Craig Wear explains how federal employees with TSP balances over $1 million face a hidden tax trap: required minimum distributions force large taxable withdrawals in retirement. Roth conversions can save millions in lifetime taxes if done early, before RMDs kick in.
So there's a new way Roth conversions could save federal employees millions of dollars in lifetime taxes. But if you've done everything right and on track to have at least $1 million saved, there's a risk your TSP account could turn into a future tax problem instead. So first, let me show you what this sneaky tax problem is. Because once you see it, I think you're going to start planning around it and really changing your life to move in a better direction tax-wise. So the reason that this problem is so sneaky is because it affects people doing everything right. I think of it like a roller coaster. So at first you're slowly climbing, right? You hear all the noise, everything feels fine. In the 401 or TSP world, you're making contributions, your balance is growing, life is good. But eventually every roller coaster reaches a tipping point. You crest at the top. You know the feeling on the roller coaster, right? And suddenly gravity takes over. You're moving in the direction you didn't expect. That same thing happens in retirement. It's called required minimum distributions or RMDs. That's the point where the IRS effectively buckles you into the ride because once the the RMDs begin, taxable income is forced out of your retirement accounts, whether you need the money or not. And by then, it's often too late to make meaningful changes.
