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MASON & ASSOCIATES, LLC

FEFP: Thrift Savings Plan Options: Super-Catch Up and Roth Conversions (EP83)

How will upcoming changes to the Thrift Savings Plan (TSP) impact your retirement strategy? In this episode, John, Tommy, and Ben explore the evolving landscape of TSP, focusing on new contribution limits and, coming in 2026, in-plan Roth conversions. They emphasize the importance of a collaborative approach to financial planning, avoiding groupthink, and tailoring strategies to each client’s unique needs.

Listen in as they shed light on the government’s motivations and the potential tax implications for highly compensated individuals. This discussion highlights the necessity of understanding these changes' long-term impact and the critical role of professional guidance in maximizing benefits.

Listen to the full episode here:

What you will learn:

  • What sets Mason & Associates apart. (3:12)
  • The value of collaborative financial planning. (6:00)
  • Our deep passion for providing financial guidance. (8:30)
  • Why younger generations should have a greater voice in these changes. (14:30)
  • Maximizing every resource at your disposal. (18:00)
  • The crucial role of professionals in ensuring mistake-free planning. (26:30)
  • Key factors that determine whether a Roth conversion is right for you. (30:50)
  • Why it's essential to choose your financial advice sources carefully. (36:30)

Ideas worth sharing:

  • "We don't have to let perfect get in the way of good enough." – Mason & Associates
  • "At the end of the day, it is not for us to always understand why things are the way they are. It's just to plan with the rules we have." - Mason & Associates
  • "Ultimately, it’s not the tool itself that’s valuable, but the advice going into that tool that’s important." - Mason & Associates

 

Resources from this episode:

 

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Read the Transcript Below:

Congratulations for taking ownership of your financial plan by tuning into the Federal Employee Financial Planning Podcast, hosted by Mason & Associates, financial advisors with over three decades of experience serving you.

John Mason: Welcome to the Federal Employee Financial Planning Podcast, with Mason & Associates. Today, John Mason, Tommy Blackburn, and Ben Raikes, the normal partners in planning. As we introduce this episode, we want to introduce a little bit of an inside joke: Tommy and I tend to think along the lines of a similar mindset. And we recognize, Ben, that we like to keep you on here as the third host of the show because you're like 'Bad Boy Ben.' You always have to have the different opinion, you always have to buck the system a little bit. So we've got three personalities on the show today: John, Tommy, Ben, partners in planning at Mason & Associates.

And in today's episode, we're going to talk about changes coming to the Thrift Savings Plan. We know that many of our listeners and our clients are going to tune into this episode because anytime we get TSP in the title, it's going to be one of our more popular [episodes]. Guys, excited to record this episode, assume it's going to launch sometime early January, which should be perfect timing as we talk about some of the changes that are coming.

Tommy Blackburn: I just thought to myself, you've got Bad Boy Ben, and it made me think of Shark Tank, Mr. Wonderful, but I would call him Mr. Stubborn.

Ben Raikes:Guys, this is not something I want to stick. There are other people listening to this. I can't be joining a Zoom call and, “Hey, here comes Bad Boy Ben.” You know what? I'll also say, at least to my credit—and maybe you guys won't agree—it's not easy being me. It's not easy to have to disagree with you guys. You know what I mean? I can get ripped in a natural state. I'm saying it's not easy, that's all.

Tommy Blackburn:That is true. You would think that you would get tired of it, but you just, every day, cue yourself up, taking the arrows.

John Mason: For the audience's benefit, as we get close to diving into the episode, we were in the kitchen the other day having some lunch, and Tommy and I were doing our normal roasting Ben over something. And Ben’s like, “Did it ever occur to you that somebody could think differently than the two of you about something?” And we were just like, “Yeah, but they're wrong.” And we just say that being funny.

Audience, we're not the end-all be-all to financial planning; we're not God's gift to financial planning. We think we're pretty good at what we do, and we certainly all have our opinions. And the neat part about Mason & Associates, guys, is that we have a rockstar operations team. We've got five financial planners with our own unique personalities, but at the end of the day, we're a team-based financial planning team, which means although our clients will have a lead advisor, they benefit from all of our years of collective experience.

And I know personally, each of you has helped over the last 12 months with me serving my clients, whether it's tax research or anything as far as sometimes I'll just pop into Ben's office and be like, “Dude, am I crazy?” and he's like, “Nope, you're good.” And just that mentality of having somebody to bounce ideas off of is so helpful.

