Does this make sense?

I’ve been doing some thinking (always dangerous)….I had planned on leaving my US Govt TSP money in the TSP for a heck of a long time (after age 70.5) without drawing much out. Then I thought “What the heck” and maybe pull $1,000 a month out just to keep from having to pull out a lot at a later date. Now I’m starting to think about just going for $4,000+ a month when eligible and drawing the account down fairly quickly over about 13 years (averaging 3% return). With the way we have been living in retirement (5.5 years, I’m 59 1/2), it just doesn’t look we will need that money to grow that much so dumping it over here in the UK creates less hassle down the road for my wife.

*Currently getting $2140 a month between pension and annuity supplement. This is paying all of our living expenses at this time with this nice exchange rate.
*At 62 (2.5 years from now) I lose the supplement (about $850 a month) but gain social security which bumps me up to about $2690 a month……and about $1400 a month of that won’t be taxed in the US as being social security and taxed in the UK.
*So……my pension will get me to $15,468 a year in US taxes.
*At $15,468 I can “make” another $22,482 (about $1800 a month from TSP) without being bumped up to the 25% bracket if I file married/separate.  Or….another $60,000+ ($5,000 a month) if filing jointly.
*If there isn’t a problem….taking $5,000 a month out seems like the way to go, and empties my TSP in about 10 years.

Tax brackets 2017
Married/separately  $9326-37,950 will get hit at 15%
                                $37,951-91,900 gets hit at 25%

Married/jointly         $18,651-75,900 at 15%
                               $75,901-151,100 at 25%

Is there something I’m missing? If I remember correctly….it seems that once my wife starts getting her pensions (first small one about £1300 a year in 3 years) that would effect the amount on my US taxes if I’m filing jointly.

Fred

A very common strategy in the US is to withdraw income from retirement accounts up to the top of 15% or 25% tax brackets to minimize RMDs at age 70.5. Many people also defer SS until age 70. You need to do a spreadsheet to compare your various options.

Does WEP come into play here? If so wouldn't that be another reason to delay taking the US Pension?

A

WEP shouldn't be an issue with me, I was on the edge of being hired as CSRS or FERS (I was misinformed by Govt reps about CSRS+FERS at the time......grrrrrr) and spent my time under the FERS program and paid into social security.

Not planning on deferring SS until a later time. I'm in the "take it now" camp.

Not taking inflation/interest rates etc into account.....if I draw the TSP account down to 0 over the next 10 years or so we would have a good £450,000 in our savings account here in the UK, at todays prices/exchange rate maybe £2,400 a month in income from pensions/SS, plus own the house which is about £270,000 at this time. Exchange rates are always going to go all over the place so that is very adjustable.
At that time I would be 70, wife 67. At this time we rarely spend over £1400 a month....and that's only if I buy a new exercise machine (I would like an ARC trainer....but jeez they are expensive), or musical instrument etc.

This post is a check to see if there is a big hole in my thinking.....and making things easier for my wife if I die first. WEP would be one if it zapped me. A larger tax issue that I didn't see is another. I will have a tax change when I lose the annuity supplement (taxed in the US) and go on SS (taxed in the UK) so if I start this withdrawal in February-April I wouldn't be able to take out as much until I drop the supplement and go on SS in a couple of years.

You won't find a better place than TSP in the UK to stash your money. I would approach it from a tax planning perspective initially, assume an average life span and see if spreading out the payments to lower your RMD will reduce your tax. Then factor in what sort of return and fees you'll expect in the UK.

You won't find a better place than TSP in the UK to stash your money. I would approach it from a tax planning perspective initially, assume an average life span and see if spreading out the payments to lower your RMD will reduce your tax. Then factor in what sort of return and fees you'll expect in the UK.

Yep, I get this. This month I am getting 2.375% on the G fund (where I put all the TSP savings a year ago). If I want to keep the money over here in a savings....only getting .05% at this time with Lloyds. Other places like Virgin can get us up around 1% for a year. The rates are lower here.....no doubt about it.....by a lot. But......

The question I'm asking isn't about where to put our money for the best returns....if so, I wouldn't even think about bringing ANY of the TSP money over here for almost 10 years and let the G fund slowly grow that money at a better rate than I will get here in the UK. The point is.....I'm trying to make things really simple.....both for me and most definitely for my wife. If you refer back to the numbers I posted earlier.....if I pull all of our money from the US and stash it here......even with crappy % rates we have more than enough money to live comfortably unless a nasty health issue pops up (in which case....we will likely never have enough money anyway). At a point about 10 years from now, my wife will get her "full" pension of around £400 a month plus 2 other small pensions earlier. If I stay with filing my US taxes married/joint....her money would have to be included on US statements....yes? I was kind of hoping that by then I could drop everything back to filing separately and I wouldn't have much income for the IRS to care about. Again.....it comes back to those numbers I posted earlier.

10 years from now if I drain all the TSP.....

1. £450,000 in savings (getting less %....but it's here and handy. No worries about exchange rates etc).
2. Around £2500 a month coming in at todays prices between my wife and I on pensions/SS etc.
3. Own our home worth £270,000.....or more....who knows with the Harrogate prices still going nuts.
4. Our current monthly expenses (includes everything, utilites, council tax, food, beer, candy, ice cream, golf, more golf, petrol, etc etc) average out to about £1400 a month. At some point 8+ years from now we will need a new car.

I would be 70......can we easily live off this without getting better returns? I guess I'm answering my own question....... My wife looked at me when I made this proposal to her and said "You are doing this to make things easier for me if something happens to you, aren't you?"..... Yes.

The ONLY thing I am really asking.....is there some really nasty tax issue (or something else like WEP that was suggested) that I am too stupid to see? If I were to start drawing my TSP money out before next month.....I would be hit with an early withdrawal 10% extra penalty....that would hurt.

I can fully understand you wanting to make things simple and would probably do the same in your situation. One option to get better long term returns would be to invest in tracker funds in your wife's name. If you are filing us taxes as MFS when she invests then she need not worry about PFIC issues.

I can fully understand you wanting to make things simple and would probably do the same in your situation. One option to get better long term returns would be to invest in tracker funds in your wife's name. If you are filing us taxes as MFS when she invests then she need not worry about PFIC issues.

Now I have to look up "tracker funds".....no idea. I'm just trying to get out of the market all-together if I can.....and if I don't need the better returns. I just can't see us spending the money that we already have.

Now I have to look up "tracker funds".....no idea. I'm just trying to get out of the market all-together if I can.....and if I don't need the better returns. I just can't see us spending the money that we already have.

Tracker = Index

I expect the U.K. has short term tracker bond funds similar to the USA if you wish to avoid equities all together.

I can fully understand you wanting to make things simple and would probably do the same in your situation. One option to get better long term returns would be to invest in tracker funds in your wife's name. If you are filing us taxes as MFS when she invests then she need not worry about PFIC issues.

The OP has good investment fund options available in TSP if he wants to move money from the G-fund. There will be no tax issues until withdrawals from the G-fund are made. The citizenship and residency status of the OP will dictate whether the funds will be taxable in the US, the UK or both countries per Article 19 and the Saving Clause. Making a series of small withdrawals over the years will reduce the RMDs at age 70.5 and might produce a smaller tax bill. Things like exchange rate and having the money in the UK in GBPs to easily spend are personal choices.

The OP has good investment fund options available in TSP if he wants to move money from the G-fund. There will be no tax issues until withdrawals from the G-fund are made. The citizenship and residency status of the OP will dictate whether the funds will be taxable in the US, the UK or both countries per Article 19 and the Saving Clause. Making a series of small withdrawals over the years will reduce the RMDs at age 70.5 and might produce a smaller tax bill. Things like exchange rate and having the money in the UK in GBPs to easily spend are personal choices.

I'm sure the OP knows all this as he has discussed it here before and these are personal choices he is asking about. His question is all about simplifying things before he gets far  into his 70's so that his younger English wife never has to deal with inheriting and managing funds in the USA.

@F4

I fully understand where you're coming from. Your situation and mine are similar in that we are both now permanent in the UK. We both have an NRA spouse, and like me, I believe you have no children (inheritance for children is not important). Neither of us have any foreseeable plans to return to the US (unlike maybe 80% of those who post on this site) or any ties to the US other than pensions. Our only major concern is if anything happens to us, what would be the best thing for the UK spouse (who will likely remain in the UK).

I agree with what I think was durhamlad's point, don't file 'married jointly' for the US. Allow your wife to be a free agent. Filing 'married jointly' may provide some near term solutions, but at this point, we need to be thinking long term.....very long term (you more so than I; you're much younger).

Your situation is similar also in that there are pensions providing (hopefully) a constant cash flow for the rest of our lives, plus a cash pot to fall back on at some time in the future. Within reason and given my age, I feel comfortable with this scenario although I realise in 10/20 years time the amount of the pension (even with COLA allowances) and the cash pot are going to be far less impressive. You need to be thinking of 25/35 years time.

We could get into a real ER.org debate about the fate of the Pound Sterling vs. the US dollar vs. the Euro, or exchange rates, or the country for the best possible return on investment. But, we have no control over the first two, and the third always depends on the health of the respective economies, which we also have no control over.

The end consideration is what happens if/when we disappear and we're the first to go? At my age, my primary concern has switched to planning for the UK Inheritance Tax situation. I would suggest you have a look at how to structure your assets for that eventuality. The key consideration, for me, is the element of 'the rights of the surviving spouse' in the UK. That needs to be considered when talking of a pot of £450,000. If that were your account solely, then UK IHT may likely be due at 40% on £125,000 (I'm still uncertain of the £100,000 Osborne 'house for the kiddies' consequences when given our situation) plus all other assets.   

The end consideration is what happens if/when we disappear and we're the first to go? At my age, my primary concern has switched to planning for the UK Inheritance Tax situation. I would suggest you have a look at how to structure your assets for that eventuality. The key consideration, for me, is the element of 'the rights of the surviving spouse' in the UK. That needs to be considered when talking of a pot of £450,000. If that were your account solely, then UK IHT may likely be due at 40% on £125,000 (I'm still uncertain of the £100,000 Osborne 'house for the kiddies' consequences when given our situation) plus all other assets.   

Currently the surviving spouse receives the inheritance tax free, and his/her zero tax allowance doubles to £650k.

As you say, there are some complicated rules for passing on the family home when the surviving spouse dies that can save a chunk of tax provided that it is direct descendants (such as children or grandchildren) that inherit the home.

https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

Basic rules
An estate will be entitled to the RNRB (Resident Nil Rate Band) if the:

individual dies on or after 6 April 2017

individual owns a home, or a share of one, so that it’s included in their estate

individual’s direct descendants such as children or grandchildren inherit the home, or a share of it

value of the estate isn’t more than £2 million

Currently the surviving spouse receives the inheritance tax free, and his/her zero tax allowance doubles to £650k.

Correct. As I understand, generally, the surviving spouse will inherit, tax free, those assets which are joint such as the shared home or a joint bank account (I believe, I could be wrong). All assets of the deceased are sum totalled (including jointly owned assets) and then the survivorship rules are applied (the joint assets). If, after the survivorship rules are applied, the resulting figure for the value of the deceased's assets is over £325,000 (leaving the rules for the home aside for now), then Inheritance tax is due. A £450,000 bank account owned solely by the deceased would likely result in some tax due. 

As you say, there are some complicated rules for passing on the family home when the surviving spouse dies that can save a chunk of tax provided that it is direct descendants (such as children or grandchildren) that inherit the home.

https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band

Perhaps someone may know the answers and can better explain if we start with a make believe (yet simple) example:

1. The home. Owned as tenants in common (both 50%) but with a will which states the deceased's share of the home is to be given to the survivor tax free. (joint tenants is straightforward.) Home value is £900,000.

