Helping Federal Employees and Annuitants Understand Their Benefits
Federal Employee's CSRS & FERS TSP ROTH Conversion
You may want to consult a qualified tax or financial advisor to help you decide if a Roth election is right for you. You should reassess your position whenever your tax or income situation changes.
With the introduction of Roth, you will potentially have two types of balances in your TSP account: A traditional (non-Roth) TSP balance and a Roth TSP balance. Any agency contributions you receive will always be a part of your traditional (non-Roth) balance. However, you may designate your own contributions any way you like depending on your individual tax circumstances. (Note: Money already in your account when you begin making Roth contributions will remain part of your traditional balance. You will not be able to convert it to Roth.) There are ways to convert your entire account to a Roth at certain times in your career and we provide the guidance for TSP to Roth IRA conversions in this section.
There are advantages and disadvantages to all investments and a Roth election is no exception.
The tax free earnings are what entices many to the ROTH. Once your money is in a Roth any dividends, interest, and capital gains are 100% Tax FREE if the Roth was held at least 5 years. Any funds withdrawn at retirement age that have been in the Roth for 5 years would be tax free. There are very few investments today that earn tax free gains except for a Roth and certain municipal bonds.
Roth contributions are taken out of your paycheck after your income is taxed. When you withdraw funds from your Roth balance, you will receive your Roth contributions tax-free since you have already paid taxes on the contributions. You also won’t pay taxes on any earnings, as long as you’re at least age 59½ (or disabled) and your withdrawal is made at least 5 years after the beginning of the year in which you made your first Roth contribution. Traditional (pre-tax) contributions, which lower your current taxable income, give you a tax break today. They grow in your account tax-deferred, but when you withdraw your money, you pay taxes on both the contributions and their earnings.
Electing Roth contributions is not an all-or-nothing decision. You can contribute to both your Roth and traditional balances. Roth gives you the opportunity to diversify the tax treatment of the money in your account.
You will elect to make Roth contributions in the same way as you have always elected traditional contributions — using either the electronic system of your agency or service, or Form TSP-1, Election Form (TSP-U-1 for uniformed services).
If you are eligible for catch-up contributions, you will use your agency or service electronic system or Form TSP-1-C (TSP-U-1-C for uniformed services).
Check with your agency or service to find out whether your TSP elections should be made electronically or by using a TSP form.
You will not be able to convert your existing TSP to a ROTH TS; your only option for doing this is to convert your TSP to a ROTH IRA outside of the THRIFT program when you are eligible to withdraw your funds. The process is described below. The following section also lists the two ways that you can get ROTH funds into your TSP account.
The President approved the American Taxpayer Relief Act of 2012, on January 2, 2013. This law allows the TSP and other qualified plans to give participants the option to convert their traditional account balances to a Roth balance. The amount converted would be taxable to the participant. The Thrift Board is currently waiting for tax reporting guidance from the IRS and they will be studying the actions required to offer a conversion option. After their review they will make a decision on whether to proceed. Read more information on this subject.
There are now only two ways to get Roth
money into your TSP account?
1. From your future pay — you’ll notify your agency or service that you want to make Roth contributions, or
2. Transfer Roth money into your account directly from eligible plans (Roth 401(k)s, Roth 403(b)s, or Roth 457(b)s only).
Currently, you will not be able to transfer money into the TSP from Roth IRAs. Also, you will not be able to convert money that
is already in your TSP account into Roth money. Along the same lines, agency automatic and matching contributions will always
be traditional, tax-deferred contributions, even if your own contributions are only Roth. You will not be able to convert any
agency traditional contributions into Roth contributions.
Federal employees and retirees may discover that shifting some or all of their THRIFT savings or traditional IRAs into a ROTH will save them taxes on investment earnings and growth long term. A good idea in many cases. Roth IRAs provide tax-free earnings on your contributions however you MUST pay taxes on your initial ROTH contributions. The amount that you transfer into a ROTH is fully taxed at current tax rates. Since you already paid taxes on your contributions 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. Usually, you must be 59½ or older in order to avoid paying a 10% early withdrawal penalty tax on your earnings. Other exceptions to the withdrawal penalty tax may also apply. IRS publication 590 provides detailed guidance.
Roth IRAs do not require minimum distributions for participants starting at age 70½ like traditional IRAs require and beneficiaries pay NO INCOME TAXES for inherited accounts open at least five years. ROTH IRAs are one of the few investment vehicles that we have, other than municipal bonds, that earn tax free income.
The 2008 income limits are $116,000 for an individual and $169,000 for a married couple filing jointly. These income limits
are eliminated in the year 2010. At that time anyone, regardless of income, can convert their THRIFT and IRAs to a ROTH. Thanks
to the 2006 Pension Protection Act, if you convert to a ROTH in 2010 you are permitted to pay the taxes over a two year period,
half in 2011 and the remaining half in 2012, a great deal for all. Uncle Sam receives a windfall in 401K taxes that they wouldn’t
normally receive for decades and those who convert will earn tax free gains on their investments and get to defer the tax burden
over a three year period, 2010 through 2012.
Retirees that are working and earning income under the limits, most federal retirees, can open and contribute to a ROTH. Contributions
limits for 2008 are the lesser of $5,000 or your taxable compensation for the year. If you are over 50 the limit increases to
$6,000.
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.
Otherwise, any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA.
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 under withholding 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.
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.
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.
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.
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.
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. Refer to IRS Publication 590.
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 the TSP site.