Answering your questions about TSP, Roth conversions, and more. Listen to the Full Episode: Enjoy the show? Use the Links Below to Subscribe:Read More
“I love your podcast and YouTube channel. Thanks. My question relates to Required Minimum Distributions. Looking far ahead I will turn 72 in June of 2035. Is it true I will have until April 1, 2036 to withdraw my RMD? Also, does the rule requiring subsequent withdrawals by December 31st mean I would take another on December 31 of the same year?” – Frank
After watching our YouTube video, Frank reaches out with an awesome question on his Required Minimum Distributions and how those will impact his long-term tax planning in retirement.
What we LOVE about this question is that cash flow in retirement is King. As we are financial advisors who specialize in federal employee benefits, we believe that seated comfortably next to the King of Retirement is the beautiful Queen IRS who will ALWAYS make sure she is accounted for.
Often times FERS Federal Employees forget that their taxes are a critical part of their retirement plan. The biggest misconception that we work with new clients through is that they assume that their taxes in retirement are going to be lower.
Sounds like it should make sense right? You’re no longer working so your taxes should be lowed? That is NOT always the case, particularly for Federal retirees.
Your FERS retirement is a three-legged stool that consists of:
Those benefits have tax implications associated with them! Yes, even social security.
Frank identities one tax planning issue when he asks about his Required Minimum Distributions (RMD’s).
An RMD is a Required Minimum Distribution that requires a person to distribute a percentage of their tax-deferred investments by the time that they reach age 72 under the Secure Act ( (or 70.5 if you were born before July 1, 1949).
People often think that taxes are to generate revenue but they forget that taxes are also a method that the government uses to incentivize and change behaviors.
So that the government can tax the retirement funds that you accumulated and have not paid taxes on yet. Additionally, to encourage retirees to take monies out of their retirement accounts so that they do not leave large inheritances to heirs.
The IRS calculates that your RMD should take,
IRS Uniform Lifetime Table
Age Life Expectancy Factor
For ease, let’s say that Franck just turned age 76. In Frank’s TSP he has $100,000 (for easy math). His RMD would be around $4,545.
Frank would need to perform this calculation each year to ensure that he takes his annual RMD. Each year, the calculation will be based on the previous year’s account balances as of December 31st.
Frank will continue this calculation for the rest of his life or until his funds are entirely disbursed from his account.
This is one of the reasons that we really want federal employees to work with a financial advisor who is versed in their benefits or, ensures that they have taken our on-demand retirement course so that they can work through these situations independently and make informed decisions. Tax planning in retirement for federal employees is imperative to not only understand but develop a 5-10 year tax strategy for retirement.
Once you have reached age 72 under the Secure Act (or 70.5 if you were born before July 1, 1949), you must take your RMD from your qualified accounts.
Accounts that are subject of RMD’s:
During your working years, as you contributed to one or more of these types of accounts you were able to defer taxes. Meaning, that the funds you contributed to the accounts were not taxed as income for the year that you made the contributions.
However, once you withdrew your contributions those funds are taxed at your current tax rate at the time of distribution.
One strategy that we work with federal employee clients to optimize is developing a long-term tax plan as part of their retirement planning process and seeing what years we can convert monies from the tax-deferred accounts to a ROTH account.
ROTH accounts are taxed the year that you make the contribution. However, when you withdraw the funds (providing you have met the qualifications to be allowed to do so) you can withdraw the funds tax-free.
Imagine what we can do to with a client who knows what age they’re going to retire and starts planning for retirement and tax planning years in advance.
Let’s add a few 0’s to Frank’s TSP account and say that he had $1,000,000 in the account. If we started working with him early and knew that Frank was going to retire under FERS on an unreduced annuity at age 62 – we have 10 years to help him plan to convert monies from his TSP to a ROTH IRA.
Year & Age
TSP to Roth Conversion Amount
Year 1 | Age 62
Year 2 | Age 63
Year 3 | Age 64
Year 4 | Age 65
Year 5 | Age 66
Year 6 | Age 67
Year 7 | Age 68
Year 8 | Age 69
Year 9 | Age 70
Year 10 | Age 71
Frank still has to pay taxes on the funds that he moves from his tax-deferred account to a ROTH account but now he can control and strategize how much he wants to pay in income taxes. We used the example of $100,000 because it’s easy to illustrate but this is really something that you want to work with your financial advisor and tax professional to optimize and see if there is a tax benefit by doing a conversion.
“Hey! I love the podcast, and I’m hoping you might be able to tell me if my Lifecycle fund-based investment strategy overlooks any important factors. I still have close to
“Hello, I am a retired 58 yr old federal employee that retired after 34 years of service. My wife and I are looking at buying a trailer and horse camping
“I have two questions about social security. I am 61 and my wife is 58. Let’s say my wife files for social security at age 62 and I wait until
My understanding is that if I take immediate retirement at MRA before 62, then I will: 1) get the FERS Supplement to my FERS annuity; and 2) but I will
Get the most out of your federal retirement benefits by taking advantage of the FERS resources created by Micah Shilanski, CFP®, and the team of independent financial advisors at Shilanski & Associates, Inc. Join the thousands of federal employees who trust us to guide them in their retirement planning journey because of our unique perspective of how your FERS benefits contribute to your comprehensive financial plan.
7 CLASSIC RETIREMENT MISTAKES Federal Employees Make
7 CLASSIC RETIREMENT MISTAKES Federal Employees Make