Investment showdown -- beyond the Roth, SDP, & TSP

[Jughead]

Does that still work if I already have a Roth IRA?

Having one, two, or seventeen Roth and/or traditional IRAs is irrelevant. So long as you observe annual limits, you can make your contributions to a single account, to a different account each year, to multiple accounts in a given year, mix/match new accounts with existing ones, etc.

As to your question, Nunya nailed it (along with your mom's back door, evidently)--since you seem skeptical, let me try from a different POV:

There are two types of Individual Retirement Accounts (IRAs): Roth IRA & IRA (aka "traditional IRA"). Unless you're trying to do something complicated (contributing or owning real estate, precious metals, options, etc.), contributing to your IRA(s) is pretty simple: find an authorized custodian (pretty much any brokerage, though there are certainly other avenues), open the account, make your contributions, get rich slowly.

While there are two types of IRAs, sometimes it's easier to think in three categories: deductible contributions; non-deductible contributions; and Roth (non-deductible) contributions. The first two are simply contributions to a traditional IRA, and deductibility/non-deductibility is (mostly) determined by income limits. There is NO income limit for making an IRA contribution; there ARE income limits for contributing to a Roth and/or for making a deductible (traditional IRA) contribution. Also, as you've discovered, those limits go way down when married/filing separately.

Loophole ("back door") for the last 8-ish years allows anyone--regardless of income--to convert from a traditional to a Roth IRA. Make contribution to IRA, convert to Roth, simple. If your contribution (or portion of it) was deductible, you'll pay ordinary income tax on it; you'll also be taxed on any gains/deduct any losses you may have realized on the converted amount. This all applies to any existing balances you may choose to convert as well. Your custodian absolutely knows how to do this and will have you sign a form; only decisions you have to make is how much of the balance to convert and if you want them to figure the taxable amount or if you want to do it yourself

So, for just about anyone wanting to contribute to an IRA but who exceeds the deductibility limit, it's a no-brainier: you can't deduct it anyway, so get it into the Roth via this method. If you can deduct your contributions, it's much more complicated, since you have to evaluate the current value of the deduction vs the assumed future value of Roth treatments--in your case, it sounds like you've already done that and want the Roth (which is probably the smart answer for most military folks). Either way, based on what you've told us, this sounds like what you want to do.

Hope this helps!

ETA: minor clarification

Edited February 26, 2014 by Jughead

[Butters]

Is there's limit to the number of times you can back door this thing? If the answer is no, then why do we have Roth IRA contribution limits in the first place?

[Jughead]

Is there's limit to the number of times you can back door this thing? If the answer is no, then why do we have Roth IRA contribution limits in the first place?

No limit, at least until the law allowing it is repealed/superseded. The Roth limits predate the back door; the back door simply didn't address the limits, so they're still in place.

And, you're right, in effect, there is no limit, you just have an additional hoop to jump through to keep the IRS happy. No, it doesn't really make sense....

[Butters]

Wow, I always thought the limit was the limit. So, as I understand it, you can covert your TSP to ROTH TSP right? If so, I am in luck this year. Long story short I am deployed most of the year and I am going to be getting close to a 24k non-refundable tax credit this year. So, I need some good tax liability to get the full 24K. Guess now I need to figure out just how much tax I would owe on my non-deferred TSP contributions.

Why isn't this shit just easy?

[C17Driver]

Wow, I always thought the limit was the limit. So, as I understand it, you can covert your TSP to ROTH TSP right? If so, I am in luck this year. Long story short I am deployed most of the year and I am going to be getting close to a 24k non-refundable tax credit this year. So, I need some good tax liability to get the full 24K. Guess now I need to figure out just how much tax I would owe on my non-deferred TSP contributions.

Why isn't this shit just easy?

No, currently you can not convert your traditional TSP to a Roth. See: https://www.tsp.gov/planparticipation/eligibility/traditionalRothContributions.shtml

[Jughead]

What C17Driver said.

Roth IRA & Roth TSP have nothing to do with one another. TSP is mostly like a 401(k) (which is NOT an IRA); when looking for parallels, that's what you should compare it to initially--you'll get the right answer most of the time.

[Butters]

No, currently you can not convert your traditional TSP to a Roth. See: https://www.tsp.gov/planparticipation/eligibility/traditionalRothContributions.shtml

Thanks for the link. Also found in there that there are no income limits for ROTH TSP Contribultions... That would have been nice to know, YESTERDAY! Well, you know the Goverment will always find a way screw you with taxes, one way or another. It is up to the individual how much time and effort you want to put into avoiding it.

[scoobs]

Is a Roth Tsp a better option than a Roth Ira?

[matmacwc]

I think Butters just answered that.

[nsplayr]

Is a Roth Tsp a better option than a Roth Ira?

Roth TSP pluses: much higher contribution limits ($17,500 vs $5,500), lowest fees in the industry, G fund is unique to TSP

Roth TSP minuses: narrower investment options, more difficult to withdraw the money earlier than traditional retirement age

Roth IRA pluses: much broader range of investment options, easier to withdraw contributions before you're old and grey

Roth IRA minuses: only $5,500 or $11,000 if you're married per year, fees can be much higher unless you go with someone like Vanguard

WIC answer: it depends

Edited March 17, 2014 by nsplayr

[Homestar]

Is a Roth Tsp a better option than a Roth Ira?

Just max out both.

[ComingLeft]

Butters,

If part of your tax credit is due to the Earned Income Credit, watch the transfer because unearned income geater than $3,000 makes you intelligible for EIC. Unearned income is not limited to but typically includes dividends, cap gains, and interest.

Posted from the NEW Baseops.net App!

[Butters]

Butters,

If part of your tax credit is due to the Earned Income Credit, watch the transfer because unearned income geater than $3,000 makes you intelligible for EIC. Unearned income is not limited to but typically includes dividends, cap gains, and interest.

Posted from the NEW Baseops.net App!

Nope, Adoption Tax credit. Did some research and the only ROTH I can contribute to is ROTH TSP. I am not even sure I can back door a Roth IRA. The problem is my wife makes too much money and the Goverment hates that. Over ~188K married joint can't contribute to Roth IRA. Over 155K or so, you can't deduct your contribtuions to a traditional IRA if you or your spose is covered by a retirement plan... So, can I contribut 10.1K to a traditional IRA and pay taxes on it since I am over the deduction limit and then still back door it? Very complicated, which is why she has here pension/401K/crazy benefits at her company and I have TSP/Roth TSP... now that I know there are no income limits for ROTH TSP . Rest goes in the Booze and Hookers fund that gets taxed like a bitch.

Edited March 20, 2014 by Butters

[Jughead]

So, can I contribut 10.1K to a traditional IRA and pay taxes on it since I am over the deduction limit and then still back door it? Very complicated

Yes, you can (2 separate IRAs, up to $5.5K ea.). Not really complicated (the rules may be, but the implementation is simple).

Edited March 20, 2014 by Jughead

[AnimalMother]

Anyone have experience separating and rolling over your TSP into a regular IRA or 401k?

[itsokimapilot]

Anyone have experience separating and rolling over your TSP into a regular IRA or 401k?

I rolled my TSP traditional over to a Vanguard Roth this year. It was pretty straight forward. Setup an account with Vanguard. Request a transfer of the funds with TSP. Once the funds transferred I converted to a Roth. The final statement from TSP reflected exactly how much was tax free. It took about six weeks for TSP to give me my money. I think you can only do this if you separate or retire. Be aware if you do what I did, convert from traditional to Roth that you just generated X amount of income and you can potentially put yourself in a higher tax bracket. It was the the right time for me, YMMV.

[AnimalMother]

Confirm they didn't charge you any fees? I keep reading about a 10% fee or some crap like that.

So you converted to Roth within a Vanguard account, or is the conversion done prior to that?

Thanks for the info man.

[itsokimapilot]

TSP doesn't charge when you do a roll over in conjunction with retirement or separation. My TSP was a traditional IRA. In order to convert it, Vanguard rolled my TSP funds into a traditional IRA, then it was converted to a Roth. The way it was explained to me was that was the simplest to create an above bar trail for the IRS.

[nunya]

The fees you've read about are for early withdrawals. As long as you don't cash out your TSP and put it in your pocket before 59.5, you're ok.

[AnimalMother]

Thanks for the info.

[Jmoo22]

Does anyone out there have first hand experience with leaving the service and than doing a direct rollover of their TSP Roth into a pre-exisiting ROTH IRA?

Here's my thoughts. If I can only contribute to my Roth IRA at a rate of $5,500 but I can contribute up to $17,500 a year to a Roth TSP, it seems like a loophole to the IRS's normal contribution limits. Once I leave the service from what I have read and understand off the TSP and IRS website, do a direct rollover of my TSP account into my Roth IRA. The reason I would close out my TSP at the end of my service is simply more investment options available to a Roth IRA account.

So if I can make larger contributions to my retirement vehicle earlier on in my life, those contributions can take advantage of compounding interest at a greater rate (everything else remaining the same), giving me a higher total by the time I'm 59 and a half.

