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Federal Employee Financial Planning: The Roth Revolution (EP58)

What exactly does a Roth account allow you to do? John, Michael, Tommy, and Ben dive into the intricacies of Roth accounts in this episode and discuss everything from Roth TSPs and conversions to the nuanced distinctions between Roth and traditional IRAs. 

Listen in to hear about the current tax code highlights and unravel the mysteries of Roth IRAs, the often underutilized financial tool. You'll learn the advantages of Roth IRAs over Roth TSPs, bracket-topping strategies, and why initiating a Roth IRA early can be a game-changer.

Listen to the full episode here:

What you will learn:

  • The difference between a Roth and an IRA. (2:40)
  • The current tax code. (5:30)
  • What a Roth TSP is and how it’s different from a Roth IRA. (10:30)
  • Why we believe Roth IRAs are underused. (13:30)
  • Why we prefer Roth IRAs over Roth TSPs. (16:45)
  • What bracket-topping is. (21:30)
  • The benefit of getting a Roth IRA started as soon as possible. (25:00)
  • The contribution limits for Roths. (30:30)
  • The importance of understanding the taxation of these accounts. (34:00)

Ideas worth sharing:

  • “Get a Roth IRA started as soon as you can.” - Mason & Associates
  • “Roth IRAs are the most underused vehicles in the country.” - Mason & Associates
  • “There is no reason to not take advantage of the flexibility that comes with having your funds in a Roth IRA.” - Mason & Associates

Resources from this episode:


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Read the Transcript Below:

Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.

John Mason: Welcome to the Federal Employee Financial Planning Podcast. I'm John Mason, certified financial planner, and with me today, the usual crew, Tommy Blackburn, Ben Raikes, and Michael Mason, folks who are four certified financial planners. Tommy is a CPA, Ben, an EA, and Michael Mason also has the ChFC and the CLU designations. One of, if not the most credentialed financial planning podcasts out there. And generally speaking, we believe that to be true, and then when you mirror that and take that to federal employee-specific financial planning, we've got to be one of the best in the nation, if not the world, producing content for you, the federal employee.

So, disclaimer. Reminder, we're financial planners first and we do this content creation second. So we hope you're enjoying not only this podcast but also the YouTube channel, which is up and running. Mason Associates 4825. We have a lot of good content coming out there weekly. This podcast, as you know, you've been listening now for over a year and a half.

We're dropping new episodes twice a month. The cadence on the YouTube channel is shorter and quicker at once a week. So we hope that content is complimentary and that you're enjoying both mediums. Today's episode, we are talking Roth. I don't know exactly where we're going to go, but we're going to talk about Roth TSPs. We're going to talk about Roth conversions, maybe some good things, maybe some issues that we see in the documentation of those conversions. So we've got a lot of good topics today, guys.

Tommy Blackburn: We do, we love Roth, and the whole world seems to, including Uncle Sam, seems to love them these days and moving everything in that direction.

Ben Raikes: I think in general, you mentioned Roth, we've got contributions, conversions, Roth IRAs, Roth TSPs, Roth 401(k)s, Roth 403Bs. There's a ton of different directions we could go of, but Tommy, maybe you could just take us through at a high level, what's the difference between kind of a Roth account versus a traditional IRA? What's the difference in how people think of those accounts and how they work?

Tommy Blackburn: Yeah, we're trying not to spend too much time on–in fact, I think we may have done a previous episode on this so I think we've got one out there, you can learn more about it, but essentially IRA slash traditional 401(k) TSP that is pre-taxed money, we were not taxed on it when it went in, it was almost like a deduction we received, so it has not been taxed, it is growing tax-deferred, it's not being taxed while it is growing, and when it comes out of the account in the future, it is taxable ordinary income to us. And Roth is basically the flip, the opposite of that, we paid tax on it before it went in, we did not get a deduction, so to speak. It went in after-tax, it grows tax-free, and it comes out, generally speaking, tax-free in the future.

John Mason: And what's the bet, guys? So when we do traditional IRA, traditional TSP versus Roth TSP, and Roth IRA, we're making a bet on something and what is that bet that we're making?

