contributions
401k - $200k (wife's account) - contribute $18k/year and get $6k/year in matching contributions
Roth IRA - (my account) - $118k, contribute $5.5/year
Roth IRA - (wife's account) - $5.6k, contribute $5.5k/year
Post-Tax account - $60k, contribute $7.2k/year
Emergency Savings - $15k, contribute $4k/year
529 Accounts - 3 kids accounts, $45k total, contribute $10k/year total

If I make it 30 years in the gov't my pension will be around $33k/year starting at age 58.  So we've done a pretty good job saving, I've been maxing out my retirement accounts really since I started working at 23 and have done so every year since.  Until now all I've really been focused on is saving and investing in index funds.  I play with compound interest calculators a lot and have been thinking about tax strategy at retirement if DW and I retire at 58, and even if she retires at 50 and me at 58 and we start converting some of the 401k/TSP money into Roth IRA money at a lower tax bracket.  We are at the top of the 25% tax bracket now and have been trying to keep taxes as low as possible, but at $650k combined in our TSP/401k, even if we didn't contribute another cent, in 20 years at 8% that would be worth over $3M, and even if we took out each year I think we would be pushing a higher tax bracket at retirement with my pension and conversion/withdrawl's from TSP/401k.

That leads me to believe that I should start looking at doing a Roth TSP next year and do that going forward.  Here are some of the issues/questions I have though:

1. I believe our MAGI is about $150k, maybe $155k, our combined income before taxes is about $220k, but we both max out our retirement ($36k), have normal mortgage and child deductions, $5k child care deductions, health care, etc.  I'm pretty sure our MAGI is about $150k or so.  So if I start doing a Roth TSP, our MAGI would go up $18k, right?  That would put us at about $173k which would still give us a bit of room before we start phasing out on Roth IRA contributions.  I think that's correct but that's my first concern, please correct me anyone if I made a mistake in my math.

2. If I get a promotion and make another $15-20k/year in a few years that would most likely push our MAGI up to around $190k if I switched to a Roth TSP and maxes out, which I think means that we could no longer contribute to our Roth IRA's, or are at that phase out point, right?

3. At retirement, can you convert a Roth TSP to a Roth IRA?  Myself and DW both have Roth IRA's and I would like to be able to rollover to a Roth IRA, but really thinking about it, I guess it wouldn't be much of an issue if I couldn't rollover and had to take RMD's from the Roth TSP since they are not taxed, right?  I'm pretty sure Roth TSP has RMD's anyways.

4. I think if I switched to a Roth TSP and only had the $500/month matching and DW had her $2k/month for the next 10 years and then she retired that we could still start slowly converting her 401k to Roth during the 50-70 ages and then take RMD's from our TSP/401k and still be able to stay in the 28% tax bracket when those RMD's start hitting, does that sound about right?

I realize we won't always get 8% in the stock market but just trying to convert my thinking from "saving & investment" to "tax strategy". 

Anyone who is in a similar situation or has done the math and is now doing Roth TSP I'd love to get your input!
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MDM

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Re: Roth TSP & Tax Strategy
« Reply #1 on: September 19, 2017, 03:57:21 PM »
1. I believe our MAGI is about $150k, maybe $155k, our combined income before taxes is about $220k, but we both max out our retirement ($36k), have normal mortgage and child deductions, $5k child care deductions, health care, etc.  I'm pretty sure our MAGI is about $150k or so.  So if I start doing a Roth TSP, our MAGI would go up $18k, right?  That would put us at about $173k which would still give us a bit of room before we start phasing out on Roth IRA contributions.  I think that's correct but that's my first concern, please correct me anyone if I made a mistake in my math.
Itemized deduction (e.g., mortgage interest) will not affect your MAGI.  See Modified Adjusted Gross Income for Roth IRA Purposes.

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2. If I get a promotion and make another $15-20k/year in a few years that would most likely push our MAGI up to around $190k if I switched to a Roth TSP and maxes out, which I think means that we could no longer contribute to our Roth IRA's, or are at that phase out point, right?
But you could do a Backdoor Roth IRA.

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3. At retirement, can you convert a Roth TSP to a Roth IRA?  Myself and DW both have Roth IRA's and I would like to be able to rollover to a Roth IRA, but really thinking about it, I guess it wouldn't be much of an issue if I couldn't rollover and had to take RMD's from the Roth TSP since they are not taxed, right?  I'm pretty sure Roth TSP has RMD's anyways.
Don't know if the rules have changed, but ~5 years ago: Q When I take distributions from the Roth TSP, can I choose where I want the withdrawal to come from, the traditional TSP or the Roth TSP?  A No, they will come out proportionately. If you had $150,000 in TSP and $50,000 in Roth TSP upon taking a withdrawal of $1,000, $750 would come from TSP and $250 from the Roth TSP.

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4. I think if I switched to a Roth TSP and only had the $500/month matching and DW had her $2k/month for the next 10 years and then she retired that we could still start slowly converting her 401k to Roth during the 50-70 ages and then take RMD's from our TSP/401k and still be able to stay in the 28% tax bracket when those RMD's start hitting, does that sound about right?
See Investment Order for thoughts on estimating future marginal taxes.

See Most TSP Participants Should Switch To the Roth TSP.  Of course, YMMV.

In today's dollars, and assuming your kids are no longer dependents and you take the standard deduction, an AGI of $173,900 is the top of the 25% bracket, and $254,150 is the top of the 28% bracket.  I'll leave the math to you on conversion amount above salary. :)

In any case, congratulations and keep up the good work!

Beach_Stache

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Re: Roth TSP & Tax Strategy
« Reply #2 on: September 20, 2017, 08:32:47 AM »
Thanks for the reply!  I guess I really need to do some math and project what my taxes might be during the years of 50-58 and 59-70 and how much I expect to be converting from TSP/401k to Roth IRA each year and if it's better to just take that tax hit now rather than be in a higher tax bracket later. 

I guess another advantage of doing a Roth TSP is if I'm in the 25% tax bracket now, being able to contribute $18k/year post tax is really like being able to contribute $22.5k/year pre-tax, so maybe that's the way I need to look at it in terms of being able to put more money in our retirement accounts.
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MDM

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Re: Roth TSP & Tax Strategy
« Reply #3 on: September 20, 2017, 11:28:56 AM »
I guess another advantage of doing a Roth TSP is if I'm in the 25% tax bracket now, being able to contribute $18k/year post tax is really like being able to contribute $22.5k/year pre-tax, so maybe that's the way I need to look at it in terms of being able to put more money in our retirement accounts.
There can be a slight advantage to Roth, even at equal marginal contribution and withdrawal rates, if you are maxing out your retirement accounts.

For small enough contributions, the commutative property of multiplication means traditional and Roth have exactly the same result for equal marginal rates.

Of course, if maxing the contributions, you don't invest the pre-tax traditional savings at all, then Roth will be better.  But that's an issue separate from "Roth vs. traditional" itself.