[nunya]

It's not really a loophole. The Roth TSP is analogous to a Roth 401K available at lots of civilian companies. (And actually theirs is often better with matching)

So yes, you can get more money under the Roth umbrella using both accounts, and you should.

[Pajaro]

In case you have not seen it, the 2015 TSP contribution limit has been raised to $18,000 (same for 401k plans)

https://www.tsp.gov/planparticipation/eligibility/contributionLimits.shtml

[Jughead]

I rolled my TSP traditional over to a Vanguard Roth this year. It was pretty straight forward. Setup an account with Vanguard. Request a transfer of the funds with TSP. Once the funds transferred I converted to a Roth. The final statement from TSP reflected exactly how much was tax free. It took about six weeks for TSP to give me my money. I think you can only do this if you separate or retire. Be aware if you do what I did, convert from traditional to Roth that you just generated X amount of income and you can potentially put yourself in a higher tax bracket. It was the the right time for me, YMMV.

BLUF: Has anyone done this and managed to keep the tax-exempt portion separated from the taxable portion? How? Suggestions and/or pitfalls of doing so?

Long-winded version: I'm a retiree, looking at options for my TSP. About 20% of my balance is tax-exampt. Ideally, I'd like to get that amount into my Roth IRA, and the rest of it into my 401(k) [goal is to get the tax-exempt portion into a Roth, to grow tax-exempt; keep the tax-deferred portion in a tax-deferred retirement account; and not have any current-year tax liability due to the rollover].

I see contradictory info on the TSP website: several places state that any withdrawal (and they appear to include rollovers--"transfers," as they call them--as a withdrawal) is made proportionally from taxable and tax-exempt balances; while other places state that transfers to qualified retirement accounts are made from taxable amount "first," followed by tax-exempt money "if required" to meet the withdrawal amount requested, with the caveat that if the plan cannot accept tax-exempt amounts that those funds are paid directly to the owner. The TSP withdrawal can only be made in whole-number percentages, and only one account can be named for any given withdrawal.

Options I'm considering:

1. Make two different withdrawals. Make a rollover withdrawal in a percentage that most closely matches the actual taxable portion (roughly 80%) of my account into my traditional IRA. Once the dust settles, make a 100% rollover withdrawal into my Roth IRA. Rollover the traditional IRA balance into my 401(k) (in order to preserve future tax-free "back door" Roth contributions). Assumes that the "taxable portion moves first" is accurate. Pros: mostly gets what I want, I never have to touch the money directly [tax issues], and is pretty straightforward. Cons: impossible to exactly match my taxable / tax-exempt proportion to a whole-number percent, so I'll have to either move some tax-exempt to the traditional (foregoing future tax-free gains on that amount) or put some taxable amount into my Roth (thus oweing taxes in the year of conversion). This is basically what my broker is suggesting.
2. Put the whole amount into a traditional IRA in a plan that cannot accept tax-exempt funds, thus getting a check direct to me for the tax-exempt portion. Rollover the IRA balance into my 401(k), as in #1. Make a self-directed rollover of the tax-exempt amount in my Roth IRA. Pros: keeps all taxable & tax-exempt amounts separate; no current-year tax liability. Cons: don't know if it'll work (!!!)--can the tax-exempt amount be rolled-over in this manner? My research seems to indicate that I'd have a 60-day window to get it done. Biggest "con" is, if I screw this up, I'd have an enormous tax liability and/or end up losing any future tax-exempt growth potential of the tax-exempt balance.
3. Put the whole amount into a traditional IRA in a plan that can accept tax-exempt funds. Let the dust settle, then rollover the whole amount into my 401(k), under the assumption that my 401(k) plan cannot accept tax-exempt funds--with the result that the taxable amount moves over to the 401(k), as in #1, and the tax-exempt portion remains behind in the IRA. Convert the traditional IRA balance (all tax-exempt at this point) to the Roth IRA account, as with the annual "back door" method. Pros: gets the job done, gets the taxable & tax-exempt amounts separated, no current-year taxes. Cons: I suspect that my 401(k) plan can accept tax-exempt, rendering this option moot.
4. Leave it in the TSP until beginning retirement withdrawals. Pros: don't need to do a thing; low TSP fees. Cons: gains on tax-exempt portion are taxable; limited investment options.

My brain hurts.... This is, admittedly & without a doubt, a "good problem" to have--but, if anyone's skinned this cat already, I'd appreciate any words of wisdom. Internet beer all around....

[Butters]

Just do all 4.