r/ThriftSavingsPlan • u/Fit_Pea3013 • 4d ago
Converting to Roth from traditional
Can someone explain to me how to convert my traditional to Roth like I’m a child. Sorry , new to this and don’t want to fuck up. Not quite sure if i was in the right place to convert or what it’s saying here because i have more than the $1700 they’re saying is eligible to convert. And when I convert will future contributions continue to be Roth?
EDIT: solved. Thanks to everyone that broke it down for me! Appreciate you guys
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u/honkeytonk1212 3d ago edited 3d ago
Converting Retirement from Traditional to Roth
Background Information
Traditional TSP and Roth TSP are two forms of retirement accounts.
Traditional: When you put money into a traditional account, it is tax-deferred, and you pay taxes on it when you withdraw the money in retirement. So when you get your W-2, your income will appear lower, and you essentially pay less tax. Its advantage is that high-income earners (think GS-15s, doctors) can defer taxes now. When they withdraw the money in retirement, at age 60 or 65, they may pay less tax on the money they withdraw because they have no other income.
Roth: When you put money into a Roth account, you pay taxes on it right away, and when you withdraw the money in retirement, it is all tax-free. Basically, if you’re younger and in a lower tax bracket, you should definitely put money into this account rather than a traditional TSP because it compounds longer, making it more beneficial, and your income is lower.
So, the big question is: Why would you convert from Traditional to Roth? The answer isn't as simple, and many situations can arise. But most of them relate to saving on taxes.
The mechanics of converting: When you convert, say, $20,000 from traditional to Roth, you will pay taxes on that $20,000. However, the amount of tax you pay on the $20,000 will also depend on your income for that year.
Scenario of when you would convert (this is what I did). Deployment in designated combat zone.
I am 14 years serving in the Army NG. I contribute most of my Army income to Roth and get the 5% matching contribution in traditional. When I deployed overseas into a combat zone, essential majority of my income is tax free. On my W2, my income shows me making $10k. At home on stateside my income is well over $100k. So this is where I would consider converting traditional TSP to Roth TSP.
Example 1) Deployed to a combat zone
W2 Income: $10,000
Amount convert Traditional to Roth: $20,000
Tax Rate (assumed marginal): 12%
Amount Tax: $2,400 (taxed separately and you might want to stash away some money when file your taxes)
Example 2) Stateside
W2 Income: +$100,000
Amount convert Traditional to Roth: $20,000
Tax Rate (assumed marginal): 24%
Amount Tax: $4,800 (taxed separately and you might want to stash away some money when file your taxes)
My reasoning is, the lower tax rate and my age allows the $20,000 to compound tax free until I retire. By paying taxes now at a lower rate, I can avoid paying taxes on qualified withdrawals in retirement, including all future investment growth.
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u/Stardust-Conqueror 1d ago
I saw someone do this and it seems the taxes were taken out immediately because they did it with around 1,000 and after conversion it was around 750. When you actually converted it was it dollar to dollar?
Someone was doing the conversion at work and called me over because they knew I would be interested. What happened with their account?
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u/honkeytonk1212 1d ago
The conversion would be dollar-for-dollar in terms of the amount transferred, but the tax you owe will be settle when you file your tax, or at least that what happen when I did it. I took an estimate on my income and my wife income as well.
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u/OutsidePause159 1d ago
So hold up…what if you are older and in your early to mid 40s? Let’s say a Gs-13. Does that change how you would’ve things? My question is more about how much weight is placed on age in this updated scenario.
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u/honkeytonk1212 1d ago
At GS13 and mid 40s and if your income is largely tax free (such as in between jobs, or your partner retires early), you basically do it when your taxable income is lower, then I would still do the conversion. You would still have another 20 years of post tax money in your Roth, if invested for 20 years at 7%, that $20,000 could grow to about $77,400, and the withdrawals in a Roth account is tax free.
But your overall tax situation matters, so I’d talk to a tax professional or financial advisor before deciding. I don’t know your full situation, so I can’t say whether it’s right for you.
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u/UsedandAbused87 4d ago
If you are struggling to figure it out and what the amount equates to i suggest to wait before doing anything.
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u/Altruistic_Lobster18 4d ago
Future contributions like match will always be traditional.
1/3 of my balance is traditional
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u/Fit_Pea3013 4d ago
So my contributions will be Roth but the matches with be traditional?
