Partial Double Transfer Of TSP Thrift Plan Funds
Man, trying to work my way around these IRA rules makes me feel like I am trying to find my way through a land mine. But the information passed on this forum has been the best and most meticulous that I have found anywhere. I really appreciate ya’ll.
Anyway, every time I think I understand all the details of my situation I bump into a new problem. So, I would like to run my plans by you and see if there is anything I am over looking. Or perhaps you’ll see a cleaner more efficient way at completing my desired goal.
I am retired and 56 years old. I have a Federal Thrift Savings Plan (TSP) account that is eligible for rollover (transfer). All of the funds in this TSP account are pre-tax dollars.
In an effort to minimize the long-term taxes on these funds I would like to transfer part of the TSP balance by a direct transfer to a traditional IRA at one of the large financial houses. (The TSP only allows one partial withdrawal, thus the reason for the double move described below.)
At first I would place these transferred funds into a (IRA) money market fund with the institution. Then a few days later I want to transfer out 50% of the new IRA (money market fund) into a Roth invested in a mutual fund with the same financial house. I do realize that the portion transferred to the Roth in 2009 will be taxed this tax year.
Then shortly after the New Year I want to transfer the entire remaining balance of the traditional IRA into the same Roth that was just created. Of course my goal in all this convoluted activity is simply to spread my tax liability into tax years: 2009, 2011, and 2012.
My concerns are to make sure I am not planning on making any transfers that may be restricted by the 30 day or 1 year limits on transfers. The TSP transfer would be a direct transfer to the new custodian. And then the transfer from Traditional IRA to the Roth would be with the same institution.
And I am assuming there is no disadvantage to making the second Roth transfer into the exact same Roth account that was created by the previous move?
Am I missing any thing? Or any further comments or thoughts would be greatly appreciated. Sorry about the lengthy post (especially for my first)!
Thank you for your time and efforts,
Paul
Permalink Submitted by Alan Spross on Mon, 2009-10-26 04:55
Paul,
Are you able to supply your living expenses at least until age 59.5 AND the tax bills for these conversions from other non retirement account sources? A key issue is avoiding the 10% early withdrawal penalty. If you separated from employment in the year you turned 55 or later, then any distributions you take directly from the TSP are taxable, but penalty free. I am fairly sure the TSP provides the option of periodic withdrawals if you need them.
As for the conversions, there is no problem with the one rollover limit per IRA because conversions do not count toward that limit. The initial transfer from the TSP also does not count because it does not come FROM an IRA. For your 2009 conversion, the 100,000 income limit applies for conversion eligibility, but the converted amount does not count in determining the amount of AGI. If you qualify and were retired most of the year, then perhaps your 2009 tax bracket will not be too high.
For the 2010 conversion, it would be best to convert into a new Roth IRA. It makes things much simpler in the event you want to recharacterize either all or part of the 2009 or 2010 conversions.
The main issue here is how much you should be converting to a Roth, and at what rate you do the conversions. While your current tax bracket vrs what you expect your bracket to be in future retirement years is the key factor, there are others to consider as well, and there is not nearly enough info to determine that here.
Permalink Submitted by Anonymous (not verified) on Mon, 2009-10-26 07:25
Alan,
Thank you for the fast reply and bringing up the excellent points that shall be considered. And I have pretty much examined the various aspects of current tax-bracket -vs- future brackets -vs- income. And of course hoping that the current low balance of the TSP account (after the market dive) would be a low point. Which of course would make it a good time to apply the taxes.
The TSP withdrawal rules are rather restrictive that is one of the points for taking advantage of this opportunity to convert. Once in an IRA and even more so in a Roth, the withdraw options are much less restrictive.
With the TSP I am allowed only ONE partial distribution. Then after that point I can take the remainder, or start systematic monthly distributions (not sporadic). And of course they have an annuity conversion that can be selected. And, you are, of course correct on the benefit of the lower age requirement to avoid penalties with the TSP.
But, by the way time flies, I will be to the 59.5 point faster than I even wanna know. Anyway, I am able to supply my living expenses without even looking toward the funds in question. And yes, I can write a check (from unrestricted funds) to the IRS for the tax bills generated from these conversions. Make note, I didn’t say I won’t have a tear or two rolling down my cheeks while writing that check!
And yes, I understand the income limit for conversion eligibility for 2009. I should have plenty of breathing room without bumping up against that issue. I do understand that it is still somewhat of an unknown for the tax rates/brackets that will be applied in 2012 for that portion of the conversion. That is partially the reason for wanting to “hedge-my-bet” by taking the tax hit on a chunk of the monies in 2009.
I expect these few years to be the lowest tax brackets I will see for awhile. Because: #1) I am convinced that taxes will have to go up. #2) I will have an additional retirement annuity commencing in 2013, then Social Security a couple years after that. Therefore, the dates of the rollover being taxed in my lower income years seem to dovetail with the timing of these events.
And no, I had no earned income this year so my taxes (taxable income) for 2009 will be lower than I have been used to. And for 2010 I will be receiving a taxable windfall in the neighborhood of $20,000. This would again dovetail right in to the “delay-option” on taxing conversions – thus skipping 2010, the year of my windfall.
Thank you for mentioning the issue of separate Roth accounts for the different conversion years. I read that point somewhere else, I don’t expect to recharacterize these accounts but I realize that I don’t always know what the future may deal us. So, that is indeed a good point and furthermore, it is free and effortless to accomplish so I will keep them separate just in case I want to use that backdoor.
I appreciate your input and even more so your comprehensive and precise information and complete answers.
Thank you
Paul