TSP rollover at retirement and collecting interest from bonds?

[nenabillalex]

I'm going to retire in a few months and I'm doing preliminary research on tax-free municipal bonds. Is it possible to roll all of your TSP funds into a personal brokerage account, buy municipal bonds that pay out a tax-free interest rate, and not pay any federal taxes because you haven't withdrawn the original funds from your TSP, you are just collecting the interest?

There must be something wrong with this?

[Cactus]

I don't understand the setup. If you are rolling all of your TSP funds into a personal brokerage account you are withdrawing your original funds from TSP. Unless the brokerage account is a retirement vehicle, like an IRA or 401K, you will be paying taxes on the entire amount in the year you pull it out. If you roll it into another retirement (deferred tax) account it makes no sense to invest in tax exempt investments because you will be paying regular income taxes on the whole amount when you do withdraw it.

[nenabillalex]

First off, I apologize for not explaining it clearly.

I already have a brokerage account (example, Scottrade, Fidelity, Charles Schwabb) with an IRA (both Roth and Traditional). I haven't retired yet and I know when I retire I have a period of time to move the money directly into one of my accounts with the broker. Let's just say its X-amount of dollars. It's my understanding that I'm not taxed because the X-amount of money is not disbursed to me. Now, within that brokerage account, I take the X-amount of dollars and purchase tax-free municipal bonds that pay out a monthly rate of 4%. Could I collect the 4% monthly rate without paying taxes since they are tax-free municipal bonds?

I still have the X-amount of dollars from the TSP transfer untouched and not paid out to me. I know at 70 1/2 I would have to draw a minimum amount and pay taxes.

[Frixxxx]

It's my understanding that I'm not taxed because the X-amount of money is not disbursed to me.
I think you are confusing broker account with a 401(*)/IRA elligible account.
The money you put into 401(*)/IRA accounts is taxed upon withdrawal. You are saying you want to move this money to another 401(*)/IRA INTO a broker account that does municipal bonds. Now, you have to pay tax on the money you take out of TSP. After that, the skies the limit.
The municipal bond market is and can be very volatile. I have lost money in 2 different muni-bonds. So be wary if a professional is telling you differently.

Check with your accountant.

[evilanne]

There is no tax advantage to investing in municipal bonds within and IRA. Any money withdrawn from IRA is taxed as ordinary income and is reflected on 1099R. It doesn't matter what the earnings are from...all is taxable income.

[nenabillalex]

There is no tax advantage to investing in municipal bonds within and IRA. Any money withdrawn from IRA is taxed as ordinary income and is reflected on 1099R. It doesn't matter what the earnings are from...all is taxable income.

Thanks for all the replies. Much appreciated.

[Boghie]

You can, and probably should, roll your TSP holdings into a self-directed retirement IRA upon leaving gubmint service. There will be no tax issues with that if done correctly.

If you move your TSP assets to a non-retirement account you will pay full income tax on the amount taken out of TSP. It will be treated as earned income. Additionally, if you are less than 59 1/2 you will get a little more love from the IRS in the manner of an early withdraw penalty. Yea!!!

Now, let us assume you moved your TSP assets properly to your self-managed IRA account. The money you take out will be taxed at income tax rates. Nothing to do with the type of assets you hold. Uncle Sam wants their money. One nice thing is that the investments in your IRA are not taxed until you pull them out. The compounding earnings are untaxed till you purchase your ski boat.