Tommy Blackburn:Pops in our offices, we say, “Yes, you are crazy.”

Ben Raikes:I think we all agree on 95% of the values, and advice, and the things that we tell our clients and our recommendations. It's just shades of different, “Hey, what would you do in this situation?”

And it's great to have, we joke that maybe I seem to be the one that disagrees with you two the most, but I think it is good to not have groupthink, to have someone that's pushing back on ideas and to have a good back-and-forth. Even if Tommy and John say, “Yeah, Ben, we're just right 100% of the time.”

John Mason: It's amazing. As I reflect, Ben, on some of the client relationships that we began this year, we had some disagreements on one client in particular. We don't often have situations where we have to, like Dave Ramsey, help people get out of debt.

But there was a situation this year where there were substantial investable assets, good fit, but a little bit of debt that we had to work our way out of too. And you and I came at it from a different perspective, and both were right. And then it just comes down to the plan that the client's going to implement.

And at the end of the day, it was just a really good example of how Ben's strategy was good, John's strategy was good, and then it just like, which one is the client most comfortable implementing? So I remember that is one thing.

And then there was another one that you and I had earlier this year, Ben, where we had some highly appreciated stock. We have some charitable giving goals and then picking, because they're also 70 and a half, so it's should we do qualified charitable distribution, should we get rid of the highly appreciated stock, and what about the step-up in cost basis if they were going to die?

There's a lot to process as you think through something like charitable giving, but like just the ordering of which one you do first. And then that can also dovetail, Tommy, into, if you're in a 12% or 15% tax bracket, do you harvest capital gains at 0% or do you do Roth conversions? And they're not hurting balance, right?

Tommy Blackburn: Yes. Yeah. A lot of times it's a balancing act. I think what you said is that's what's key: a lot of times we talk with clients and we say here is the maximization button, the mathematical, absolute correct, or best answer. But there's also five other really good answers.

So we don't have to let perfect get in the way of good enough. So here's our advice. Here's how we got there, but here are some other strategies. And let's collaborate and let's get to what actually is implementable for you versus what we think is the 100% best answer. And that's where we're going to go.

Ben Raikes:I'm thinking about a joke we all tell ourselves whenever we're having these discussions and there's multiple different ways to go with a recommendation. It's the joke of financial planning is, “Hey, what should I do? Should I do X, Y, or Z?” And the answer is literally 100% of the time, “It depends.”

And I'm repeating a little bit of what you just said, Tommy, but there's the mathematical, “Hey, I want to maximize and get the most benefit ever,” but then there's also a ton of other avenues to look at. And one of the important avenues is what the client feels the most comfortable with? What are they going to want to implement? What's going to work well with their plan?

Another example of this might be Social Security, right? A lot of the times, if you live long enough, you may get the most benefit by each waiting until 70 to collect your Social Security. How many clients are going to feel comfortable retiring at minimum retirement age and then waiting 13 years each to start their Social Security benefits?

A lot of times, we'll do a 62- and a 70-strategy, which gets you really close. There's a lot of different times where, “Hey, we're not just picking the best mathematical answer. We're picking what works best for you,” and what gets us really close to where we want to be.

John Mason: It's fun. It's fun to think about. I wrote down fiduciary. So as a registered investment advisor, we're legally held to a fiduciary standard for our clients. As certified financial planners, we're held to a fiduciary standard.

So as a fiduciary, we have to recommend things that are in the client's best interest. And that's all well and good, but we also have to be passionate about our recommendations as well, because fiduciary advice without passion, ends up basically just becoming noise. And what I mean by that, I'm thinking the Grinch noise, noise, noise, noise.

And it’s, yeah, without passion, you don't get the implementation. So there's a reason that Dave Ramsey has been successful and has helped so many people, because if you listen to his show, he is passionate about getting out of debt. He is passionate about his baby steps. He lives, breathes, eats, loves everything about his process, right, wrong or indifferent. It gets people motivated to act.

And I think, ultimately, all five of us march in the same direction, but Ken's passion may be different than Mike’s a little bit, maybe different than Ben's. And at the end of the day, we're giving fiduciary planning advice. We all have our own passions. We all have our little bit of individual biases towards things. But as long as we're doing things during the client's best interest, that ends up being an implementable plan, which is important. So I don't think we can forget the passion part.