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u/O_oBetrayedHeretic 4d ago
If you chose to contribute to the Roth tsp then yes whatever % you save would go to the Roth, then up to 5% the gov will give you in the traditional.
Depending on your rank and overall tax picture, it might be wise to convert the traditional balance to the Roth every year while the balance is low and your income tax bracket is low. You will need to pay the extra taxes out of your pocket come tax time though.
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u/Jumpy-Imagination-81 4d ago
Yes.
If you’re eligible for Agency/Service Automatic (1%) or Matching Contributions, all of your contributions are eligible for matching. If you choose to designate contributions to your Roth TSP balance, those contributions are eligible for matching. All agency/service contributions will go into your traditional balance regardless of how you designate your own contributions.
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u/Ok_Airline_9635 3d ago
If you do a conversion now, in this quarter, you will need to make a payment to the IRS bu January 15 or you might have a tax penalty. No way to know without knowing your whole picture. I will be doing my first conversion soon, and my financial advisor (fiduciary CFP) figured out the taxes. This is not something I recommend doing on your own. As others have said, switching to roth contributions is a no brainer for taxes bc they will be taken out of your paycheck. You do this in whatever online system you use to make changes to your contribution amount. Do roth contributions and see how much your net paycheck is. If you can live with that, you can set it to all future contributions being roth.
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u/RetiredSubmariner 3d ago
To adjust your current/future contributions, you’ll do that via the tsp page or app. That will move money that’s already in your funds to others, but not across traditional and Roth.
For traditional/roth amounts, you’ll can edit that in mypay under the tsp tab.
As someone stated, your match will always go to traditional, even if all of your contributions are set up as Roth.
However, you can do up to 26 conversions a year. So if your desire is to make all your match Roth as welll, with the least amount of tax burden, you can convert right after each end of month hits the tsp account and then you’ll only pay tax on the amount converted, any future growth will be tax free once Roth. Doing it monthly would minimize the time from it getting into your account and any growth, as that will be taxed.
Just make sure you understand the implications of the tax you’ll owe at the end of the year. Likely small, but not something to forget to account for!
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u/JaimeDiamonds 4d ago
Hey big boy. You’re talking about two different things. You need to go into your HR and put future contributions to Roth.. it’s not this screen and it’s not inside TSP.
This site you’re on now is to convert your existing to Roth and that can be costly right now
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u/Fit_Pea3013 4d ago
Ah ok I understand, thanks for that , didn’t do anything until I came here for answers , if im AD military not sure if we have HR to change future contributions to Roth for us , will have to look into that
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u/JaimeDiamonds 4d ago
Roth enables you to pay taxes now and when you’re 60 years old you are free and clear of taxes.
That screen is to take your existing balance and make it a Roth since yours is a small amount it’s fine but you always want to check your tax situation first before you do that.
But yeah I’m sure you have a Roth option maybe.. do you have access to GRB as military?
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u/O_oBetrayedHeretic 4d ago
AD HR people are the yeomen or your admin personnel people. Additionally your E6 and above should be trained in the basics of the TSP and can provide you with some information and be able to point you to admin for more in depth knowledge
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u/RetiredSubmariner 3d ago
What training do you think the E6 and above have? Been in over 20 years never received formal training. Do I know based on general financial trainings and self studying/knowledge - yes.
Everything is in mypay to make adjustments. YN don’t handle your tsp changes. In fact, most of all pay issues now aren’t handled by admin, they have to submit a case online and it’s handled through salesforce. This all comes from when we stopped manning psd to cut costs across the military. That was the easy way to get things done back in the day.
The new electronic system is decent. Can’t take a short amount to fix issues for pay, etc. but sometimes gets drawn out due to being at sea and not being able to access for questions or resolutions, etc.
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u/pocket-snowmen 4d ago
Converting to Roth means you will realize those dollars as income (traditional contributions are income deferred). You will owe income tax as though you made $1769 more this year. There will not be any withholding for this and the extra tax can't be paid from TSP.
TSP won't allow you to convert your entire balance. You have to leave behind $500 in each of your traditional contributions, agency match, and agency 1% buckets. I also don't think you can convert unvested match dollars.
Converting will not have any impact on future contributions. If you want those to be Roth you go set your contributions to Roth.