Ben Raikes: We're making the bet that we want to deduct income while we believe we are in our highest marginal tax bracket. So if you're getting taxed super, super high at a super high rate, that's when we start thinking about doing traditional types of accounts. So a traditional IRA that's gonna get you a deduction or a traditional TSP or 401(k), and we think the exact opposite with a Roth. So if our tax bracket is lower, that's typically when we wanna make Roth contributions.

John Mason: So, thinking into the future, and we all know, Mike, you know better than anybody, just because you have more experience than us, but those future tax rates are so unknown. And when 401(k)s came out, I believe the line for 401(k)s was defer as much income as you can today because in the future you will be in a?

Michael Mason: Lower tax bracket.

John Mason:And how has that worked out in your career since like 1987?

Michael Mason: Yeah, it hasn't, right? We're in the lowest tax brackets ever today. For anybody listening to this, probably your entire lifetime, we're in the lowest tax brackets.

John Mason: So we've seen nothing but tax rates go down over the years and even in our career, which we say is short in comparison to Mike, but it's still over a decade now, me, you, and Ben, Tommy, doing this, and we've seen tax rates go down. We may actually see our first tax increase or tax reversion to the previous tax code here in 2026, right?

Tommy Blackburn: That's it. That's when the current tax regime sunsets. So there was a temporary law 2026. We snapped back to those old rates, which I'm secretly got my fingers crossed that we stay in this one, not only just because of the brackets, but I do believe even though it is still a complicated system we are in, it is a little simpler. And yeah, I just prefer this one, so I'm hoping that we get an extension here.

John Mason: So the nickname for the current tax code is the Trump Tax Code. I think the official name is the Tax Cut and Jobs Act of 2017 or something.

Tommy Blackburn:Something like that.

John Mason:If that rings a bell, so. The highlights of this legislation, and there's many things to highlight, so please don't say this is the only thing that matters, but a higher standard deduction is one, Tommy, what else can we highlight from this current tax code?

Tommy Blackburn: So our brackets came down, they got wider, so we have longer that we're in a tax bracket, so those moves alone were favorable. Now you may have given up some deductions because we've got the bigger standard deduction, so it's definitely your individual situation. Some other was that alternative minimum tax, AMT, pretty much gone. I mean, it's still there, but it affects so few people now. There used to be this haircut, they called it the P's limitation on your itemized deductions. So that went away. So even if you were deducting, maybe you weren't getting the full benefit of it.

We got rid of our personal exemptions because we've got our bigger standard deduction. The child tax credit got way bigger or maybe not. I think it got bigger, but the income limit went way up, so way more people got the benefit of the tax credit, the child tax credit. Those are just a few that are jumping out to me. I guess the other big one is the SALT cap, that we can only deduct up to 10,000 of state and local on our itemizer if we're even itemizing.

John Mason: So a lot of changes, and a lot of people had quite a bit of positive, you know, we believe, positive net tax savings through this. Now, if you go back in history, Mike, you'll remember that there were some clients who owed for the first time in a long time, and they thought, “Oh, this Trump tax code really was a bad thing for me because I owed at tax time.” Well, we know that maybe they owed, but they still paid less taxes

Michael Mason: They absolutely did. It was just a factor of their W4 not matching the new tax code, right? The minute you say married on the W4, it's going to assume that new, and then it was what, 24,000 standard deduction. And if both spouses did the same thing, both spouses work, the payroll company assumed 24,000 for each one of you. If you didn't have 48,000 of itemized deductions, you were in trouble.

John Mason: Well, I know this episode is all about Roth, and I think this is all relevant because we're talking about the tax code and how we're changing again in a few years, potentially, but it's kind of eye-opening. I think just now on , which you know, I think now you log into your retirement pay through but it's still attached to services online just through like that website now, but they just changed it. I don't know if you guys have seen this, but it used to be you could go into OPM and you could say, “I want a thousand dollars withheld from my federal pension.”

You've all helped clients do this, yes? It's changed now. Now there's just like crazy form that you have to fill out, and you have to monkey around with it, you have to change it. It's like filling out a W4. Have you seen it, Mike?