Tommy Blackburn: 100% where my mind went. I think we want to move off of this. As you said, that is there are certain things that we would consider probably catastrophic, and that's when you'll really see us get passionate where it's just, “No, I'm not going to be your advisor anymore.” That's the true passion, right? Where it's this is a grave mistake, and I will ultimately be your choice client.

But I have to stand my ground on my advice here. There are instances where that's the true passion. Then there's the passion of here's where we need to go based on your plan or ways I think we can get there, and I see a number of ways to do it. And I'm going to be very passionate about helping you with the strategy we both land on. But I don't necessarily feel passionate that it has to be this one strategy versus this other strategy that gets us pretty close as well. So I guess I'm just saying it's like multiple flavors of the passion, and it just depends on how critical it is what we're talking about.

John Mason:Agreed. So let's dive into TSP contribution limits changing in 2025. So it looks like the 2024 contribution limit for those younger than age 50 was $23,000. Guys, that's bumping up to $23,500 for those of you who are younger than 50.

For those of you who turn 50 next year, so you're 50 to 59, your catch-up contribution is an additional $7,500, which, if I did my math right, takes your total contribution to $31,000 if you fall into that 50 to 59 demographic.

And what's very important there is you become eligible, guys, for the catch-up contribution the year you turn 50. So even if you turn 50, December of 2025, you become eligible for those catch-up contributions January 1, which essentially we're recording this podcast on December 19th.

We're probably going into payroll systems now and making those changes, so they're effective the first pay period of next year. So it's the year you turn 50. But there's an interesting nuance that is going into play next year as well. I think it's thanks to Secure Act 2.0, or 10.0, whichever version we're on now. I say that tongue-in-cheek because we believe more Secure Acts are probably coming in the not-too-distant future. But what changes is for 60 to 63-year-olds do we have next year?

Ben Raikes:So next year, the catch-up amount will be another $11,250. So that's not $11,250 plus $7,500. What they've done is if you're aged 60 to 63, next year, you get one of the following extra catch-ups. You get either $10,000 or 150% of the current catch-up amount. So 150% of $7,500 is $11,250.

So next year, somebody do the math. What's $11,250 plus $23,500? That is your new catch-up amount. So we were talking about this a little bit. John, that's only an extra, what, $3,750 that you can contribute into your TSP for ages 60, 61, 62, and 63.

That's an extra $15,000 over those four years. Is that really going to help someone that's late and needs to catch up on retirement? Is that extra $15,000 over four years making any difference whatsoever?

John Mason: No, it's not making any difference. The fact that we even have to waste our breath talking about this, and answer questions about this, and the reverberations throughout the world because of this silly rule is like, why 64-year-olds are excluded from this?

Like, why Mike can't do it. Yeah, why Mike can't do it, but Ken can next year. It's alright, so it's a good idea for a group of people, four years of people, it's a good idea. After that, it's not good for Tommy and Ben. We can't do any catch-up. It's not good if you're 59 and behind. But by golly, at 60, if you've made it, you also deserve the ability to save more.

And I was watching something yesterday. So I read a book last year. It was called Subtraction. And Subtraction was a really interesting book, Tommy, because it talked about in society, we believe that we're taught to add things. And one of the examples in the book is if you had a bridge that was uneven and you had to make the bridge even, something like 9 out of 10 people would add a block to this one to make the bridges equal.

It was very rare that somebody would subtract a block from the higher side to bring them down to equal. And this, to me, is just bureaucratic junk. It's not solving any problems. It was a lot of legal work and pages and unnecessary burden that didn't solve any problems, that didn't make anybody's life better, and should have been subtracted or excluded or completely fundamentally changed.

And at the end of the day, if we have—I know I’m ranting—if we know that Millennials and Gen X are behind the eight ball and not going to be able to retire, and oh, by the way, there could be all these other things to Social Security—like you can't claim it at 62 or we're raising them—who should we be letting put more into the system?

We should be letting 25-year-olds, 30-year-olds. We should be letting those people put more into retirement contributions, not the people that are already at retirement. And it's just, man, I'm passionate now. See, passion's coming through. If we're worried about healthcare in the United States, we should probably be focusing on keeping the younger people healthy because we're the ones working, and we're the ones like, it's just so backwards. I find all of it so backwards.

Tommy Blackburn: I will, I guess I would say on healthcare, it's really across the board, right? Because the older folks tend to be the ones utilizing it, so proactive, maybe you get older and you don't need as much healthcare, but if we can keep the older folks healthy, they'd use the system less. So across the board, that would be good.

