The TSP has added a new option for participants who are eligible to transfer their TSP accounts to a traditional individual retirement account (IRA) or an eligible employer plan (like a 401(k)). Participants may now be able to transfer their accounts to a Roth IRA.
Why "may"? The Internal Revenue Code has specific requirements that participants must meet in order to be eligible to transfer their accounts to a Roth IRA and participants must be prepared for the immediate tax consequences of the transfer.
The following Questions and Answers were developed to help you decide if you want to transfer your TSP account to a Roth IRA. However, we strongly encourage you to talk to a tax advisor before you make your final decision. You don’t want to make the transfer and then find out when you’re filing your taxes for the year that you weren’t eligible or can’t pay the tax bill.
|Q1. What is a Roth IRA?|
|Q2. Under what circumstances may I transfer money from my TSP account to a Roth IRA?|
|Q3. Do I have to pay the income taxes on my TSP contributions?|
|Q4. Will the TSP withhold money for taxes when I transfer funds from the TSP to a Roth IRA?|
|Q5. I received my single payment in cash. Can I roll this payment over into a Roth IRA?|
|Q6. Do I have to pay a 10% early withdrawal penalty tax on a transfer to a Roth IRA?|
|Q7. Is there a dollar limit on the amount that can be transferred to a Roth IRA?|
|Q8. Are there any other special rules or restrictions for moving money into a Roth IRA?|
|Q9. Where are the Roth IRA Transfer forms?|
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|Q1. What is a Roth IRA?
A Roth IRA is an alternative to a traditional IRA and may provide future tax benefits to some individuals. The advantage of a Roth IRA is that it provides tax-free earnings on after-tax contributions. Because your contributions have already been taxed, you can withdraw them from a Roth IRA at any time tax-free. Generally, if your account has been open for at least 5 years, your earnings are tax-free when you withdraw them. However, you must usually be 59½ or older in order to avoid paying a 10% early withdrawal penalty tax on your earnings. (There are some other exceptions to the withdrawal penalty tax.)
Another advantage of the Roth IRA is that there are no required minimum distributions for participants at age 70½ or older.
Other rules apply that may affect your eligibility for a Roth IRA and the tax-free earnings advantage. You can find out more information about Roth IRAs at the Internal Revenue Service web site, www.irs.gov, or from your tax advisor.
|Q2. Under what circumstances may I transfer money from my TSP account to a Roth IRA?
First, you must be eligible to withdraw your TSP account, and your payment must be an eligible rollover distribution. Consequently, you must be eligible for an age-based in-service withdrawal or a post-separation withdrawal.
Once you’re eligible to withdraw your TSP account and you determine that your payment is an eligible rollover distribution, you must determine whether you meet the eligibility requirements for a transfer directly to a Roth IRA. Specifically, you are not eligible to transfer your payment to a Roth IRA if either of the following conditions applies:
(1) Your modified adjusted gross income is over $100,000; or
Otherwise, any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA.
|Q3. Do I have to pay the income taxes on my TSP contributions?
Roth IRAs are based on after-tax contributions. So, if you transfer your tax-deferred TSP contributions and earnings to a Roth IRA, you must pay income tax on the entire amount of the transfer for the year of the transfer. Future earnings on the Roth IRA will be exempt from taxes if you meet the criteria for withdrawing from a Roth. Further, depending upon your tax liability, you may have to pay estimated taxes to avoid underwithholding penalties and interest. This is important – transferring your TSP account to a Roth IRA does not allow you to avoid paying the taxes on your TSP contributions and earnings. In fact, you have to pay them sooner than you would if you transferred the money to a traditional IRA. We have spoken to participants who did not understand this.
|Q4. Will the TSP withhold money for taxes when I transfer funds from the TSP to a Roth IRA?
No. Because your Roth IRA transfer is an eligible rollover distribution, we do not withhold any taxes on the transfers. So be sure that you have the funds to cover the tax liability you will incur as a result of the transfer.
|Q5. I received my single payment in cash. Can I roll this payment over into a Roth IRA?
If you’ve received your eligible rollover distribution directly, you can roll it over into your Roth IRA. However, you should check with your Roth IRA provider to see if they’ll accept it. (Standard rollover rules apply.) Remember, if you receive your eligible rollover distribution in a payment to you, there is mandatory 20% Federal tax withholding. You may roll over to the Roth IRA all or any part of the eligible rollover distribution. You will still have to pay taxes on any amount rolled over and any part you keep.
|Q6. Do I have to pay a 10% early withdrawal penalty tax on a transfer to a Roth IRA?
No, the 10% early withdrawal penalty does not apply to a transfer to a Roth IRA, a traditional IRA, or an eligible employer plan. However, you may be subject to the penalty if you do not meet the eligibility requirements at the time you withdraw your Roth IRA earnings.
|Q7. Is there a dollar limit on the amount that can be transferred to a Roth IRA?
There is no dollar limit to the amount that you can transfer. However, don’t forget that you’ll be taxed at ordinary rates on the amount you transfer. Further, the transfer may push you into a higher tax bracket. So be sure you take that into consideration as you make your decision.
|Q8. Are there any other special rules or restrictions for moving money into a Roth IRA?
Yes. The tax rules on Roth IRA transfers are complex. We strongly recommend that you consult a tax advisor before you make your decision.
|Q9. Where are the Roth IRA Transfer forms?
The Roth IRA transfer option has been added to our withdrawal forms and the information included in the associated tax notices. These are available in the Forms and Publications section of this web site.
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