Re: [TSPStrategy] 20% tax on withdrawals

The Roth portion of a TSP can and should be rolled over to a Roth IRA before 72 - this from one of the TSP webinars and also from a tax lawyer presenting during a NITP seminar. This will avoid RMDs from the Roth portion.



On 7/24/21 at 6:03 PM, Mo in Seattle (Mo4iu@yahoo.com) via groups.io wrote:

From: "Mo in Seattle (Mo4iu@yahoo.com) via groups.io" <Mo4iu=yahoo.com@groups.io>
Date: July 24, 2021
To: TSPStrategy@groups.io,
"eljosco@mail.com" <eljosco@mail.com>
Cc:
Subject: Re: [TSPStrategy] 20% tax on withdrawals

On Saturday, July 24, 2021, 12:20, lindalyc via groups.io <lindalyc=aol.com@groups.io> wrote:

Thank you, Mo:

I'm learning, so I do have questions:

Item#1:--------isn't Roth IRA (not Roth TSP) excludes from RMD by IRS?

ANSWER #1:  Yes, no RMDs are required to be taken from Roth IRAs, whereas, RMDs from your TSP includes the percentage ratio of Roth TSP amounts as mentioned.  I believe that this was because it was all Congress allowed when Roth IRAs were approved for the TSP system. I think this is going to be changed in the near future as part of several changes that Congress approved and that we will be able to designate if our withdrawals should be taken from Roth or non-Roth TSP balances and what better options are provided related to not having to include Roth funds as part of our RMD.

Item#2:--------so I take RMD from Roth TSP and since I don't need it I'd put it in regular brokerage where I'd be taxed on dividends earned or capital gain from sales, wouldn't it?==no more tax advantage (tax shield), right?  and what if I eventually have 100% TSP Roth before 72?

ANSWER #2:   Anytime you withdraw funds from any Roth IRA account,TSP Roth  or non-TSP Roth, and invest the withdrawal elsewhere, the earnings will be taxed. The earnings only accumulate tax free while part of a Roth account.  I may have misunderstood your earlier comment about this, as I thought you were referring to the earnings from funds remaining in your TSP Roth being taxed, which they are not. 

If you have 100% of your TSP balance in Roth then it might be beneficial to consider a transfer to a non-TSP Roth account depending upon what changes take effect next year regarding options with the TSP Roth. I think we will have the option not to have to withdraw any Roth balances. 

So I think a key part of your situation might be to consider what percentage of Roth funds constitute your total TSP balance? I had the same concern about my Roth funds in my TSP account but realized that, in my case, the Roth amount was such a small percentage of the total that it wasn't significant to worry about small withdrawals each year because the bulk of the Roth funds would still be there after many years of TSP RMD withdrawals and the Roth funds outside of the TSP is what were significant. If I had larger Roth balance inmy TSP, it might have been a different outcome. Again, what changes take affect will be key for future decisions.

Item#3---------"A portion of an IRA can be converted into a Roth while a person is still working but with certain limitations on the amount allowed each year.'  I didn't know that except I do know tax liablity from conversion. 1. Which portion of an IRA can NOT be converted into a Roth, please?   2. I only know in-service withdraw/rollover allowed 4 times per year and minmum of $1000 per occurance, but don't know the limitations on amount. would you point out the maxi. amount?

ANSWER:   I had to do further research on this question  because it has been some time since I had any personal interest in this area and some changes have been made since that time. Although there are some limitations on the amount of new money annual contributions that can be made each year while working, (less so for TSP participants) there is no restriction on the amount that can be converted from an existing IRA into a Roth IRA. There is a limitation on withdrawing those funds without penalty. If you withdraw them before being on deposit five years there is a 10% penalty.  Of course, as mentioned, whatever amount you convert from an IRA into a Roth is included in that year's taxable earnings. 

However, your question in this instance makes it sound like you are still working. If you are 72 but still working, you don't have to be concerned with RMDs from your TSP, as you can wait until you retire before any minimum distributions are required from your TSP account, but which is not  true with IRAs I believe.

Hope this helps. You might want to look at the TSP website which has a wealth of informational booklets and documents that all participants should read and re-read to become familiar with the TSP and retirement. It is better acquiring knowledge to answer your questions than to depend upon strangers. There are many, many, comments that I see posted here that are factually incorrect even though those posting give the impression of insisting what they say is accurate. I could be one of those people. Better for you to study and research on your own so that you can sort out fact from fiction. 😄🖖

p.s. I don't use any financial advisors. I'm DIY kind using major self-directed brokerages.

