Converting all my TSP to a ROTH TSP?

Federal Benefit Advisory

I get this question 3 or 5 times per month.  The answer in three words, YOU CAN NOT! and here is why:

  • TSP will not allow you to convert TSP to ROTH TSP, the system has no provision for doing so. If this is what you want, you must transfer to an IRA, outside of TSP, that will allow you the conversion. The transfer has some qualifications:
    • You must be 59 ½, if still employed by the federal government.
    • Or terminate your employment through resignation, retirement, fired or laid off (RIF), VERA or VSIP.

If you really want to convert your TSP to ROTH, understand that first, the conversion is a taxable event, therefore, your income, from the job, the income from supplement or social security, the additional amount of your TSP, is a big big tax event. If you live in a state with an income tax, you can throw that in the mix.

Wanting a tax-free income, while in retirement or later years, makes some sense, so what do you want from the conversion? Does the tax paid even out to being an advantage? 

Consider these two alternatives:

  • Begin a ROTH with TSP or another financial institution.
  • Purchase Municipal Bonds.
  • Or:  Buy an ‘Over Funded’ life insurance policy.

Wait a minute, did I say life insurance?  Yes, here is why; let’s say you fund a ROTH, with $2000.00 a year. If you passed away in 3 years, from an accident, your ROTH is worth $6,000.00. The same cost into a life insurance policy could pay $250,000.00. 

Secondly, the ROTH you hope will earn interest. In the past few years, that might amount to 5.00% if you were lucky. The typical life insurance policy has paid from 6.00% to 8.00% on the cash value. Now, here is the trick, you might buy a life insurance policy, with a premium of $1500.00 annually, but you pay in more, much more than ROTH allows, so you could have a cash value of $100,000.00 or more, earning more interest. Then if the need for the life insurance is no longer needed, then the cash value can be converted to a Tax-Free Income. More than ROTH and you have had greater protection. The beauty is, you build as much as you wish without restrictions, through over funding.

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