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Thread: TSP Transfer to ROTH using Insurance Money

  1. #1

    Default TSP Transfer to ROTH using Insurance Money

    I've been toying with the idea on how to transfer our TSP (wife and I) to ROTH without us having to come up with the money to pay the tax involve with the transfer after 59 1/2. I was reading Ed Slott's book and was amazed on what I found. He offered many different way to skin the cat but I found one that I think will suit our needs. This is to get enough insurance to cover the transfer cost. This is how it works and this is hypothetical:

    Let's say a husband and wife have a million dollars each in their TSP account. Each of them will designate each other as the primary beneficiary and their kids at the alternate or secondary beneficiaries. When one of them passes away, the plan is to rollover the TSP account to the beneficiary's account. So at this point, there are now 2 millions at the beneficiary's account. To transfer this to ROTH the beneficiary will have to pay 36-40% in taxes. Instead of paying the taxes out of the 2 millions fund (800k), the beneficiary will use the insurance money to cover this cost. This way, the whole 2 millions will be rolled over to the ROTH.

    What is the benefit? Insurance money funnels directly to the beneficiary tax free, however, when the beneficiary dies, this becomes part of the estate. Big estate means big taxes towards the end. By using the insurance money, the estate will not be burden of additional chunk for estate planning. Thus saving it tens of thousands of dollars. Additionally, with the power of compounding interest and the fact that 2 millions were able to pass through the surviving ROTH instead of 1.2 millions, it will ensure that their heirs will receive a big chunk every year tax free (if they decide to use their life expectancy).

    Now, if the heirs are old enough to have a ROTH, the surviving spouse can refuse the TSP and give them to the secondary beneficiary which is their kids. Using the insurance money, the surviving spouse will lend the heir the 800k so they can transfer the whole 2 millions into their ROTH. I mentioned lending it to their heir instead of giving it to them because IRS rules that you may only give a 10k each per year. By lending it to them, this will not fall under this rule. Now, you know how kids are, you'll never know when will they ever be ablle to pay you back.;-)

    Pyriel


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  3. #2

    Join Date
    Sep 2004
    Location
    Missouri
    Posts
    8,619

    Default Re: TSP Transfer to ROTH using Insurance Money

    Work'n all the angles! That's what I like to see!
    Socrates: "Democracy, which is a charming form of government, full of variety and disorder, and dispensing a sort of equality to equals and unequaled alike."

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  5. #3

    Default Re: TSP Transfer to ROTH using Insurance Money

    Now you and your spouse can stare at each other and wait for each other to die.

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  7. #4

    Join Date
    Jun 2004
    Location
    canonsburg, Pennsylvania, USA
    Posts
    207

    Smile Re: TSP Transfer to ROTH using Insurance Money

    Quote Originally Posted by fabijo View Post
    Now you and your spouse can stare at each other and wait for each other to die.
    i sat there and try to digust what pyriel said and it was great and i thought i had everything understood then fabijo came out with his comment and i have not laugh so long and hard (i was crying) in such a long time.it just hit my funny bone the right way. Tom this site is great thank you so much. Pyriel i will read it tomorrow and digest it the right way. that's what happens when you work 6 days a week 10 hrs.

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  9. #5

    Default Re: TSP Transfer to ROTH using Insurance Money

    Quote Originally Posted by fabijo View Post
    Now you and your spouse can stare at each other and wait for each other to die.
    I was LMAO!!! You are hilarious... But since you brought it up, I now have to answer that. Since each will have an alternate beneficiaries and the end result is to funnel retirement accounts to our kids, we both don't have to wait for someone to croak. If for some reason that we both pass away at the same time, the same rule may be applied since the alternate beneficiaries become the primary beneficiaries. They can then do the same tactics which I brought up with my first post within thread.

    Just to let you know that i'm smiling while i'm typing this...

    P

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  11. #6

    Join Date
    Jun 2004
    Location
    canonsburg, Pennsylvania, USA
    Posts
    207

    Thumbs up Re: TSP Transfer to ROTH using Insurance Money

    pyriel -----you handle the situation so well not like tech and fundsurfer getting mad at each other or when borderpilot and 06savefor2012 jump all over tom, pyriel you always try to stay on the subject

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  13. #7

    Default Re: TSP Transfer to ROTH using Insurance Money

    fabijo is really a good guy and is becoming to be quite an asset here in TSPTalk. Tech, Birch, Fundsurfer and many others here all have different investing styles and how they view the market as a whole. A little disagreement is healthy. Underneath all that, I guarantee you that each of them have a level of respect with one another. Sometime they are just a bit shy of showing it....;-)
    Pyriel

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  15. #8

    Default Re: TSP Transfer to ROTH using Insurance Money

    Quote Originally Posted by pyriel View Post
    Since each will have an alternate beneficiaries and the end result is to funnel retirement accounts to our kids, we both don't have to wait for someone to croak.
    I read your post in another thread and that's when I realized that you were looking out for the future of your kids, by passing along tax free money. I'm glad I can make people laugh even on such an impersonal medium like a message board. Laughing is healthy and will help you live longer to enjoy the benefits of your retirement longer.

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