Michael Mason: Well, it's miserable. It's miserable. I mean, I was trying to get this client who's got a survivor check coming in as well as his, and I think our end result was we just claimed whatever, and I said, “Tell me what it is and then we're going to add.”

John Mason:Exactly.

Tommy Blackburn: That was going to be my tip for anybody in this situation. I did not know they made this change, but that is, I think, the way to go about it. Figure out whatever's on file right now. So if it was married in two, just say, “I'm keeping that.” And then there's additional withholding box, add what the number you're looking for there. That's probably far easier than figuring out the number of exemptions and so forth to claim.

John Mason: No doubt. And this has always been at least my strategy, I think y'all follow this too, is that we kind of use OPM as–or DFAS as the fixer of the tax status when we get to retirement. So rather than having to monkey around with IRA, TSP, social security withholdings, we can use DFAS or OPM as the withholding source, and that was always our go-to. Not saying it can't be that now, but it's certainly changed.

Tommy Blackburn: Yeah, 100%. You hit the nail on the head.

John Mason: So a lot of changes coming and leave it up to the government. We got this out about a year before the tax code expires or two years before the tax code expires. It'll be interesting to see if it does expire in 2026, how they then go back and update services online again.

Michael Mason: Yeah, I fully expect something most of what we see to stay in place. Congress on both sides doesn't really like raising taxes so.

John Mason: So Roth, and I think we should start now is like maybe a big comparison between Roth IRA and Roth TSP. What's the difference? How are they the same? And then maybe we can also just introduce this topic when why we like Roth IRAs better in certain circumstances, whether you're young and contributing or even in retirement.

Ben Raikes: So from a high level, your Roth TSP, you're going to contribute two through payroll deductions. And right now you can contribute if you're under age 50, $22,500. If you're over age 50, you get another 7,500, so you could put 30,000 per year into a Roth TSP. There are no income limitations. So technically you can make a million dollars and if you're still working for the federal government, then you can put $30,000 into your Roth TSP.

The IRA, the Roth IRA works a little bit differently in that the maximum you can put in if you're under the age of 50, $6,500. If you're over the age of 50, you get another thousand, so you can put in $7,500, but unlike the TSP, you're going to have modified, adjusted gross income limitations that can prevent you from putting money into the account if you make too much.

I think that MAGI limit right now is right around $230,000, maybe it's 228 or something like that. So from a 30,000-foot view, payroll deductions are going to fund your TSP contributions and you can put up to $30,000 a year. Roth IRA, you can put $7,500 a year and that's you going to be writing a check into that account.

Michael Mason: Ben, just for clarity, that was MAGI, Modified Adjusted Gross Income, not MAGUP, right?

Ben Raikes:Yes, sir, MAGI.

John Mason: Modified Adjusted Gross Income. And I think one other big difference there too, Ben, is that for TSP, you have to get your contributions in calendar year.

Ben Raikes:Correct.

John Mason: So January 01 through December 31. Roth IRAs and traditional IRAs, you actually have until the tax filing deadline to get those ends. That's a little nuance that we don't talk about.

Ben Raikes: It's great. They give you a little leeway there, right? ‘Cause maybe you're someone who's on the edge of making over that income limitation and you can actually wait and see how your income turns out and say, “Okay, well I'm under the limit before I file my tax return. Why don't I go ahead and make that contribution?”

John Mason: Dude, that's a great point. And we love, as financial planners, getting folks on systematic contributions. That's a really nice thing to see $500 a month for 400 clients come in, you know, why not? Why would you not do that? It's a good budgeting tool. It's good for business. It's good for everybody until you're on the cusp and then you have to remove a disallowed contribution and you used to do things like recharacterizations and all kinds of stuff. I mean, it is a nightmare when you start going.

Tommy Blackburn: Yeah, you want to avoid those removal of excess contributions and recharacterizations if you can. Yeah, I have a love-hate relationship with that April 15th being allowed to do my Roth IRA. ‘Cause I do it for clients, but it is–systematic would be much easier. I much prefer to be in that world if we can, but there are definitely the cases where we don't know until we know exactly how that tax return is going to look.