Thanks again.

-----Original Message-----
From: Mo in Seattle (Mo4iu@yahoo.com) via groups.io <Mo4iu=yahoo.com@groups.io>
To: TSPStrategy@groups.io; eljosco@mail.com <eljosco@mail.com>
Sent: Sat, Jul 24, 2021 2:37 pm
Subject: Re: [TSPStrategy] 20% tax on withdrawals

Lindalyc--

Item#1:  Tax law and the IRS requires a "forced" RMD not the TSP. An RMD is required by the IRS when a person reaches 72 (it used to be 701/2 but was recently changed. The TSP is your friend when it comes to ensuring that you comply with taking the appropriate amount because  failure to withdraw what the IRS requires would result in an IRS penalty of 50% of the amount that you failed to withdraw. At the end of the year, if you haven't withdrawn enough to comply with the law, the TSP will send you the remaining amount so that you are not penalized by the IRS.  It makes no difference whether or not you need the RMD--it is required based on your age. Prior to age 72, no withdrawals are required.  

Item#2:  The amount in your Roth TSP is still tax free when included as part of your RMD, so no, you do not lose your "tax free capital gain shield" as you state.  Withdrawals from the TSP do require that an amount of your Roth funds be included in the RMD in the percent that they exist in your total account balance, e.g. if your Roth comprises 2% of your total TSP account then your 2% of your annual RMD will be from your Roth balance. So transferring the Roth portion of your TSP to an outside Roth IRA, if allowed, could  be beneficial to eliminate the inclusion of a portion of the your Roth TSP in with your RMD. However, it may not be worth the trouble, if it is a just a small percentage anyway, because having a small part of your RMD comprised of Roth funds means that your taxable income is less since that portion is tax free.

Item #3:  It sounds as if you are under the impression that a TSP balance can be transferred to an IRA and then converted into a Roth IRA.  An IRA balance cannot just be "converted" to a Roth IRA. A portion of an IRA can be converted into a Roth while a person is still working but with certain limitations on the amount allowed each year. Whatever amount that is "converted" from an IRA into a Roth IRA,  increases your ordinary income and your tax liability that year because you have to pay taxes on an IRA when it is withdrawn.

There are a lot of rules and requirements for IRAs which are based in tax law passed by Congress and then enforced by the IRS. Those laws can be confusing. That is why CPA's and tax lawyers exist.  But the TSP helps you comply with those requirements at no extra cost to you.  Private companies and so-called "financial advisors" who earn commissions from investing your hard earned savings in what they recommend--are NOT your friend--and want you to believe that you are better off transferring your money out of the TSP and into an account with them. But doing so will cost you in commissions paid by your purchases or by investments in recommend that will have higher fees. 

On Saturday, July 24, 2021, 09:59, lindalyc via groups.io <lindalyc=aol.com@groups.io> wrote:

I attended it, not that helpful to me--they are for the best insterest of TSP board/company.

My concern is I want the flexibility of distributions not a forced RMD.

So even with Roth TSP, you're required to RMD. so in case I don't need it the RMD means I would lose the tax free captial gain shield.

Isn't it the best to transfer (after 59 1/2 year old) to outside/eventually convert into Roth IRA? 

well, I asked and they would confuse you with a lot "cautions".

-----Original Message-----
From: eljosco@mail.com
To: TSPStrategy@groups.io
Sent: Sat, Jul 24, 2021 2:44 am
Subject: Re: [TSPStrategy] 20% tax on withdrawals

That's interesting to know it happened that way.

An easy way to check out about TSP withdrawals is to attend one of their webinars on this topic. Besides their chat the live Q&As are always helpful. There's one specifically on post-service (retirement) withdrawals coming up this Wednesday at 10am. 

https://www.tsp.gov/online-learning/#tsp-post-service-withdrawals



On 7/23/21 at 7:45 PM, Karol Kusunose wrote:

From: "Karol Kusunose" <lochcarron@msn.com>
Date: July 23, 2021
To: "TSPStrategy@groups.io" <TSPStrategy@groups.io>
Cc:
Subject: Re: [TSPStrategy] 20% tax on withdrawals

This what HAPPENED.....  I requested 20% tax amount and filed it as an RMD.

 

They took out 10% BECAUSE I filed it as and RMD.  In previous years I requested a monthly amount and

they sent 20% as I requested to the IRS BECAUSE I DID NOT designate it as an RMD,

 

This was the verbal explainaton given to me when I called then for an explaination.

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