Can Thrift Savings Funds be converted to Roth IRA or Life Insurance

Submitted by raul vargas on Sun, 2016-06-05 15:58

I am 65 years old, retired and receiving retirement annuities including Social Security. I also have a Thrift Savings account which I will have to use if I get to live past age 70 1/2. Are the conversions of iRA to Roth IRA or Life Insurance apply to my situation?

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Permalink Submitted by Alan - IRA critic on Mon, 2016-06-06 03:16

You could do either, but there is no way without considerable additional data to tell whether either would be of benefit for you. Both conversions and distributions to purchase life insurance require paying large amounts of taxes up front. Conversely, if you were to just take your RMDs from the TSP or from an IRA rolled over from the TSP, you would probably be paying taxes at a lower rate since RMDs start out at less than 4% of the account value. If in a particular year you are able to convert at a lower rate than your future marginal rates in retirement, partial conversions in those low income years would be of benefit. The first conversions you do would be of more benefit than later additional conversions since each conversion lowers your future RMD amounts. Once you lower your future RMD income enough to reduce your future marginal rate, further conversions would cost you more than they are worth. Making the decision of how much to convert, if any, requires detailed number crunching.

Permalink Submitted by William Tuttle on Mon, 2016-06-06 14:47

I urge caution in withdrawing from the TSP. Especially, if it is being encoruaged by salesmen and/or investment advisors. They are not looking after your best interests. They specifically target TSP retirees and are looking to line their and their company’s pockets.
Many experts think the TSP is arguably one of the finest tax-advantage retirement vehicles available. It has some of the lowest expense ratios and the excellent G Fund which can be very useful for RMD staging.
Unfortunately, the TSP has rather draconian withdrawal restrictions. For example, you can only make one partial withdrawl.
So the decision to take a partial or full withdrawal and roll it over to an IRA should not be taken likely. The rollover to a traditional IRA should generally be a seperate issue from the Roth conversion. If you did a direct rollover to a Roth IRA that would be your one partial withdrawal and taxed in one year. Whereas, if you rolled over a fixed amount to a traditional IRA, you could convert a smaller amounts to a Roth each year. As suggested by Alan, this would be more tax efficeint manner.
A personal opinion. If you are rolling over TSP funds to an IRA, I would only do it with a reasonably low cost brokerage/mutual fund provider such as Vanguard, Fidelity, Schwab, etc… I would absolutely avoid insurance companies and full service brokers.
A good general rule is: Investments should be bought not sold. What this means, is that you should be proactive, educate yourself and choose the option(s) that fit your goals and needs. If someone comes to you and says “such a deal I have for you”, run like hell.