Michael Mason: And, you know, I think Roth IRAs are the most underused vehicle in the country. Many people, you guys have said it three times, contributions. Many people hear contributions, they think it has to come out of their checking account. And they're sitting here with an after-tax brokerage account that has a quarter of a million dollars in it, and every time there's a capital gain, they get to pay taxes. Other financial planners let them sit there when all they had to do was open a Roth IRA right beside it and transfer $7,500 every year for both spouses.

John Mason: So we don't have to pay tax on the money that goes into a Roth, correct?

Michael Mason:Yeah, we don't have to pay tax again, right?

John Mason:We've seen that as a common misconception. It's like, “I have this million-dollar brokerage account or $100,000 brokerage account, but I don't want to pay taxes to get it into the Roth.” And we're like, “Dude, you already did. You already paid taxes on that when you put it in there the first time.”

Michael Mason: It's funny what people think. And again, what their accountants–think about that, why doesn't the CPA say, “Boy, there's all those dividends and capital gains coming in. How's your Roth doing?” “Well, I don't have one.” And, “Where's the financial planner?” Yeah, he doesn't–he or she doesn't want to go through the paperwork to open a $7,500 account.

John Mason: It is. We have that whole episode that we did recently on fiduciary and doing the right things and being that person for your client. And it's interesting because the cost of doing business is not zero like there are costs to operate Mason & Associates, and depending on where you decide to do your performance reporting and where you decide to do your trading, there are services out there that charge you per account.

So when you talk about conflicts of interest, opening up a $7,500 Roth that some of these software providers charge you the same for that as they would a $2.5 million dollar Roth. Maybe that's why we're not opening the accounts. Just saying.

Tommy Blackburn: It’s a good point because it's definitely one of the things we look at We say, “We've got a brokerage account, can I get rid of this?” I mean generally, it’s how do we move to tax-free accounts? I mean, that's what you're looking for. Maybe that is the reason. It's also actually made me think of a client recently, a rather new client. We're doing this exercise for them where we're moving money out of the brokerage periodically into the Roth. And they, one of the comments was, “You've got like a different way of thinking about things. This was never, the previous advisor never brought this up. So it's interesting, like you're getting out of the box, how you're thinking.” And to us, it's not really out of the box. It's interesting that we never addressed this but maybe it's just not as common as we realize.

Michael Mason: Yeah, if you look back in time, which I've done several times, when acquiring a new client, you know, had you been doing this for the last 10 years, you'd have a hundred thousand growing tax-free. Now we got to start from scratch.

Tommy Blackburn: Right. Because if we've got spouses, right, so maybe we're doing 15,000, $7,500 each, that's 15,000 a year. And if we can, if we have that April 15th, maybe we can get two years in and one. And so now we've got 30,000 and we just do that periodically.

John Mason: So maybe we can talk now a little bit about the difference between emergency fund status or like which vehicle serves better as an emergency fund. So we know our audience typically, you know, I don't know what the exact, but we assume mostly a little bit younger. So maybe mid-career folks listening to this as well as we know some clients are listening. So hello clients, thank you for tuning in to another episode, but let's share with the audience why we prefer Roth IRAs at 50 years old or 40 years old, or 30 years old or for Roth TSP.

Tommy Blackburn: It doesn't get more liquid than that. And what we mean there is there, whatever you put into a Roth IRA, we've established it's already been taxed. Well, you can pull that out. There is no tax. There is no penalty. There is no age you have to meet. At any point in time, you can pull those contributions. Those are the first thing to come out and there's no pitfalls to doing–obviously, we want to leave them in there for retirement. That's what we've designed this for, but we can get back to that money very easily. That's the first thing that comes out.

Whereas Roth TSP or TSP, I'm sorry, Roth 401(k), those we generally are going to have to be 59 and a half severed. So once that money goes in, it's a great way to get it in there, not so easy to get that money back.

