Ask The Experts: Money Matters

By Mike Miles

Tax strategy for transferring TSP

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Q. I’m a FERS retiree, age 64, with a $36,000 annual pension. My spouse has a $40,000 annual salary. We have a rental property that brings us $24,000 a year. And we have a home mortgage balance of $500,000. Our living expenses so far do not require me to withdraw my $600,000 Thrift Savings Plan fund. I plan to live until age 85.

As I approach age 70½ with minimum distribution, what is the best tax strategy for transferring the $600,000 from the TSP into a private investment account? A lump-sum rollover into a Roth account after paying the taxes? A calculated annual withdrawal that would not push me into the next higher tax rate?  Should I start withdrawing now at age 64 or wait until age 70? What type of private investment accounts best mirror the TSP accounts?

A. I suggest that your default approach should be to take the required minimum distribution and only take more, or withdraw the money sooner than necessary, if something compels you to do so. Finding a compelling case is up to you and your tax preparer. The closest things you’ll find to TSP funds, outside of the TSP, are Exchange Traded index Funds, or ETFs. iShares is the leader in these, but they are produced by a variety of firms, including Vanguard. iShares comps for the TSP funds are: IVV for the C Fund, IWM for the S Fund, EFA for the I Fund and AGG for the F Fund. Unfortunately, there is no equivalent for the G Fund, which is one of the arguments for sticking with the TSP for as long as possible.

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Comments

  1. Al R Says:
    August 24th, 2012 at 9:01 pm

    I can’t imagine any compelling reason to rollover $600k from your TSP to a Roth IRA. You’ll get killed in taxes. Suggest you transfer to traditional IRA instead. Vanguard (Admiral shares) mutual funds that mirror the TSP funds are cheaper (lower expense ratios) than the iShares: C: 0.09% – 0.05%, S: 0.23% – 0.14%, I: 0.34% – 0.12%, F: 0.20% – 0.10%.

    Since these are essentially identical index funds, there is no reason to buy the more expense option. The savings goes in your pocket.

  2. Tom Allen Says:
    September 3rd, 2012 at 9:44 am

    The time has come to move out of federal employees’ TSP stock funds, says investment analyst

    If your investment strategy includes timing the stock market, now is a good time to shift your holdings out of the TSP Funds that are composed of corporate stocks, says one market watcher. “Given the more than 7% run-up in the overall stock market that occurred between early June 2012 and September 1, 2012, now is a good time to take profits”, says Tom Allen, editor of TSPFundTracker.com. “For TSP Fund investors, we currently recommend shifting investments from the C, S, and I stock funds into the G bond fund”, he says. More than 3 million federal employees invest in the TSP (Thrift Savings Plan) Funds.

    Allen explains that the G Fund currently is preferred over the other TSP bond fund, the F Fund, as a place for temporarily parking money because interest rates are not expected to rise in the foreseeable future. The G Fund provides a higher interest yield rate than the F Fund, but the G Fund can lose significant value during a rise in interest rates. The F Fund does not lose significant value during an interest rate rise, but its interest yield rate currently is lower than G Fund.

    The reasoning behind Allen’s current recommendation to shift out of the C, S, and I stock funds lies in his risk-to-reward evaluation. “There is ample historical evidence that a stock market rally in the last six months of a presidential election year often is followed by a large stock market downturn. Given the current weakness of the economy, we believe the risk of missing a large stock market rise in late 2012 is much less than the risk of getting caught in a large stock market downturn during that time or early in 2013. Our thinking is that a savvy investor could take their profits now and get an almost no-risk yield of about 3% in the G Fund for several months, and then shift back into the C, S, or I funds after a large stock market drop that begins in late 2012 or in 2013.”

    “Whether or not to shift money between funds definitely is a big investment decision. Many investors probably are uncomfortable trying to time the stock market by switching all of their holdings out of the C, S, and I funds. An investor could take a less aggressive approach to market timing and hedge their bets by shifting only a portion of their holdings from those funds to the G fund”, Allen says.

    Allen adds the following caveats to his recommendations, “Although we have had considerable success in our more than 20 years of TSP Fund investing, we cannot predict stock market performance, and an investor has sole responsibility for their investment decisions.” The daily-updated graphs of the TSP Funds can be viewed at TSPFundTracker.com