Posted on Saturday, 5th January 2013 by

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There is considerable confusion on what federal employees and retirees can do to convert all or a part of their TSP funds to a TSP ROTH.  There are limitations and unfortunately you can’t convert any of your current TSP funds to a ROTH within the TSP program. There are only 2 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).

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.

That being said, there are no limitations on transferring your TSP funds when eligible to a private sector ROTH account outside of your TSP.  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. 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 may earn tax free income.

For more information on ROTH accounts visit our TSP ROTH page and review the extensive FAQ that we have on the site to determine if a ROTH is right for you.  Current federal employees should review this carefully, a ROTH can be highly advantageous and devoting at least a part of your contributions to a ROTH could prove worthwhile.  Roth contributions are taxable unlike your standard  TSP contributions.  I converted half of one of my retirement account to a ROTH in 2010 and was able to pay the taxes over the next two years.  The conversion added to my taxable income for both years however since converting to a ROTH my account has increased in value by 33% and all capital gains and dividends are tax free as long as I keep the account for 5 years before withdrawing any of the gains.  There is no penalty if you have to withdraw any part of your original contributions because you already paid taxes on them when you converted.

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The information provided may not cover all aspect of unique or special circumstances, federal regulations, and financial information is subject to change. To ensure the accuracy of this information, contact your benefits coordinator and ask them to review your official personnel file and circumstances concerning this issue. Retirees can contact the OPM retirement center. Our article is not intended nor should it be considered investment advice. Our articles and replies are time sensitive. Over time, various dynamic economic factors relied upon as a basis for this article may change.

Last 5 posts by Dennis Damp

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    Posted in ANNUITIES / ELIGIBILITY, BENEFITS / INSURANCE, EMPLOYMENT OPTIONS, ESTATE PLANNING, FINANCE / TIP, RETIREMENT CONCERNS | Comments (0)