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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.
The implementation of the Roth 401(k) contribution plan is tentatively
scheduled for the beginning of the 3rd quarter of calendar year 2012 (PP10,
the first full pay period in May 2012). For the first time federal employees
and military personnel will be able to apply their contributions to a Roth
TSP account.
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.
- Roth contributions are subject to Federal (and, where applicable,
state and local) income taxes, while traditional contributions are not
taxed until withdrawn. However, both Roth contributions and traditional
contributions are included in the amount of wages used to calculate
payroll taxes (e.g., Social Security taxes).
- You would have to pay taxes on any pre-tax amount transferred to a
Roth IRA.
- Transfers to a Roth IRA from a Roth TSP are not subject to the
income restrictions that apply to Roth IRA contributions.
- Roths have Tax-free earnings if five years have passed since January
1 of the year you made your first Roth contribution, AND you are age 59½
or older, permanently disabled, or deceased.
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 Any funds withdrawn at retirement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.
- 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.
- The combined total of your Roth and tax-deferred traditional
contributions in
2012 cannot exceed the elective deferral limit of $17,000, or the
catch-up contribution limit of $5,500.
- Agency contributions will always be part of your traditional
(non-Roth) balance.
- Any contribution allocation or interfund transfer will apply
to the investment of
both your Roth and traditional contributions or balances.
- You will be able to transfer Roth 401(k), Roth 403(b), and
Roth 457(b) (but not Roth IRA) money into the Roth balance in your TSP
account. Pre-tax transfers will continue to be placed in your
traditional balance.
- Roth TSP is similar to a Roth 401(k), not a Roth IRA. There
are no income limits for Roth TSP contributions.
- You will be able to take loans, in-service withdrawals, and partial
withdrawals from your account as before. They will come out of your
account on a pro rata basis — with a proportional amount from your
traditional and Roth balances.
- When you withdraw your account, you will be able to separately
transfer any portion of your Roth and traditional balances to IRAs or
other eligible employer plans.
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.
Converting Your TSP to a
Roth IRA
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.
Roth Conversion Questions:
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.
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