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The Federal Retiree Who Did Nothing

Brad Bobb, CFP® | September 21, 2022

I want to share a somewhat common scenario I recently saw in hopes that it will help new and future federal retirees. My biggest reason for sharing is that I see this scenario a lot and I hope it resonates with some of my readers.

The scenario:

A widow in her late 80s has significant assets because she and her husband saved, invested and lived frugally throughout their lives. Her late husband, a federal employee, never made more than $100,000 and while his income wasn’t exceptionally high, his investments in TSP had turned into about $2.5 million.

The TSP account became a Beneficiary Participant Account (BPA) upon the husband’s passing. The following year, the widow was forced to begin taking distributions of over $350,000 per year. This moved her into the 35% tax bracket.


This couple did a very good job of saving and investing. Some people reading this will think that $2.5 million is unattainable, but it’s not. If you consider a person retiring at the age of 57 with anywhere from $500K to $1M in a TSP – not taking distributions until required, and then taking only the minimum distribution – a $2.5 million balance is something most feds can attain by their mid 80s.

The widow’s tax rate is extremely high.

She is paying an IRMAA (Income Related Monthly Adjustment Amount) surcharge of $408 a month on her Medicare Part B premium due to her increased income.

Her 3 beneficiaries’ tax brackets range from 12% to 22%.

She donated $17,000 to charities last year.

The problem

Because this couple didn’t spend much money, and their pension income supported their lifestyle, they didn’t need income from their investments. Not spending any of the TSP allowed it to grow to an impressive sum of $2.5 million which led the widow to a tax nightmare.

While the couple wanted access to their funds in case of need, their ultimate end game was to pass assets on to their three kids. However, allowing the TSP to grow that long pushed them into a higher tax bracket when they were forced to take distributions.

Their new tax bracket was significantly higher than those of their heirs. You ideally want the party with the lowest tax bracket paying taxes on the account.

What could the couple have done differently? The couple had several strategies they could have used to lower their tax liability, including Roth conversions, transferring funds to an IRA, and performing Qualified Charitable Distributions (QCDs)

Roth Conversions. They should have started doing Roth conversions after the husband retired at age 60. Looking at today’s tax brackets, he could have been taking distributions and paying 22-24% in federal tax and converting the funds to a Roth IRA. Moving assets into the Roth would have accomplished three important things moving forward:

Income tax-free growth for the life of the couple

Avoided RMDs required by TSP at age 72

Income tax-free inheritance when passed on to kids

Annual Roth conversions could have also helped them reduce and possibly eliminate future Medicare IRMAA surcharges.

Performing conversions over a 27 year time period might have enabled them to transition the entire TSP to a Roth IRA, but at the very least it would have substantially reduced the amount remaining in TSP.

Transferring funds to an IRA: Surviving spouses have multiple options when they inherit a spouse’s TSP. In this scenario, the widow was forced to take a distribution of over $350k when it could have been nearly a third of that number had she moved the funds to her own IRA. The problem with a TSP BPA is that it uses the IRS single life table (for use by beneficiaries) and forces the owner to rapidly liquidate the account. Moving funds to her own IRA would have allowed her to use the uniform lifetime table and take substantially lower distributions.

Qualified Charitable Distributions: QCDs can be used once an IRA owner reaches age 701/2. They allow a person to donate funds directly to a charity from an IRA and not pay any taxes on the distribution. QCDs are a great way for this widow to reduce her taxes and help satisfy her RMDs and would have been an even better tool if her husband had began using them at age 701/2.

Getting back to the beginning, this couple did a great job of managing their household finances and investing! But unfortunately that not the end of the story when it comes to financial planning. By implementing the strategies above over their lifetime, I would estimate they could have left an additional six figures more to their beneficiaries, instead of giving it to everybody’s favorite uncle.

If you need help making with the details of your financial planning, we’d be glad to have you schedule an introductory call with us to see how we can help.

Brad Bobb, CFP® is the owner of Bobb Financial Inc, and an expert in retirement planning for federal employees. 

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