Yeah, as you were going on your soapbox for a second, I was trying to think about why. You just wonder sometimes, why did this make it into the legislation? What did we think we were solving? What is the hidden agenda that we're missing? And I haven't quite figured it out because the most bewildering part is, I can understand, okay, if you got to 60 and you're still behind, we really need to open the door to try to give you some extra advantages to get caught up, as it's called.

But why all of a sudden at 64, you no longer need to be caught up is like—why do you have this little window? And then you're like, that's pretty confusing. But at the end of the day, it is not for us to always understand why things are the way they are. It's just to plan with the rules we have. So anyway, there you go, a little more complexity to make it even slightly more complex starting in 2026. And this was because it got delayed.

If you are highly compensated, consider that, which I believe it's $145,000. My partners, please correct me if that is not the case. But once you get to this highly compensated range, starting in 2026, your catch-up contributions have to be Roth. They can no longer be pre-tax. And that's whether it's normal or super catch-up. And so that means you just don't get that pre-tax deferral.

Again, everything appears to be moving to the way of Roth. We think that Congress enjoys it because it’s maybe penny-wise, pound-foolish. In short-term budget windows, they're getting the tax revenue in the door now to make the budget look better, even though they're missing out on the longer 10-year projection. Whereas if they allow you their pre-tax deferral, it's costing money in the short run, but they'll make it up in the back end. So anyway, more complexity coming. Outside of that, though, I know there's some other changes with TSP we want to chat about.

Ben Raikes:But before we get into that, I just want to, if I'm the guy that is opposite of Tommy and John, we're doing a lot of collectively poo-pooing on this extra catch-up amount. Listen, if you're somebody who is already maxing out your TSP, you have the extra cash flow. It’s not going to make any difference if you put money in the account, but if it makes you feel good getting up to that extra catch-up amount, the total amount you can put in, if it wasn't clear before, is $34,750. Divide that by 26 pay periods. If you want to know what to set your new payroll to, that's $1,336 per period.

So again, we don't think it's this great catch-up opportunity. We all agree that this is not going to help someone who's behind the eight ball and really needs to max their 401(k) or TSP savings. But if you do want to take advantage of it and you do have the extra cash flow, that's the total amount you can put in and that's how much you should update if you're paid 26 pay periods, which federal employees are.

Tommy Blackburn:Ben, to be clear, we plan on advising our clients that can do it to do it. I'm sure Ken Mason will take advantage of the extra catch-up. We don't think it's going to move the needle for anybody.

Correct. Absolutely. Take advantage of everything that you have available to you.

John Mason:Correct. The big advantage that I can see, which is interesting again that they picked 60 to 64, Ken loves Aunt IRMAA. That's what I was just thinking about. He loves talking about Medicare premium tax brackets and how that could change. At the end of the day, saving an extra $7,000 between two spouses with this enhanced contribution isn't really going to do much from a long-term retirement planning perspective. Maybe it brings you down a tax bracket from $24,000 to $22,000. That's not that significant either.

Yeah, it's interesting that if you saved an extra seven or eight thousand, that could bring you back down into a Medicare IRMAA threshold—not a Medicare IRMAA threshold entirely. So there could be reasons, or contributing a little bit extra to your TSP that gives you the ability to do Roth IRA contributions.

Although we don't understand it from what it's trying to accomplish, there are significant reasons why you'd want to lower adjusted gross income seven or eight thousand and what that could do to you long-term. It could make you, even for higher-compensated people, maybe it gives you more access to some child tax credit. Maybe it changes how your medical deductions are calculated. Lowering your AGI is a good thing in a lot of ways, so it doesn't seem to be solving a retirement planning issue, but it could help on the tax side.

And then, like you said, Tommy, the 2026 mandatory Roth contributions for catch-up contributions for highly compensated folks. It'll be interesting to see if the $145,000 changes. I'm seeing right now that it's indexed for inflation.

Tommy Blackburn:So it must have changed. I'm guessing $150,000 or north of $150,000 at this point.

John Mason:Yeah, so it looks like that's probably going to go up. Another big change—was it 2026 that we saw, Tommy, where TSP was going to offer in-plan Roth conversions in 2026? So our audience, you've probably heard us talking about Roth conversions before, which is the act of taking money in a traditional IRA or pre-tax asset and then doing a conversion to Roth. So you take it from pre-tax and you move it to Roth.

