Government Retirment Plan

Submitted by Danny Fisher on Sun, 2008-12-14 21:18

Ed Slott said that it would be a good idea, not for everyone, to rollover you company 401K when you retire to a better investment. I have a Government (TSP) retirement plan and it looks like a good plan to me with lots of options. Are there better plans out there or should I stick with my TSP and not rollover my retirement when I retire? I’m just looking for general consensus and I will seek advice from Ed Slott’s Elite Advisers. The info about TSP retirement plan is at http://www.tsp.gov/.



Submitted by Bruce Steiner on Sun, 2008-12-14 22:03

Most people roll their benefits to an IRA (i) to have more investment choices, (ii) so their employer won’t know their business, (iii) since some employer plans don’t allow stretchouts for or transfers to inherited IRAs for non-spouse beneficiaries (not an issue for spouses since they can do rollovers).

In the case of the Thrift Savings Plan, the investment choices are good (though they don’t allow you to buy individual securities, or to select your own mutual funds or investment managers, which some people may want). And the Thrift Savings Plan allows both stretchouts and transfers to inherited IRAs. So if you’re happy with the investment choices in the Thrift Savings Plan, you could leave the money there.

Leaving the money in the plan can provide an additional potential benefit. A nonspouse beneficiary who transfers the benefits to an inherited IRA can transfer them to an inherited Roth IRA (if his/her income is under $100,000, before 2010).



Submitted by Bruce Steiner on Fri, 2013-02-15 22:17

Supplementing my previous response, the provisions of Section 402(c)(11) allowing nonspousal rollovers to inherited IRAs apply to employer plans under Section 401(a) that are exempt under Section 501(a).  However, while the Thrift Savings Plan works about the same way as a 401(k) plan, it’s created under a separate law, and it’s not a 401(k) plan.  While there’s no logical reason not to allow a nonspouse beneficiary to transfer TSP benefits to an inherited Roth IRA in the same way as to an inherited traditional IRA, I haven’t found anything in the TSP rules that would (or would not) allow such a transfer.



Submitted by Alan - IRA critic on Fri, 2013-02-15 23:31

Bruce,

  • Here is a copy of 7701(j):
  • >>>>>>>>>>>>>>>

 

  • (j) Tax treatment of Federal Thrift Savings Fund
  • (1) In general
  • For purposes of this title—
  • (A) the Thrift Savings Fund shall be treated as a trust described in section 401 (a) which is exempt from taxation under section 501 (a);
  • (B) any contribution to, or distribution from, the Thrift Savings Fund shall be treated in the same manner as contributions to or distributions from such a trust; and
  • (C) subject to section 401 (k)(4)(B) and any dollar limitation on the application of section 402 (e)(3), contributions to the Thrift Savings Fund shall not be treated as distributed or made available to an employee or Member nor as a contribution made to the Fund by an employee or Member merely because the employee or Member has, under the provisions of subchapter III of chapter 84 of title 5, United States Code, and section 8351 of such title 5, an election whether the contribution will be made to the Thrift Savings Fund or received by the employee or Member in cash.
  • >>>>>>>>>>>>>>>>>> 
  • Do you think there is some other exemption for the TSP, or might it be that WRERA only requires a qualified plan to transfer a non spouse’s inherited balance to an inherited IRA, but not necessarily to a ROTH inherited IRA???


Submitted by Alan - IRA critic on Sat, 2013-02-16 00:00

From 408A, indication that for purposes of 7701a(37), a Roth IRA is considered an  IRA. Perhaps this is what the TSP is missing:>>>>>>>>>>>>>

  1. (b) Roth IRA For purposes of this title, the term “Roth IRA” means an individual retirement plan (as defined in section 7701 (a)(37)) which is designated (in such manner as the Secretary may prescribe) at the time of establishment of the plan as a Roth IRA. Such designation shall be made in such manner as the Secretary may prescribe.

>>>>>>>>>



Submitted by Robert Lanois on Sun, 2013-03-31 12:20

Since I am reading the Retirement Savings Time Bomb I am now concerned about my TSP money. I like the underlying funds and the low management costs so I had considered leaving it there and doing the withdrawals monthly and paying the taxes on that withdrawal at tax time. I did not put much into Roth accounts so almost all of my retirement savings is here in the TSP. I do have two pensions that will provide me my current income. That means my income not our combined income. I am pretty sure we can even live on that income into retirement by moving to a lower COL state. Paying cash for a new home and enjoying life. I can even work PT to suppliment income and the same goes for my wife. So now we get to my concern after reading the beginnings of the time bomb I began to worry that I would not be able to protect enough for my daughter to benefit from our savings. My plan was to put together a trust in her name to provide her a retirement income. She will not be able to save much since she is a social worker so her income is lower than it could be. Would I be able to leave it in TSP withdrawing as normal and making deposits into a trust based on a Roth IRA after taxes for her to use later and not worry about accidental death of both of us? My concern is based upon the resulting problem addressed here in this post https://irahelp.com/forum-post/18998-federal-tsp-transfer-inherited-roth-ira.



Submitted by Bruce Steiner on Sun, 2013-03-31 19:17

It’s more complicated.  If you convert it to a Roth, can you do so at not too high a tax rate?  If you can’t convert it all at once without going into too high a tax bracket, can you spread the conversion over a number of years to keep it from being in too high a tax bracket?  If not, if your daughter or the trust for her benefit transfers it to an inherited Roth IRA, can she (or the trust) do so over a number of years, to keep it from being in too high a tax bracket?  Or would she (or the trust for her benefit) have to transfer it to an inherited Roth IRA (if at all) all at once? If you don’t convert it to a Roth, will your daughter be in a substantially lower tax bracket when she takes distributions?  Is the amount large enough that you would leave it to your daughter in trust rather than outright?  If so, might the trust accumulate some of the distributions, for asset protection, even though (if you don’t convert) the trust would pay income tax at a higher rate?  Might you benefit by taking out a mortgage when you buy your new home, so you can deduct the interest against your ordinary income, while investing the money you would have otherwise paid for qualified dividends, long-term capital gains and tax-exempt interest?  For more on trusts as beneficiaries of retirement benefits, see my article on that subject in the March 2004 issue of BNA Tax Management’s Estates, Gifts & Trusts Journal:  http://www.kkwc.com/docs/AR20041209132954.pdf.



Submitted by Robert Lanois on Sun, 2013-03-31 20:12

Okay so my thoughts were spot on. My initial plan and this could change is when I retire and move to an income tax free state (Texas is currently my choice) I begin withdrawal. This will be age 62 or 63. I am delaying SS payout to age 70 and so isn’t the wife who is my age. She will take spousal from SSA at 66.5. So between 62 to 70 will be our lowest income level. We have a two other accounts not Roth. We may work with those first since they will be the smallest of the accounts and we want to park that in a good fund that will hopefully become a nice nest egg for our only child. Outside of starting this up we will spend down the bulk of it with travel. I am pretty sure we will be able to live on COLA pensions alone and suppliment with PT work.Thanks for the reply and confirmation.



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