John Mason: So if you have $6,500, you're an audience, you're listening to this podcast and you're like, “I'm looking for $6,500 to save somewhere, can I do Roth TSP or Roth IRA?” And let's assume you have room in both places. We would suggest to you that Roth IRA is probably the route to go because we have access to that money. Like Tommy just said, at any time, for any reason, we just need to be tracking those contributions. And so you track your contributions one of two ways.

You can either save canceled checks, you can–maybe three ways–you can save statements that show it, or you can use a beautiful form called IRAs 8606, which ironically we find that a lot of firms don't like filing for some reason.

Tommy Blackburn: And well, let's just go on that one while we're there. So, sometimes we have to file it, and that's the one that's most bewildering, is when it is a requirement and it's not done for Roth IRA contributions, you don't have to file the 8606, however you can tell your software to do it. And there it will show those contributions, and that would be a very good way to track it going forward. So that one requires a little bit of proactive work on your tax preparer's part. There are other times, I guess we'll get to, when it's actually required, this is not an option.

John Mason: Let's just dive right in, Tommy. So we're recommending Roth conversions, which is the idea of taking money from a traditional asset like a TSP or IRA or 401(k) and moving it to Roth. And one of the reasons we're doing this, not just wholesale a 100% like, like some other videos and podcasts are suggesting, but thinking about it in an increment.

Sometimes it makes sense to do it all. Sometimes it makes sense to do partial. But when we look at a TSP, and I just want you to imagine, you our listener, right now, and you're saying, “Okay, I have a million, I have 500,000 in my TSP and it's all pre-tax.” What I want to let you know is you don't have what you think you have.

You have 500,000 or a million less an arbitrary future tax rate. If we go ahead and siphon off some of that money every year and start shoveling it over into Roth, we at least know what we have. And in order to do that, we have to pay tax on the transfer. So that's the idea of the Roth conversion.

Michael Mason: We call that the devil you know versus the one you don't know.

Tommy Blackburn: And we have to report that on the 8606. You mentioned something too, I want to maybe hit home because I think sometimes people don't quite fully latch on to that, as you said, partial conversion. One, I want everybody to realize as much as we talk about Roth conversions, we are usually not talking about let's take your entire IRA or your entire TSP in one fell swoop and convert it.

That may be a strategy that we may consider, but usually, it's partial. Let's just take a chunk. Maybe it's only 20,000 a year and let's systematically, over time, move that into Roth. So when you hear us talk about Roth conversions, it just dawned on me recently, like I don't want people to be terrified. These guys are talking about paying huge tax bills all at once. This is something that we usually execute over many years.

Michael Mason: Yeah, we may be converting to the top of the 22 percent bracket or the next one was the 25, right? The top of the 25 percent bracket, you know, there's some logic to it or we're going to do five years worth of your church tithing in one year, take that deduction upfront, and convert that amount to a Roth IRA.

John Mason: We love that idea, bracket topping whether it's to the top of the 22, 24, or 28% bracket or up to the Medicare on IRMAA premium thresholds, if you've heard that podcast on IRMAA, is one of our, maybe one of our more favorite ones. Yes, one of the most hated taxes and all the land so yeah, bracket topping is a really fun concept, Mike, and it's something that we've been doing for quite some time.

I like at 59 and a half, so there are federal employees been listening to this podcast right now who are 59 and a half who have access to an in-service transfer or an in-service distribution that allows them to move money from TSP to an IRA. Why would one consider doing that at 59 and a half, regardless of whether or not they're working with an advisor?

Ben Raikes: They’re moving money from their TSP

John Mason: To an IRA.

Ben Raikes:To an IRA. They just, at that point, they have greater flexibility. They can avoid 10 percent penalties. The list goes on and on. There's a plethora of investment options that they have. It looks like Tommy wants to jump in here

Tommy Blackburn: Well, I'm gonna leave you a little bit, and then what, we're just talking about partial Roth conversions. So what else once we've made this move?

Ben Raikes: You could do after-tax Roth conversion.

Tommy Blackburn: Well, I think where we're going is can we do, can we convert our TSP?

Ben Raikes: No, we cannot perform Roth conversions within our TSP. That has to be done within an IRA.

