Penny wise and pound foolish?
June 2, 2016 10:06 AM Subscribe
You are not my lawyer, my accountant or my financial planner. Which makes sense, financially speaking, or, what factors should I consider, in figuring out which way to credit my ex for his portion of our marital home. My choices: (1) Pay him 85K cash; or (2) credit him 90K in his tax-deferred Thrift Savings Plan (TSP) from my marital share. I am in the U.S.
I can do either.
Is it better to have the 90K in TSP funds that will grow, fairly safely, for the next 20 years before I'd withdraw them when I retire. Or, it is better to credit him with that 90K which he will then have to pay taxes on when he withdraws those funds?
If I pay my ex in marital shares of his TSP fund, I could take the 85K cash I have now and put it in some other investment.
Some assumptions/concerns. I assume I will be in lower tax bracket when I retire. I feel uncomfortable that, because I was a stay at home parent for several years, my retirement savings are not up to snuff.
I can do either.
Is it better to have the 90K in TSP funds that will grow, fairly safely, for the next 20 years before I'd withdraw them when I retire. Or, it is better to credit him with that 90K which he will then have to pay taxes on when he withdraws those funds?
If I pay my ex in marital shares of his TSP fund, I could take the 85K cash I have now and put it in some other investment.
Some assumptions/concerns. I assume I will be in lower tax bracket when I retire. I feel uncomfortable that, because I was a stay at home parent for several years, my retirement savings are not up to snuff.
From a purely emotional point of view, I think that I would prefer to have my retirement funds in investments that I can control, so it makes more sense to credit the 90K and invest the cash on your own.
But, the tax implications mean that that kind of emotional response could end up costing you a lot of money (do you have a way to get that 85K into a tax deferred investment?). If I were in your shoes, I'd want to figure out how the numbers would line up, can get a sense for how much you'd be paying for that control. If it were me, I'd probably be willing to take up to a 30% haircut, but you are not me.
posted by sparklemotion at 10:23 AM on June 2, 2016
But, the tax implications mean that that kind of emotional response could end up costing you a lot of money (do you have a way to get that 85K into a tax deferred investment?). If I were in your shoes, I'd want to figure out how the numbers would line up, can get a sense for how much you'd be paying for that control. If it were me, I'd probably be willing to take up to a 30% haircut, but you are not me.
posted by sparklemotion at 10:23 AM on June 2, 2016
Response by poster: @praemunire.
Yes. Some. But I don't feel like I have enough.
posted by youdontmakefriendswithsalad at 10:24 AM on June 2, 2016
Yes. Some. But I don't feel like I have enough.
posted by youdontmakefriendswithsalad at 10:24 AM on June 2, 2016
One thing to consider is that retirements in the US are a lot more legally protected (from seizure, bankruptcy, etc). So if you feel that you are at all financially rocky, I would keep the retirement money. That way if you do have something come up--and you never know, the economy is doing crazy things these days--you have a separate pot of money you can access in 20 years.
Also, for many aid programs, retirement assets are not counted. So it's easier to get help if you have retirement money than if you have regular cash money.
If you're concerned about your ability to direct it, you should be able to roll the TSP over into an IRA. You can choose any provider for the IRA and funds from that provider. (This is assuming, you're no longer employed by the employer that provided the TSP.)
Other things that I would consider:
* Do you have enough income to cover your expenses and a bit extra for emergencies? If not, how long would your current cash on hand last you until you can figure something out?
* Presumably, you're keeping the home. Is it currently in good shape or does it need repairs? Are you going to be renting out a portion of it to make extra income? If so, do you need to cash flow anything in order to prep for that?
* You mention a lower tax bracket, but how much lower? Is it lower than 5.6% effective tax rate (implied by 90k pretax or 85k post tax)?
If I were in your position, without knowing more of the rest of your assets, I would pay in cash and keep my retirement fund. But this is me hedging my bets for the worst case scenario.
posted by ethidda at 11:17 AM on June 2, 2016
Also, for many aid programs, retirement assets are not counted. So it's easier to get help if you have retirement money than if you have regular cash money.
If you're concerned about your ability to direct it, you should be able to roll the TSP over into an IRA. You can choose any provider for the IRA and funds from that provider. (This is assuming, you're no longer employed by the employer that provided the TSP.)
Other things that I would consider:
* Do you have enough income to cover your expenses and a bit extra for emergencies? If not, how long would your current cash on hand last you until you can figure something out?
