pyriel
10-30-2006, 03:20 PM
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
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