Q:

Thanks Kerry for your detailed response.  One other potential issue:  In addition to the Voluntary Contribution Plan, I also participate in the Government's Thrift Savings Plan (TSP).  This is the Government equivalent of a 401K.  When I retire, I am eligible to rollover the balance of my TSP to a regular IRA.  I want to do this at some point.  I realize that when I convert my regular IRA (including VCP contributions) to a Roth, I must pay ordinary income taxes on any portion of the contributions and earnings which resulted from pre-tax contributions.  I am OK with this.  So it appears that I should not rollover my TSP until after my planned Roth conversion.  Is there any way I am risking taxation on my TSP as long as I wait until after the Roth conversion to perform the rollover?  Thanks

 

Regards,

P.S. Love your websites

A:

I don't see a problem whether you do the TSP rollover before or after you do the Roth conversion.  Roth conversions aren't an all or nothing situation.  You can decide the specific amount from your regular IRA account to convert to a Roth and pay taxes on.    What would make things easier for you in terms of record keeping would be to have different rollover IRA accounts to keep the pre-tax amounts separate from  the after tax money.  If you commingle those two types of money, it will be more of a task keeping straight your tax free cost basis.

As I mentioned before, I do still have the very same serious concern about paying out very real tax dollars now for promised tax savings several years down the road that could be taken away at any time by our rulers in DC, as I mentioned in my 1999 letter that was published in the Wall Street Journal .  If you're willing to take that chance, that's your call.

Good luck.

Kerry

Follow-up Q:

Hi Kerry,

I understand that partial conversions can be done.  However since my TSP consists of all pre-tax contributions and earnings (my VCP and IRA  mostly contain monies which have already been taxed)  having any part of it included will increase the taxable amount of any amount which is converted to a Roth.

I appreciate your concerns regarding depending too much on the tax-free status of Roth withdrawals.  While it is true that the amount of tax code tinkering we are all subjected to seems to increase every year, the extent and nature of any changes is unpredictable.  I have enough trouble reacting to what I already know to be true.  I agree that the future holds higher taxes (and probably higher inflation too).  I feel that it is an easier sell to raise general tax rates rather than do a complete about face on the Roths.  Do you feel that Roths are a bigger target?

Regards,

Follow-up A:

The burden is on you to keep good records of your after-tax cost basis in the retirement accounts, so you can recover that much tax free when you make withdrawals.

Across the board tax increases are not as politically feasible as just nailing a group of people that everyone is stirred up to hate, such as evil rich retirees.  Our rulers have already done this very thing to people receiving Social Security, so I find it hard not to imagine the very same thing happening to people with Roth IRAs whose income is over a certain arbitrary level.

I'm not as concerned with people putting new money into Roths and missing out on the current deduction that a conventional IRA has.  I am mostly concerned with people paying out real tax money on converted IRAs with the hope of receiving tax free benefits several years or decades down the road.  I just do no trust the bozos in DC to be fair with this.

I hope I'm wrong; but their past screw-jobs on retirees tell me otherwise. 

It's your call.

Kerry

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 2/20/2005 05:33:00 PM Send this post: