Originally Posted By: ArrestMeRedZ
Don't confuse tax penalties on early withdrawal (before 59.5) with normal taxes on Required Minimum Distributions (RMDs) at 7O.5. The penalties on RMDs are only if you fail to make them the year you turn 7O.5, otherwise they are taxed at the normal income tax rate.
I am in a similar situation with a 4O1k as opposed to a TSP, but the rules are similar. I rolled it all into an IRA (no tax implications there), then started rolling that IRA into a Roth IRA each year, and paid the additional income tax on the rolled amount out of my savings. So far I have done it up to the edge of the 15% bracket, but I am thinking of raising that to the 25% bracket later this year or next year to maximize my tax free Roth account.
My reasoning is I believe tax rates must rise during my lifetime (not getting political here but under ether party government is getting bigger, doing more, and that costs), and with required minimum distributions I won't be in control of my taxes without being in a Roth. I just turned 66 and am also deferring Social Security until I get my IRA completely transferred to Roth. That way I will also minimize the amount of taxes on my Social Security income once I start taking it. I am currently in a no income tax state which may change in the future so I would save all state tax on distributions, which a Roth will do. For someone else the amount of money involved in a high tax state may dictate a change of residence while converting.
I realize our situations are different and this might not apply to you but a Roth conversion might be worth looking into.
AMRZ:
You make a lot of great points...It's amazing how complicated our tax system has become...where the average person needs to hire a specialist just to keep more of his money. I agree with you that tax rates will only rise in the future for the reasons that you stated. If our elected officials were forced to play by the same rules as the rest of us (SS, retirement savings accounts, Obamacare, etc...) maybe some of this would change...