And in order to do that transfer, you have to pay taxes to get the money to move from A to B. Historically, we've been fans of Roth conversions, as long as it adds value over the lifetime of your plan. And we come at it from a very smart planning perspective. Roth conversions can make a lot of sense, albeit not for everybody. One of the disadvantages of the Thrift Savings Plan historically has been the inability to execute Roth conversions inside of TSP.

What that means is if a client then wanted to execute Roth conversions or do Roth conversions in retirement, the only way they could do that was to transfer money out of TSP to an IRA. Now, in-plan conversions are going to give federal employees a new planning opportunity that doesn't have to involve an IRA.

Ben Raikes:Yeah. And John, I don't know if they released any of the details on exactly what it looks like. Is there a form? Do you go and do it online? And I believe that you must withhold or can you not withhold when you're doing it.

So the benefit to a lot of our clients in doing the Roth conversions is, hey, these Roth conversions still make a lot of sense. But let's say we want to do a Roth conversion of $25,000. We might actually take $30,000 from your IRA and roll it over into a Roth and we'll withhold $5,000 from that distribution. So you don't have to come out of your pocket to pay those taxes.

What Thrift Savings Plan is going to do is say, hey, if you want to do $25,000, go ahead and do the $25,000, but then you're going to need to write that check for the estimated payment to pay the taxes.

So again, we think it's a great thing that Thrift Savings Plan is offering this, but like a lot of things related to TSP, there are some potential downsides, particularly when you're talking about converting those distributions within TSP. John, just like there are a lot of differences when you're actually distributing funds from TSP as far as state tax withholding and mandatory withholding on distributions. So it remains to be seen how useful this will be in the long run, but certainly an added flexibility that we all think is welcome.

Tommy Blackburn:Yeah, I think the real story here is the TSP is becoming more flexible. It still has its limitations, and we'll probably go through some of the limitations, but it is becoming a better tool for us to use with our clients, and that's all it's ever been.

The value prop has never been we have access to an IRA, and this is probably some advisor's value proposition is that, oh, TSP stinks and I have an IRA and it's so much better than your TSP vehicle. That playing field is starting to shift. We still have reasons as to why an IRA or a Roth IRA outside of TSP has some advantages. But ultimately, it's just another tool. And what's really important is the advice.

So now we're able to look at TSP and think, okay, we do have an in-plan Roth conversion feature. Now, we're going to have to learn how to execute that. So there's always the service issue, right? And having an advisor come up with a plan and then helping you execute on that plan—maybe it makes sense to do it in TSP occasionally. Maybe because of something like some aggregation rules. It could be something there.

But regardless, the tool in and of itself is not the value. It's the advice going into that tool that's important. We'll have to be mindful of estimated tax payments. And Ben, you mentioned some things, some frustrations I would say, still with TSP. And maybe frustration is a little harsh, but you can't have state tax withheld on distributions, so you have to account for that. We're fairly inflexible. We have some oddities on what we can do from a federal withholding perspective.

It still has some—IRA gives us more flexibility there. IRA, we can do qualified charitable distributions. And even Roth distributions from TSP. It's usually not an issue, but there is an ordering rule and TSP still follows it. It's a pro-rata, where it's earnings and basis on a Roth distribution. Whereas Roth IRA always has earnings come out first, which I'm sorry, principal always comes out first, which is the most advantageous because you're never going to be taxed on your principal being returned.

So cool things happening with TSP. We love it because it's just another feather in our cap for our clients. But if anybody ?who, if that's their only argument to use, ?that my IRA is better than TSP, well, that's becoming less so and less so.

John Mason:We used to always say, for a long time, that TSP is a great accumulation vehicle and not the best distribution vehicle. And when you say best, I think we still agree that it's probably not the best. But it’s certainly better than it was in 2010, 2015, 2020.

So these improvements are welcomed improvements. They make it more flexible. Ultimately, one of the things that made TSP so competitive and so good was the simplicity—five funds, lack of opportunity to screw things up. And now it's going to get more complicated. Now we have this brokerage window. I've never seen a client actually use it, but that's a complication where now, all of a sudden, maybe people are buying actively managed funds that are underperforming. That's not great. Now we're going to layer in this Roth conversion or in-plan conversion piece.

And as we add complexity, it adds room for failure or mistakes. My biggest fear with this in-plan conversion thing is not what Mason & Associates and our clients will do with it. It's the message that it's sending to federal employees across the country. Like, how many people are going to start executing in-plan conversions with no context or understanding of what that actually does, helpful or harmful, to their financial plan?

