5 Reasons to AVOID the Roth TSP (and Roth Conversions)

have you ever wondered if you should be using the Roth tsp I bet you have because we get this question all the time from federal employees but you're in luck because today we're going to talk about when you should not be using the Roth and we're also going to talk about some Roth planting potholes that you really want to make sure you avoid and some of these are even more important inside the tsp so make sure you stick around for the full video and before we jump in I just want to say welcome to all the new people watching our Channel lately I'm Thiago and my team and I are advisors to federal employees so if you're coming up to retirement or maybe you're already retired then make sure you subscribe so that you're getting our weekly videos the first reason you might want to avoid the Roth is if paying the taxes up front is just too much of a burden remember that with a traditional or pre-tax tsp whatever you contribute goes into your account and gets fully deducted from your taxes that year but with the Roth let's say you contribute a thousand dollars from your paycheck you still owe taxes on this full thousand so you might have to pay something like maybe 300 worth of taxes on that money and that's 300 more that has to come out of your paycheck for you to do a thousand dollar contribution into the Roth Now your taxes are going to vary depending on what bracket you're in but no one really wants to pay these taxes but sometimes paying a little bit more taxes today could mean paying little or no taxes at all in the future and the same is true for Roth conversions there's no question that a Roth is one of the best kinds of accounts that you can own having the freedom of tax-free money or greatly reduced taxes in the future comes at a price that you have to pay today but it's a matter of understanding what is having slightly less money right now because of taxes due to your overall plan in the long run Roth accounts don't always make sense for everyone so make sure that the math works the next reason you may not want to consider a Roth is if you're leaving an inheritance of retirement assets to multiple children the new inheritance rules for retirement means that the money has to come out of the retirement account for a beneficiary within 10 years so to spread it out evenly if one person inherits an account that's 10 each year over 10 years to fully liquidate the account and satisfy the rule and remember that whole 10 percent is fully taxed at whatever rate that beneficiary is but let's say you plan to leave your retirement assets to maybe two or even three or four children now the amount that has to come out every year is a much smaller amount for each one of those children so they could collectively spread out the taxes over 10 years for each one of them so that could be 20 or 30 or even 40 tax years if you have four children all of which that gets to spread out that tax payment and so when you're spreading out the taxes over such large periods of time chances are doing the Roth right now is going to put you in a higher bracket compared to the kids later in life now this is a especially true if your kids are likely to be in a lower tax bracket than you are today when they are inheriting that money we don't generally want to leave the taxes to our children but it may make economic sense for them to pay the taxes instead of you with the Roth right now now note that this is a very specific situation most of the time the new inheritance rules is actually a penalty to the kids because they're likely going to be in the highest earning years when they do inherit money and so paying taxes at their brackets is probably worse than yours but that's beyond the scope of this specific video all right the next circumstance in which you may not want to do a Roth is if both you and your spouse are high earners maybe a tax deduction from a traditional retirement account contribution to your tsp or their tsp if they're a Fed as well or even their 401K those deductions may actually be really helpful if you're in a higher bracket right now and we often see the case for families especially in higher earning areas like here in DC where if these are the tax brackets okay each step is a new tax bracket dual income earning families tend to fall in this category or higher and so if that's the case and you're in that second to highest tax bracket you may want to consider using traditional overroth because at some point you're going to stop working which means your income is going to go down your income goes down that means your taxes go down that may be a better window of opportunity for you or Roth then right now if you are in this category right here before we jump to the next one we made this channel so that we can share what's working well for our clients with FEDS who aren't working with us and we need your help because our goal is to help 300 000 federal employees by 2030 and the only way we're going to be able to do that is if you help spread the word about our content either through our newsletters that's free which you should get if you're not on it by the way these YouTube videos or various other Publications that we have so we'd really love it if you share it with other federal employees or colleagues or even your agencies so that we can help reach that number of in time and we hope that you'll help with the mission all right the next reason to avoid roths is if you have anticipation of high medical bills if someone is in a long-term care situation or maybe they have expensive home renovations as a result of some sort of medical situation that person may have incredible tax savings and deductions available to them so in a circumstance like this if this is you or you anticipate this to be you maybe a Roth is not a good idea for you and the reason for that is maybe when you have those years of high deductions maybe that's when you want to actually realize the taxes on your retirement money and so by doing a Roth now you're paying the taxes higher than possibly lower in the future and again remember that's the whole concept when are you going to Target taxes at the lowest rate is it now or is it later you have to pay taxes at some point thinking about where your brackets will be and when is a part of this big tax plan now as financial planners we don't do tax advice but we do do tax planning there is massive value from this kind of planning and work that you can do in your specific retirement and so if you have pre-tax dollars to help pay for those big medical expenses you might have the opportunity to offset your taxes in a pretty big way the next reason to avoid rots is if you're waiting for