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Use Roth's First or Last?


"I am currently retired and have monies in TSP that I do not plan to draw out until I reach age 70.5. Now, I also have monies in two Roth IRA's. What is the best strategy to draw out these monies when and if I need them?  Should I draw down the Roth's first?"  

Though my Gen X and Y clients are not in your situation, I thought I would answer your question because it can provide some insight why a combination of Roth and pretax accounts are important.  

First of all I want to explain to everyone reading this, what a TSP is.  A TSP is a Thrift Savings Plan which is a qualified retirement plan very similar to a 401(k) or 403(b) as far as the tax treatment is concerned.  This retirement plan is available to the United States civil service employees and uniformed services.

On the surface your question may appear very simple, and I do have a simple answer for you, however, as with most things financial planning, it isn’t necessarily black and white.  To succinctly answer your question, I would typically recommend drawing down your Roth accounts last and begin with your TSP.  Here is why.

All the appreciation within your Roth accounts grow tax free whereas the growth within your TSP account will be taxed upon withdrawal.  Most importantly, you can leave the money in the Roth for as long as you like to continue to grow tax free.  As you alluded to in your question, you are required to begin withdrawing from your TSP at 70.5 years old or face significant penalties.

All things being equal, it makes the most sense to leave your money in your Roth for the reason that you can control when you withdraw the money.  The longer you can allow this account to grow tax free the better.  Perhaps you can leave the money in these accounts until you are 90,  or perhaps you never need the money and are able to pass it on directly to your beneficiaries.

To reiterate my previous point, the real benefit of the Roth accounts is that you get to decide when it is best to withdraw the money from them.  Perhaps, it is in your best interest to withdraw the money from your Roths now in order to completely avoid or minimize the tax on your social security benefits.  Perhaps, using some of your Roth accounts can avoid pushing you into another tax bracket.  These are very real situations that could make withdrawing the Roth accounts prior to your TSP quite practical.  Without knowing your entire situation, I cannot provide you any more specifics than the general advice above--withdraw your Roth accounts last and let them continue to appreciate tax free for as long as you can.

I hope this was helpful to you.  I enjoyed your question as this is an area that gets quite complicated when you factor in someone’s taxable investments, tax-deferred investments (TSP’s, 401(k)’s, 403(b)’s, etc.), Roth accounts and social security.  Because of this complexity, I encourage you to see a fee-only financial planner to assist you with these decisions because these decisions can have a big impact on your retirement and how long your money will last.  I hope my general answer was helpful to you or others who read this post.  Thank you again for your question and please keep your questions coming.