And the government wants tax dollars. There's no doubt, which is probably one of the reasons that this is coming into play. I think the government ran, we had a positive budget back in '96 when we had the first Roth conversions under President Clinton. So there's a lot of money in TSP. It's the biggest 401(k) in the country. And if we can start doing some marketing, encouraging federal employees to do conversions, probably not going to make a dent in the national deficit too much, but hey, it's more tax revenue. So maybe that's a skeptical view of why this exists.

Tommy Blackburn:For sure.

John Mason:But it's a good tool. It's a good tool. I'm just worried, guys, that people are just going to start doing it without any advice, without any planning. TSP will no doubt release some sort of calculator, I assume, to help people do it. But it's anything bad input in equals bad results out.

Ben Raikes:There's going to be, without a doubt, somebody that has a million-dollar TSP that said, hey, I learned a way that I can make this all tax-free. I went ahead and did the in-plan conversion to the TSP. Then come tax time, they're going to get a 1099-R that says you now have $1,000,000 of taxable income, and by the way, you didn't withhold on any of it. That's going to be quite a tax bill. Now, again—

Tommy Blackburn:Finding the way to pay that tax, right? It gets locked up inside of a TSP or something.

Ben Raikes:Now you need a second mortgage to pay your tax bill. I'm using a little bit of, I'm not using scare tactics here, but I do foresee—

Tommy Blackburn: Real mistake that could happen.

Ben Raikes:It’s a real mistake that could happen and just something to be aware of. John, I agree with you wholeheartedly. I think the added flexibility is 100% a good thing, but this is not something where, hey, I'm a do-it-yourselfer and I'm wondering whether I should do these conversions. You know what? Let me just go ahead and do the full million dollars I have in my TSP. Tax-free money sounds good.

Tommy Blackburn:Even if you are doing it yourself, I think it all comes back to you have to have the bigger plan. You have to have the advice, right? Because even TSP do-it-yourself for now, just roll it into a Vanguard IRA, do whatever it is you want, and then do your Roth conversion.

This didn't make it to where you all of a sudden... Maybe in some situations, I don't know, pre-59 and a half, if we couldn't get our money out of TSP or something, now we can do these conversions. But ultimately, it's not a game changer in that stance. You still need the advice to figure out, does this make sense? How much should I do? How am I going to pay it? What's all the ramifications behind this thought process?

John Mason:And to be clear for the audience, Roth conversions have... I struggle saying this word, guys, but Roth conversions have always been easier for those 59 and a half and older because we could distribute money from a TSP to an IRA, we can have taxes withheld on the conversion if we need to.

A little rule that not a lot of people know about is if you're 25 years old and you do a Roth conversion and you have taxes withheld, that's going to be subject to a 10% penalty. Where at 59 and a half, it's not. So Roth conversions have always been easier for folks 59 and a half and older.

Like you said, Tommy, this in-plan conversion is going to give folks the ability to do Roth conversions under 59 and a half before they could do a TSP in-service distribution. We have to be worried about a couple of things: how are we going to pay the tax? And then also, interest rates aren't insignificant now. I would assume that like everything else, if you do a fourth quarter Roth conversion inside of TSP, when you populate TurboTax, it's going to be like that conversion took place all 12 months.

And if you didn't make an estimated payment and not in safe harbor, now all of a sudden you owe money, you're paying taxes and penalty and interest. There's a lot to unpack all things Roth conversion. And folks, the message here is just be careful, get some advice, understand what it's going to do to your plan long-term. And as we think about, maybe we can share with the audience, guys, some of the variables that impact whether or not a Roth conversion actually makes sense for somebody.

I'll say one is if you don't have any children and your life expectancy, you're both going to die by 75, chances are Roth conversions may not make sense for you. You don't have a long lifespan. We're not looking at giving tax-free assets to children, and we're probably not going to see a lot of benefit for the present value of bringing all that tax forward rather than deferring it until you would have died at 75. So life expectancy is one variable. What are some other variables that folks may need to be thinking about as they analyze Roth conversion?

Tommy Blackburn:?It can hit a few, but I feel like you could go on and on about the variables that could impact that analysis. How much are we spending? What's our distribution rate? Because that's going to impact our tax rate today and tomorrow.

