Question
As always, thank you so much for your clear videos. For the most part you clear up the murky topic called retirement.
My question is: I’m 59 and retiring this year and I have just sold my home. The proceeds of that sale went to pay off the mortgage of my retirement home and I still have around $300K left. Would it make good sense to use that tax free money for the next 6+ years as I would my TSP along with my pension and NOT touch the TSP at all? That way the total sum in the TSP that has very low admin fees can grow a bit more before I really need to mess with it.
Or would you invest the money.
Long question I know, but thank you so much for taking a look.
Answer
This is a great question. And to answer your question properly we have to touch on how different types of income are taxed.
There are 3 different tax buckets that we need to know:
Tax Me Now
This includes things like brokerage accounts and the 300k that you have left over from your house sale. Basically, if you were to invest this 300k and it grew to 350k then you would have to pay taxes on the 50k of income as you earned it (or when you sold the underlying investment).
Unlike your TSP, you generally can’t defer your taxes until later.
Tax Me Later
This includes your TSP and other pre-tax accounts like a traditional IRA. Basically, you don’t have to pay taxes as your money grows but you do have to pay taxes when you take the money out.
Tax Me Never
This includes your Roth TSP and Roth IRA. And once you have money into these accounts then you never have to pay taxes on the growth. This is a great tax bucket to have in retirement.
Now that you know about the 3 different tax buckets we can discuss what order that we’d normally want to use these accounts.
Most of the time, it makes sense to use “tax me now” money first because it will allow your other money to continue growing tax deferred or tax free. So this would mean that it probably would make sense to use your 300k first in retirement to allow your TSP to continue to grow.
That being said, 300k is a lot of money to just sit on the sidelines for 6 years. It may make sense to invest some of it to get some return on your money. But you’d probably want these investments to be pretty conservative because you’d need the money relatively soon.
Also, you may want to consider doing Roth conversions in the early part of retirement as well to get some of your traditional TSP money over to a Roth IRA. This way you will have more tax-free money later and be able to escape RMD’s (required minimum distributions) to some degree.