John Mason: So we love it. 59 and a half doing these in-service transfers because one, we get this money out into an IRA and it's accessible, right? So now all of a sudden I have a linked checking account, a linked bank account. So if I'm traveling overseas and I need money, I can send money directly to my IRA. Why would you not want that flexibility now? TSP has gotten better, but it's still a process. It's still like a DocuSign thing and there's still limitations on how often you can do it.

Tommy Blackburn: Mandatory withholding. I mean, yeah, it's not very flexible.

John Mason: Yeah. So the flexibility of having those funds in an IRA, there's no reason not to. There's index funds out there that are the same expense ratio is inside TSP. Then to your point, Tommy, we have access to these Roth conversions, which in TSP, we can't do. So if partial conversions make sense or what like we like to call them feel-good conversions, if you even want to do some feel-good conversions, we have that ability at 59 and a half. You may have never had this ability your entire career until now.

Tommy Blackburn: One of the things that maybe going back on too, when we talked about what was so great about the Roth IRA and that liquidity from it, where we got to pull our contributions out. Unfortunately, so TSP has gotten better. The rules keep changing and they have gotten better. Distributions from Roth TSP are pro rata. So it's not just the contributions coming out first. Usually, this doesn't matter, but if we are in that situation, where for some reason, we haven't satisfied the five-year rule. We've done something, that's where that pro rata rule could hurt, whereas the Roth IRA, we get to pull those contributions out first, and that's the best world.

John Mason: So separate five-year rules from Roth IRA to Roth TSP, and then I think we can take that even further, right? And it's actually five-year rules for Roth IRAs, TSP, and any additional employer retirement plan you have there on that. They all have separate five-year rules.

Ben Raikes: And then speaking of conversions as well, every separate conversion that you do has its own five-year period coming out of a Roth IRA as well. So there's a lot to keep track of.

Tommy Blackburn: There's a lot of five-year rules to keep track of. I guess I'll throw this tip out there though, that we, I think all generally prescribed to, which is just get that Roth IRA started as fast as you can because what's, to your advantage, if you move money out of a 401(k), a Roth 401(k), or a Roth TSP, once it gets into that Roth IRA, it's got the same timeline that all of your Roth IRAs have had. So once you satisfy the five-year clock once for Roth IRA contributions, you've satisfied it forever.

Michael Mason: Guys, let's think about somebody that's 40. I'm sure we have many of those 35, 40, 45 that is kind of retirement saved out, and they don't have a Roth IRA and maybe they have a child and they're trying to save $500 a month for that child's college education. Let's kind of compare and contrast maybe 500 into a 529 plan or maybe $500 into your Roth IRA. If you have to make those choices, let's talk about the benefits of maybe using the Roth versus the 529.

John Mason: I think in almost any circumstance, maybe HSA would take priority if I had a high deductible health plan. But I think in almost any circumstance, if I had to pick one investment vehicle to save, it would be Roth IRA.

Just for the flexibility and knowing that I have access to those contributions and, so if you're trying to decide, Mike, between 529 and Roth and you only have, I say only, you only have $6,000 to save that year, we would suggest Roth because you could get those contributions out in the future to pay for college, and then there are even certain exemptions when using money for higher education where you avoid the 10 percent penalty. So, contributions come out tax-free, we could avoid the 10 percent penalty if using for college, it's a pretty good deal.

Tommy Blackburn: And the annual license you hit on, I think that's the big part. There is no annual license on 529 contributions. We can do those whenever, so we have a lot more flexibility, whereas Roth IRA, every year it's a ticking clock.

Michael Mason: You're hedging your bets, right? It's like 529 is growing tax-deferred as long as my child goes to college and they go to college without a scholarship or we can have a tax-free Roth. What's the negative? You know, maybe all we can get is our contributions, but you also may wake up 15 years from now, your career's in high gear, and you don't even need what you put away. So now you've socked that away for your own retirement at Roth IRA. Your bets are so much better hedged in that scenario than the 529.

John Mason: I am so proud of you. You know that? I thought when you were saying you were going to go down the path 15 years, who the heck knows? College could be free. You know, I thought we were going to get political there, but you just stayed right by the books. That was pretty good.