2. Joint bank accounts totalling £100,000.

3. Deceased's 'solely owned' bank accounts of £500,000.

4. Deceased owned a car worth £5,000, and assorted personal items worth £7,000.

5. Jointly owned household items total £9,000

6 Deceased had a (DB) pension paying £6,000/ month. Survivor will receive 50% of the pension going forward after the deceased's death.
ETA: I've left out one asset which F4 would also have, US SS. Say a WEPed SS benefit paying £600/month for which the surviving spouse would receive 100% of the pre-WEP amount. /ETA

These separate forms would be required, (?)

https://www.gov.uk/government/publications/inheritance-tax-jointly-owned-assets-iht404

https://www.gov.uk/government/publications/inheritance-tax-bank-and-building-society-accounts-iht406

https://www.gov.uk/government/publications/inheritance-tax-household-and-personal-goods-iht407

https://www.gov.uk/government/publications/inheritance-tax-pensions-iht409

all feeding into:

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/497785/IHT400.pdf

If there are foreign assets, then also:

https://www.gov.uk/government/publications/inheritance-tax-foreign-assets-iht417

Of course, for the more complicated estates, there are forms for life assurance and annuities, listed stocks and shares, gifts and other transfers of value, etc.

https://www.gov.uk/government/publications/inheritance-tax-inheritance-tax-account-iht400

theOAP- (just added this little bit since you just posted again....my SS should not be WEPed....I paid into SS while working...although my pension would be cut 50%).  I haven't been on the ER site much over the last couple of years.....I was spending too much time on it.....kind of like I was on this site up to a few weeks ago. I still occasionally get back to see what the Fire+Money folks are talking about. I certainly picked up some good things there in the past. Passing along money after my wife+I go kaputt is a slight consideration.....in the fact that we would at least like to make sure her kids from a previous marriage (4) get a nice little bonus at that time. The Wills are done and shouldn't need updating for a while.

Part of my worry is that if I get hit in the head by a golf ball (plenty of close calls recently), I'm not sure how my wife would deal with getting that money out of the TSP and what specific tax issues she would have to deal with. Right now......the $ to £ rate is good....real good. If I pull around $4,000+ a month out of the TSP and file jointly I can keep that tax at 15%. It's irrelevant to UK folks since it's a US Govt savings/pension. If I die.....and she pulls that money.....what are the chances she will be pulling that money out anywhere near 15%? I can pull that money out now (we really don't NEED that money for around 10 years at the rate we are going).....and stick it somewhere that will get 1% or more if I lock it up for a couple of years. Once that pile of money is sitting here in a bank (getting very little %).....and if I die....at that point there is no tax issue in the UK for her is there? That money will have already been taxed.....it's hers....

My wanting to stay filing married/jointly is only in my mind for the next 5-10 years until I draw that TSP account down and I can take advantage of the lower US tax for filing jointly. At that time I would go back to filing separate.......at that time I would have no trouble staying in the 15% bracket with just my pension.

At this time....I still come back to the question I was asking....directly related to just the numbers......only the numbers......not what would be the best rate of returns on our money etc. IFFFFF I follow through on what I was thinking.......the following are the current $/£ situation....

Jan 2017
*£103,000 just sitting in the bank in the UK getting .05% (ouch).
*$67,000 (about £50,000) ROTH in Vanguard which I plan to sell in a month to clear my Vanguard account. So in a month or two we would have a little over £150,000 here.
*About £1500 a month at current exchange rates for pension. That will change to about £1800 a month in 2.5 years when I get SS (but lose my supplement with the pension.
*$533,000 in the TSP
*£270,000 house paid for.

10 years from now........

Jan 2027  all totals are at current valuations.
*Probably over £450,000 cash here in the UK. I would kind of think it will be around £500,000....but I was playing it safe.
*Around £2500 a month coming in from my pension/wife's pension/SS (exchange rate could change that a fair bit one way or another...but still way more than we are spending now).
*Still have the house worth the current £270,000.

When I look at those numbers for 2027, I ask myself this question....
Is this enough money for me/us to live very comfortably on? We are currently spending less than £18,000 a year as long as no larger expenses occur. I just can't see our needing this much money to live on.

My wife wouldn't have to worry about getting hold of that TSP money from the US and which taxes to pay.....or which country to pay them in. The money would be sitting here in the UK....taxes paid with no headaches for her.....or me if I'm still alive and well and avoiding golf balls. All we/she would have to do is take money out of the bank whenever she needs to.