* Presumably, you're keeping the home. Is it currently in good shape or does it need repairs? Are you going to be renting out a portion of it to make extra income? If so, do you need to cash flow anything in order to prep for that?
* You mention a lower tax bracket, but how much lower? Is it lower than 5.6% effective tax rate (implied by 90k pretax or 85k post tax)?
If I were in your position, without knowing more of the rest of your assets, I would pay in cash and keep my retirement fund. But this is me hedging my bets for the worst case scenario.
posted by ethidda at 11:17 AM on June 2, 2016
The $90k in the TSP is pre-tax, and whoever withdraws it will pay some tax on it eventually, while the $85k cash is post-tax. It's an odd comparison; if you're thinking of them roughly the same, they are not.
Like ethidda says, I think this question has to be answered in context of your other expenses and income.
posted by Dashy at 11:40 AM on June 2, 2016
Like ethidda says, I think this question has to be answered in context of your other expenses and income.
posted by Dashy at 11:40 AM on June 2, 2016
Best answer: Hmmm... I did some research and found this page which says (in a hypothetical where Jane's ex-spouse is the one with the TSP): Jane can elect to have the money moved in a taxed or non-taxed way directly with TSP.
And from the official website: Your TSP Account May Be Divided
If that's the case, the "emotional" argument doesn't really enter into it -- you'll have control of your assets in your portion of the TSP in your own TSP account. So it really is just down to the numbers...
So, this is more like a situation of choosing to fund a home purchase from cash on hand, vs. from a 401k. Because there's only so many ways to get money into tax deferred accounts (what with contribution limits and such), it usually better to use cash for that kind of thing than to pull out of a retirement account.
Therefore, my layman's suggestion based on not knowing much about your financial situation is to pay with cash and get the TSP separated so that you have your own, tax-deferred retirement account with an extra 90k in it.
posted by sparklemotion at 11:50 AM on June 2, 2016 [1 favorite]
And from the official website: Your TSP Account May Be Divided
If that's the case, the "emotional" argument doesn't really enter into it -- you'll have control of your assets in your portion of the TSP in your own TSP account. So it really is just down to the numbers...
So, this is more like a situation of choosing to fund a home purchase from cash on hand, vs. from a 401k. Because there's only so many ways to get money into tax deferred accounts (what with contribution limits and such), it usually better to use cash for that kind of thing than to pull out of a retirement account.
Therefore, my layman's suggestion based on not knowing much about your financial situation is to pay with cash and get the TSP separated so that you have your own, tax-deferred retirement account with an extra 90k in it.
posted by sparklemotion at 11:50 AM on June 2, 2016 [1 favorite]
Best answer: So, TSP contributions are usually pre-tax. $90K in a TSP is therefore worth significantly less than $90K in cash (the $90K will be taxed as it is distributed). The tax rate would have to be insanely low for $90K pre-tax to end up being worth more than $85K post-tax (it could end up being worth as little as $60K, or even less). From that point of view, you are better off handing over the $90K in the TSP. If you were to start funding your 401(k) with that money going forward, it would take you a little over four years to get it all into that account. You would have to pay taxes on the returns of the investments outside the account until it was fully invested, which, since you are probably at a higher marginal tax rate than you will be at retirement, will cost you a bit. (The returns on the putative $90K TSP over that period would be taxed, too, but only at distribution and thus hopefully at a lower rate.) I think you are still very likely to come out ahead if you give him the TSP shares rather than the cash.
However, the difference is not so glaringly huge that, if you feel that you would be tempted to fritter that money away during the period of investment, or have good reason to fear a big lawsuit or bankruptcy, it would be absurd for you to pay the cash.
posted by praemunire at 2:46 PM on June 2, 2016
However, the difference is not so glaringly huge that, if you feel that you would be tempted to fritter that money away during the period of investment, or have good reason to fear a big lawsuit or bankruptcy, it would be absurd for you to pay the cash.
posted by praemunire at 2:46 PM on June 2, 2016
A really good resource for insight on this type of question, and retirement planning in general, is the bogleheads forums.
posted by Dashy at 4:46 PM on June 2, 2016 [1 favorite]
posted by Dashy at 4:46 PM on June 2, 2016 [1 favorite]
This thread is closed to new comments.
posted by praemunire at 10:16 AM on June 2, 2016