As well as another variable is that we don't know for certain ever what's the future tax rate going to be. That's a big variable in that calculation. And if we're not, if we're taking a lot out for distributions now, that means it's not compounding into a bomb down the road. Or if we're not taking out distributions, it's compounding into that bomb. So there's just the taxation of Social Security, which could change. You could go on and on. And Ben's probably got something that he's wanting to put in here but it's a lot.

Ben Raikes:I think of one: are you charitably inclined? So if you're someone who's giving a lot to charity, maybe you tithe to your church and now, let's say your RMD is $15,000, but you give $20,000 to church every year, you use what's called a qualified charitable distribution and 100% of that required minimum distribution is now written off of your tax return. It never hits it. So if you did Roth conversions, but the distributions were never going to hit your tax return anyway, what's the point? It's not that.

Tommy Blackburn:There was none.

Ben Raikes:Exactly, exactly.

Tommy Blackburn:And honestly too, if in John's scenario, if we're going to pass away at 75 and we didn't spend the money, we're just going to leave it to charity anyway, and they're not taxed on it. So we wouldn't want to leave them a Roth IRA to begin with. You want to leave that to actual people who can take advantage of it.

Ben Raikes:Yeah, we could go—I'm sure we could spend a long time on this list, but I think those are good.

Tommy Blackburn:I was thinking this is a fun one. I've done this for a couple of clients now because the rules became more flexible with being able to contribute to IRAs, or they've just had some random pre-tax money out there. And I will still be doing Roth conversions if I think it makes sense. But the same thought process, if they're charitable, actually just earmarking an amount, whether we're currently contributing to an IRA just because I know we're going to turn around and use it as a QCD, there are some complex rules there you need to be aware of based on the age, or if we just happen to have an old 403(b) or something out there, and now maybe it's $50,000.

We're not going to convert that. Particularly for the older spouse because she's going to get to QCD age first, and I don't care what the RMD amount is, I just know based on your giving, we're going to give that away over X amount of time. Yeah, just fun thoughts, I think, that we have as we even think about charitable giving and what assets and how we're going to position things over time.

John Mason:There are so many variables, and recently, we were selected to present at the Kitces Value Summit, which was cool. And one of the things that we discussed during that presentation was that when we present how we do ongoing financial planning advice, it's not uncommon for us when we produce an initial plan for somebody to say, Roth conversions appear that they make sense, but we're going to come back and review this every year.

And the host of the Value Summit was like, “John, how do you tell somebody? Like, how do you just give that ambiguous recommendation?” It's not really ambiguous, and it's not really wrong. It’s like, this is what you told me you were going to spend, and this is how long you told me you were going to live, and this is how much you told me you were going to give to charity. All three of those variables could change over the next 12 months, which could completely debunk the entire thought process of Roth or completely solidify that process.

Roth conversions can appear to make sense during the initial financial plan. But as you work with a financial advisor and you get clarity on these variables, or maybe you're working with a team of professionals who are supporting, empowering, and motivating you to spend more of your assets in retirement, so then that distribution goes up and Roth conversion value maybe goes down, right?

Tommy Blackburn:Life changes, right? Life changes constantly. John, I wish I was in that presentation with you because I know who the host is, who I have a lot of respect for, but I'd have had your back because I'd have flipped it around on him and said, “How do you say anything other than it appears to be?” You tell them it is absolutely the right thing to do a Roth, or absolutely not right to do a Roth. We're saying the correct thing. So I, yeah, you got me passionate when you said that.

Ben Raikes:To bring it full circle, what we talked about at the beginning, where Tommy might think a slightly different way, Ben might think a slightly different way, and John, we're all headed in the same direction.

John, the answer was, how can you recommend that? Just because you were being honest, right? This may or may not be best for your plan. We're going to continue to work with you and determine whether this makes sense in the long term or not. So I think that's 100% the right thing to say.

John Mason:This is a good message, thank you both for bringing it up. In 2026, in-plan conversions—and the advisor community (and I'm doing that in air quotes), but let's say the sales community—is always looking for the sales tactic on how to convince you to invest more money with them, whether it's in an index annuity, a variable annuity, a life insurance policy, or even a fee-only asset under management account.

And anybody who just like really comes out and gives you these absolutes, that's always the time, probably, to step back and say, okay, maybe I should get a second opinion or like, how can you really be so sure? I'm not even retired yet. I've never taken my first distribution yet. Are you really...really? We can be that confident? We're standing on top of a mountain shouting from the top of our lungs.