Clarity on the new tax laws the current tax laws are actually set to sunset here in a few years and so that means that we're going to have tax laws changing coming up soon now it's probably safe to assume that tax rates are going up not down which would make sense to pay the taxes now while they're still in a slightly lower bracket but maybe during this time frame something is changing in your financial situation maybe you're retiring maybe you are going to have some large medical procedures there's various things that can completely alter whether or not a Roth makes good sense for you when you retire you have something that we call your tax planning window okay and that's because when you're working obviously you're earning a lot of income your taxes are high then you retire and between the time that you're retired and when you have minimum distributions which is your rmdh that's depending on when you were born that's that's going to be either 73 or 75 under the new rules the idea is that here the only thing that's taxed is your first and your Social Security so this window of time in between you might actually have a really good opportunity to start converting things for raw so if this is you and you can really only understand this if you're doing income and tax projections in your retirement plan then you maybe don't want to use a Roth if you're still working and are possibly at a slightly higher tax bracket we have seen Roth conversions during the tax planning window save families hundreds of thousands in one specific case it was actually over a million dollars in taxes that they were going to never have to pay Simply by incorporating this within their plan that can be very very significant of course it's going to vary according to plans but just understand how important this is in a retirement plan and if you do it at the wrong time because you were rothing to too soon then you could actually hurt the tax planning window opportunities that you'll have later so how can you know if you should do it now or later well one of the things that we do for our clients that they say is really helpful with this is we start to do income and tax projections for them well before they're retire and so usually five years or less in retirement we're doing these kinds of things that lets them understand what is their income going to look like what are their taxes probably going to look like and it gives us a better shot of understanding okay when is the best time to do a Roth how much how are we going to pay the taxes all of those other questions come to play which leads us to the next one another reason for not doing a Roth is if you just don't have the money to pay those taxes the best way to do it is to actually pay the taxes from another account not from the conversion itself let's say you do a Roth conversion for a hundred thousand dollars and you're going to withhold the taxes directly from the conversion well that might make your conversion and what goes into the Roth maybe seventy thousand dollars assuming that that you know you're 30 oil in or your taxes well now that seventy thousand dollars has to work that much harder to grow because it's starting from a lower balance so the idea is that perhaps you have that thirty thousand dollars in your savings or in a brokerage accounter somewhere else that you can use to pay the taxes because what that will do is it may allow you to do the full one hundred thousand into the Roth and now that entire chunk gets to grow tax-free for you now this doesn't mean that you shouldn't do a Roth conversion if you don't have the cash but it does mean that you have to be that much more careful and really make sure that it's going to be worth your while in your specific situation all right so let's say you have decided you want to do the raw there's a really big mistake that federal employees make when considering Roth conversions from the tsp they attempt to do a Roth conversion within the tsp technically you cannot do a conversion in the tsp it can't go from traditional tsp to the Roth tsp but if you tell them to do a conversion to an IRA they're still going to do it and folks if you get nothing else from this video please keep this one in mind do not try to do a Roth conversion inside the tsp if you tell the tsp to send a part of your pre-tax or traditional tsp straight to a Roth the tsp is going to hold a large chunk of that as your tax payment the whole thing gets very sloppy and it's not going to be the way that you want to do it we're not going to get into how to do it in this video because future videos will go into more details like this so make sure you're subscribed to the channel now the other big mistake that people make is they don't consider how else their financial situation will change by doing something like a Roth conversion for instance especially if you're on Medicare Part B so for all my Tricare folks out there or even folks who are on Part B with fehb a Roth conversion is going to possibly increase your part B premiums and it can do so for at least two years so when you're doing a conversion there's likely a very specific amount that you need to do doing too little means you probably wasted that tax years opportunity doing too much even a dollar over what you were supposed to do could mean that you cost yourself tons more in Medicare Part B premiums so generally early when you're doing conversions we really recommend that you work with advisors on this I've had federal employees come to us with all kinds of messed up Roth conversions and unfortunately they're permanent the new law doesn't allow you to reverse around conversion even if you make a big mistake so guys please make sure you're careful so obviously Roth planning should be a part of every retirement plan so if you need help with this in your plan check out our website we'll leave the link to the description down below and I'm really curious about your thoughts what do you think about Ross do you think they're worth it have you done any of them before do you plan on doing them use the comment box and let us know your thoughts and remember that we need your help to get in front of 300 000 federal employees so please help us by sharing the content that you think someone else might find helpful too and we hope to see you on the next video Until then stay wise and stay wealthy foreign [Music]

Channel: The Fed Corner - Federal Retirement Planning

Views: 7,851

Keywords: the fed corner, tsp, FERS, OPM, Federal Retirement Planning, FERS Planning, FERS Retirement, FEHB, plan my federal retirement, plan your federal retirement, my federal retirement, SES

Id: APJQM3qAQsU

Length: 11min 23sec (683 seconds)

Published: Sat Jun 17 2023