Michael Mason: Well, thanks for reminding me that I can go political every now and then.

Tommy Blackburn: So, Mike, this is an odd moment for me. I think all of us can laugh, but I don't know if–Carter does this, but, you know, I've had moments with Zoe where I say, like, “I'm so proud of you,” when you see her accomplish something or she's getting it down. And you've probably said something to Carter. Well, Zoe also will occasionally say that back to me. She'll say, “I am so proud of you.” And that was almost like the son telling the father right now, “I'm so proud of you.” That's awesome.

John Mason: Well, let's talk about distribution. So we're retired or yeah, I think we're retired. We're taking distributions from TSP. TSP allows you now to pick the source. They didn't used to let you pick. It used to be pro rata. So if you took 10,000 out, some would come from traditional, some would come from Roth. They changed it a few years ago where you can actually source your distributions from whichever balance.

So you've got that flexibility. So let's say you moved a bunch out and it's in an IRA either at Vanguard, Schwab, or maybe somebody like Mason & Associates is helping you manage the money. Let's make sure we educate the audience on the ability to transfer funds back to TSP and the difference between traditional IRAs and Roth IRAs and those transfers.

Tommy Blackburn: So IRA money, pre-tax traditional, that can come back into a TSP. It's a pretty much a revolving door there so we can move money in and out. That Roth money cannot. That Roth money, once it can come out of Roth TSP into a Roth IRA, but it cannot go the other direction. So it's important just to be aware.

A lot of times we always say you can go back to TSP with a Roth IRA. You cannot. It is advantageous. There's a planning opportunity here with the segregation of accounts when we're doing those partial Roth conversions or Roth conversions. If you're wanting to go down that route too.

John Mason: Yeah, so just be aware right that there are changes and differences between these things and I highly doubt that there's any financial planning firm out there encouraging folks to do Roth conversions so that they can't ever possibly be fired to move the money back into TSP, but like it's a thing.

It's true. It could be there. So just being aware of those changes and we have a couple of YouTube videos, which are actually pretty popular: “Don't Max Your TSP!” and “Don't Close Your TSP!”, two of our most watched videos on YouTube. And I just want to throw that out that, our audience, if you haven't seen “Don't Max Your TSP!” or “Don't Close Your TSP!”, you may find those interesting after listening to this episode.

So, guys, I think we've touched on quite a bit as it is like the Rothification of the world, Roth pros, Roth cons. I don't think we specifically touched on that if you can contribute to both a Roth IRA and a Roth TSP in the same year, I don't think we've touched on that yet.

Tommy Blackburn: I don't think we have. Ben went through it in the beginning, kind of the limits of what we can do, but your point, right, the immediate point is we could do, in theory, 30,000 into our Roth TSP and another 7,500 into our Roth IRA. So those are separate limit bucket type of accounts there.

John Mason: Absolutely.

Michael Mason: Many people make that mistake. They make the mistake thinking Roth TSP is income-tested. And then they can't put more than 7,500 into it, or if they did TSP, then they can't do Roth IRA, so that's good clarity.

Ben Raikes: And this is also just for one person, right? So we could have a spouse that makes another 7,500. You could also have a federal employee spouse and do another 30,000. So, technically, we could get quite a bit of money into these Roth-type accounts just in a single year.

Tommy Blackburn: And I'll go so far as to say you may not have a choice here soon, particularly for what they call highly compensated under Secure Act 2.0, so starting next year, I believe it is, if you made more than 145,000 in 2023, your catch up contribution, so we had the 30,000 and what amount is it, Ben? So it's 22,500 plus 6,500 is our catch-up, that has to be, that will have to be Roth catch-up going forward so you may not have a choice but to contribute to Roth.

John Mason: And there are, I believe, changes in this plan too that there are still employers out there. Secure Act 2.0 is what I'm referring to. There are some employers that don't have Roth 401(k) or Roth 403B options. And in those situations, if you find yourself to be highly compensated and your employer does not offer Roth, you just can't do catch-up contributions anymore.