Tommy Blackburn:We're talking about the future, which is never certain. So how can you speak in no certainty?

John Mason:That's a great point, guys. So there's so much that can impact the analysis here. And then, another one recently is, as I worked with, or I'm working with a client who has, let’s say he has a $1 in his 401(k) and he has $9 in non-qualified taxable brokerage accounts. So that could be $1 million and $9 million. It could be $1 and $9, whatever you think about it. Only 10% of this person's assets are in IRAs.

So you would think they have all this money that could pay taxes on a conversion, but then the pre-tax money is only one-tenth of their assets. So when you look at the benefit of doing Roth conversions for this client, it's drastically different than if you flip that to where 90% of the assets are pre-tax and 10% are non-qualified.

So it’s even interesting thinking about it from that perspective, because sometimes in our minds, we get very excited, Ben, when we see a big non-qualified bucket. We're like, yes! We can use that to pay taxes on a conversion! But then if that non-qualified bucket’s so big, it’s maybe conversions don’t make sense anymore.

Ben Raikes:Yeah, maybe it doesn't make any sense at all. Yeah, we have the assets to pay the tax, but the question should be: Do we want to pay the tax to do the conversions? There's so many considerations.

Just another quick one that went through my head since we're all kind of spitballing here: Roth conversions, and another kind of case for them, is if there's a significant age difference between husband and wife.

Let's say you have a husband who's 70 years old and a wife who's 55 years old. That's a 15-year age gap, and the husband has $3 million in his 401(k) or TSP. Guess what? The likely scenario is that the wife is going to outlive the husband by 15 or 20 years, and she’s going to inherit $3 million. She is going to inherit it in a—

John Mason:Single tax bracket.

Ben Raikes:Exactly, Tommy. $3 million, and she's going to be in a single tax bracket, which essentially cuts all of those really wide brackets in half. So now she's time to take RMDs, and that asset has continued to grow. She might be in the highest tax bracket there is.

So I think, guys, I'm sorry if I went down another tangent or a rabbit hole, but again, just reinforcing what you all have already said. Yes, it's great that TSP offers this, but if there's not the advice behind it, which is really the valuable part about being able to do it, it’s just another option.

Tommy Blackburn:Just for fun for the audience, as I think we were probably wrapping this episode up: In those examples, Ben is typically on the opposite side of Roth and doing Roth conversions.

He's usually more conservative in his thoughts on those than John, even though we feel we’re fairly conservative and thoughtful on it. So anyway, I nearly fell over when I heard him say a case for a Roth conversion. Typically, we're arguing over this. Just figured it'd be fun to share that.

John Mason:That's great, guys. Let's do a quick recap and summary. 2025 is the year of the enhanced matching, or enhanced catch-up contribution. For those who are 60 to 64 years old, you can do an additional total contribution—$34,750. Total catch-up contribution—$11,250. That goes into place in 2025.

Remember, the contribution limits for everyone else are also going up: $23,500 normal deferral, $7,500 catch-up contribution for those between 50 and 59 as well as those 65 or older. So those contribution limits are changing. In-plan Roth conversions coming to you as a federal employee in the year 2026.

And we also anticipate under Secure Act 2.0 the changing or the mandating that catch-up contributions must be made Roth starting in 2026 for those folks who are highly compensated, somewhere around $145,000. That salary looks like it’s indexed for inflation. So a little bit of a wait and see what that number is going to be in 2026, but these are some big changes coming.

With all changes, as always, be careful. These are positive enhancements, a lot of them, especially the in-plan conversion, positive enhancements to the TSP. But just because it's a positive enhancement doesn't mean we need to act on it. Like we always say, get qualified advice. Nothing on this podcast can be construed as financial planning, investment, or tax advice. But if you're going to look at doing Roth conversions inside your financial plan, please consult a financial planner, CPA, or tax professional, and consider all of these variables that we've discussed.

Welcome to 2025. Thank you for following us on this journey. Three years in to the Federal Employee Financial Planning Podcast, starting year four. Thank you to our clients for listening. Thank you to our audience. We appreciate you being on the journey and sticking with us for another episode of the Federal Employee Financial Planning Podcast. We’re Mason & Associates, masonllc.net.

The topics discussed on this podcast represent our best understanding of federal benefits and are for informational and educational purposes only, and should not be construed as investment, financial planning, or other professional advice.

We encourage you to consult with the office of personnel management and one or more professional advisors before taking any action based on the information presented.