Public sector workers with a Thrift Savings Plan (TSP) may be tempted to move their retirement funds elsewhere. TSPs, though generally great products, aren’t flawless and tend to lose their appeal once the participant’s days as a federal employee are over.
A popular option is to move accumulated capital into a separate individual retirement account (IRA). If your retirement contributions have already been taxed and are sitting in a Roth TSP, then it can make a lot of sense to open a Roth IRA, an account that also is funded with after-tax dollars, to house your savings. These accounts offer a wider selection of investment options and more flexible withdrawal rules, including the option to let your retirement money sit there for as long as you like.
In this article, we’ll talk you through how to move your retirement funds from a Roth TSP to a Roth IRA and flag the most important things to be aware of before proceeding.
Key Takeaways
- There are two main ways to move money from a Roth Thrift Savings Plan (Roth TSP) account to a Roth individual retirement account (Roth IRA): Ask your TSP to handle it, or do it yourself.
- In theory, a Roth TSP-to-Roth IRA rollover is simple, as both of these retirement accounts are taxed at the point of contribution.
- However, an indirect rollover involves a withdrawal, so if you choose this option, you may face penalties and be left out of pocket.
- The starting date for the five-year penalty period on the transferred amount does not carry over.
How to Move Roth TSP Funds into a Roth IRA
You’l firstl need to decide how you want to move money to a Roth IRA. There are two main methods. The first is known as a direct rollover, and the second is known as an indirect rollover. Direct rollovers involve having your TSP administrator send the fund for you without you touching them. Indirect rollovers involve you withdrawing the funds and sending them to the Roth IRA yourself.
Withdrawing funds from a TSP, Roth or traditional, is a relatively straightforward process. All you need to do is log in to your account on the TSP website and then select the “Withdrawals and Changes to Installment Payments” link in the menu. Once there, an online withdrawal wizard will walk you through the entire process.
Direct Rollover (or Transfer)
Choosing this option basically means instructing the TSP administrators to handle the transfer for you. Essentially, all you need to do is indicate how much you want to transfer and the details of the account where the proceeds will go, then just wait for the funds to be moved.
Once you place funds in a Roth IRA, there is no going back.
Indirect Rollover (or Rollover)
An indirect rollover is the do-it-yourself approach. Here, you get the money in your TSP sent to you and then deposit it into another retirement account yourself.
While that may sound both simple and appealing, there is a good reason why many financial experts advise people not to take this path. Indirect rollovers can be complicated and costly to execute. Key things to be aware of include:
- If the distribution is not “qualified,” the TSP will withhold 20% of the earnings portion for federal income taxes.
- The earnings portion of a “non-qualified” distribution will be taxed and potentially be subject to the early 10% withdrawal penalty unless you roll over the full balance withdrawn.
Qualified vs. Non-Qualified Distributions
You may now be wondering what “qualified” and “non-qualified” distributions are.
Roth TSP balances are separated into two pools: money contributed and earnings generated. Funds added to this account have already been subjected to income tax, meaning that they won’t be taxed at the point of withdrawal. With earnings, it’s a little more complicated.
The extra money that the investments in your pension make may or may not be taxable. For Roth TSP earnings to be considered “qualified” and tax free when withdrawn, the following must be true:
- Five years have passed since January 1st of the first year when you made Roth contributions to your TSP account.
- The distribution occurs when you are at least 59½ years old, die, or become totally disabled.
Fortunately, when you transfer capital to a Roth IRA, you don’t need to worry about this—unless, of course, you do an indirect rollover. When doing a rollover yourself, any distribution deemed not “qualified” will be subject to income tax withholding. You’ll get that money back after you make the transfer, but until then, the transaction will be treated as a withdrawal.
To avoid the repercussions of making an early withdrawal, everything taken from the TSP needs to be transferred to the Roth IRA—including the sum withheld for taxes. That may not be a big issue if the amount is small. However, if it is large, you’ll be left with a big shortfall to make up and the risk of paying penalties if you cannot cover it.
How Soon Do You Need the Money?
As mentioned above, Roth accounts must be open for five years before earnings can be withdrawn tax free. This requirement, known as the five-year rule, is often well-publicized. What people often fail to realize is that these five years cannot be carried over.
When you deposit Roth TSP funds into a Roth IRA, you are back to square one. The Roth IRA is a new and different account, so earnings cannot be withdrawn from tax-free until at least five years from January 1st of the year the rollover was done in. However, if you already had a Roth IRA prior to doing the rollover, the five years is based off of that account. You can withdraw tax-free five years from January 1st of the year in which you made your first contribution to a Roth IRA.
Can I transfer a Roth Thrift Savings Plan (Roth TSP) to a Roth individual retirement account (Roth IRA)?
Yes, money can be transferred from a Roth TSP to a Roth IRA without paying any tax or penalties.
How much can I put in my Roth IRA monthly?
The Internal Revenue Service (IRS) lets you contribute up to $7,000 each year to a Roth IRA or traditional IRA in 2024 (up from $6,500 in 2023). If you are age 50 or older, it rises to $8,000 ($7,500 in 2023) with the catch-up contribution. Dividing these sums by 12 will give you your monthly contribution. To contribute to a Roth IRA, your annual income must be below a certain amount for that tax year. However, if you are rolling over from a Roth TSP to a Roth IRA, the rollover amount doesn't count towards the limits, as funds are not a new retirement contribution. Check your choices with a tax professional to be sure that you are in compliance.
Can I move money from an IRA to a TSP account?
You can move money from a traditional IRA to a TSP account, but not from a Roth IRA to a TSP account.
Do Roth TSP contributions count against Roth IRA contributions?
No, you are free to contribute up to the annual limits for each of these accounts. They have separate limits the Roth IRA has its own limit and the Roth TSP has its own limit which is the same as the 401(k) limit. In 2024, they are $23,000 (or $30,500 if age 50 or older) for a TSP and $7,000 (or $8,000 if age 50 or older) for a Roth IRA. In 2023, they are $22,500 (or $30,000 if age 50 or older) for the TSP and $6,500 (or $7,500 if age 50 or older) for a Roth IRA.
The Bottom Line
Both Roth TSPs and Roth IRAs have merits, and choosing which one is best depends on your individual circ*mstances. It’s important to think carefully before making any switch and not get misled by all the talk on the internet that making this jump is a no-brainer for everyone. Like any big financial transaction, make sure you do your homework and pay close attention to the rules before taking action.
Failing to realize that the five-year rule cannot be carried over and that you could be hit with out-of-pocket expenses when executing an indirect rollover can cause big headaches. If you’re not careful, you could potentially undo some of the sacrifices you made contributing chunks of your salary and paying taxes in advance so that your older self could live more comfortably.