That's a shame. So you may want to start talking to your employers and see about how we're going to amend those 401(k) plan documents if you're listening to this in your private sector. One other change, Mike, under Secure 2.0, which was really cool was the abolishment of TSP and 401(k) Roth RMDs.

Michael Mason: Which is tremendous. We didn't even know why it was there and while we're talking about it, also the extension of RMD age to 75, which is another, I know it's off subject, but still.

John Mason: Oh yeah, so now that was kind of like a great equalizer. Like, one of the things was you never want to have a raw TSP because you have an arbitrary RMD. You would never do that. Now it's kind of been the great equalizer. It's like, well, we still prefer IRAs for all the flexibility, but we at least don't have, Tommy, that RMD bogey anymore.

Tommy Blackburn: Right, yeah, so, yeah, the Roth IRA never has had required minimum distributions. You could leave it in there your entire life if you wanted. Roth TSP starting in 72, 73, 75 depending on when we were born, you had to start taking money out. Wasn't taxable, but it had to now come out and start being taxed again in the future. So you don't want that, don't have to worry with it anymore.

John Mason: Well, you know, this episode is all about action. We've talked a lot about Roth and the Roth vacation of the world, but let's go around the table with any action items that our audience can take away from today and immediately, or maybe not immediately, but soon implement in their financial plans,

Michael Mason: You know, as I was thinking about this don't necessarily know that it's an action item, but we talked about the devil you know versus the one you don't, which is a tax bracket you're in, and this is going to apply to any of our listeners that are not federal employees that won't be getting a pension.

You must understand that if you convert taxable IRA or 401(k) money to Roth, even if you're in the same tax bracket today as you will be at retirement, but If retirement's going to be Social Security and what you've saved, you could delay Social Security to age 70, you may have a $60,000 benefit, your wife may have a $60,000 benefit, and if everything you have saved for retirement's Roth, everything is tax-free.

So don't just look at today's tax bracket. Understand that's the way Social Security is taxed, and factor in if I convert my 401(k) to Roth, yeah, I may not ever have another tax bill once I retire.

Tommy Blackburn: We have some clients that they like that world.

Ben Raikes: I’m going to reiterate, I think a great point that Mike made earlier. If you have those taxable brokerage accounts, whether it's a joint account or an account that's just in your name, you don't have to write a check from your bank account to contribute to a Roth IRA. Think about slowly converting those taxable accounts into Roth IRAs. You can do $7,500 a year for yourself and your spouse. That's $15,000 a year. And you could, again, time it with the end of one year and the beginning of the next. You could get 30,000 moved from an account that's paying capital gains, dividends, and interest to an account that's tax-free for the rest of your life.

Tommy Blackburn: Share the podcast with your friends. Rate us five stars. I think maybe on the simplest level, going back to that five-year clock, just go ahead. If you don't have a Roth IRA, get one started. Get that clock satisfied.

John Mason: YouTube channel: Mason Associates 4825. Do all the things, hit the like button, bell notification, subscribe. We're, again, we're loving producing this content. We hope you're loving it as well. Couple things, if you're interested in becoming a client, you can schedule an intro call at That's under the Get Started page. We asked for a few pieces of information and you'll get a 15 to 30-minute call with one of the five advisors at Mason & Associates.

So if you're interested in becoming a client, we'd love to hear from you. Of course, your questions and comments about the podcast are always welcome at Mason FP like And my takeaway, guys, for one of the final action items is if you're 59 and a half, let's think about doing that in-service transfer for all of those flexibility reasons that we talked about earlier, and enabling us to do some more in-depth financial planning and into Mike's point, conversions is not just based on your tax rate. It has to be part of a global financial plan.

Just like everything we talked about on this podcast is it can't be construed as investment or financial planning advice for you, but we hope that because you tune in every 2 weeks for 30 or 40 minutes listening to this, that you feel educated and empowered and motivated to make a change in your financial plan.

Thanks for joining us on the Federal Employee Financial Planning Podcast. We are Mason & Associates. Thanks again for being here and tuning in to another episode of the Federal Employee Financial Planning Podcast. ?

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