How to Roll Over a Traditional Thrift Savings Plan (TSP) to a Roth IRA

You can ask the TSP to transfer your retirement funds or do it yourself

When you leave your federal job, you might want to consider moving the funds you’ve accumulated in your traditional thrift savings plan (TSP) to another retirement account. Traditional TSPs come with many benefits, although some of their main advantages, including generous contribution allowances and matching employer contributions, disappear once your days as a government worker are behind you.

A Roth IRA is an attractive alternative. These individual retirement accounts (IRAs) offer greater investment choice, aren’t subject to required minimum distributions (RMDs) starting at age 72, and are funded with after-tax dollars, meaning you can grow your earnings tax free.

If, after doing your own due diligence and perhaps consulting with a financial advisor, you decide to take this path, you should be aware that it isn’t always a very straightforward process. There are different ways to move your retirement funds from a traditional TSP to a Roth IRA, and taking the wrong step could prove costly.

Key Takeaways

  • There are two main ways to move money from a traditional TSP account to a Roth IRA.
  • You can instruct the TSP to send your funds directly to your new retirement plan.
  • Alternatively, you can withdraw the funds and transfer them personally to a Roth IRA within a set deadline.
  • Both approaches create immediate tax liabilities, as traditional TSPs are taxed at withdrawal and Roth IRAs are taxed at the point of contribution.

How to Roll Over TSP Funds Into a Roth IRA

To request a withdrawal, you need to log into your account on the TSP website and then click on the “Withdrawals and Changes to Installment Payments” link in the menu. Once there, you’ll be walked through the entire withdrawal process.

Before proceeding, you’ll need to consider carefully how you want to move money from a traditional TSP to a Roth IRA. There are two methods. The first is a transfer, also known as a “direct rollover,” and the second is a rollover, also known as an “indirect rollover.”

If you move from a traditional TSP to a Roth IRA, you will have to pay taxes on the amount you transfer.

Direct Rollover (or Transfer)

With a transfer, you basically instruct the TSP to send your funds directly to your new retirement plan. Select this option and someone else will take care of almost everything for you. All you need to do is make sure you already have a Roth IRA set up and the account details at hand. You’ll also be required, at a later date, to pay some taxes to the Internal Revenue Service (IRS).

A traditional TSP is funded with pretax dollars and only taxed at withdrawal. Roth IRAs work in the opposite way. When contributing to one of these accounts, the IRS will tax you straight away.

However, unlike with a regular job, no one withholds your tax liabilities. It is up to you to settle this bill. You’ll need to add however much you transfer to your taxable income for the year, declare this figure to the IRS on Form 1040, and then pay up accordingly.

The TSP will also inform the IRS of your withdrawal and mail you a copy of Form 1099-R the following January. This form, which can be downloaded from your online TSP account the first week of February, serves as a record of the transaction.

You can avoid a big tax bill in a single year by doing a traditional TSP-to-traditional-IRA rollover first, then gradually transferring funds each year from the pretax IRA to the after-tax Roth IRA until all have been moved.

Indirect Rollover (or Rollover) 

An indirect rollover, or just rollover, is when you get the money in your traditional TSP sent to you and then deposit it into another retirement account yourself. This might sound like a tempting option. However, there are several caveats that will likely give you second thoughts.

The most important things to be aware of are:

  • You are taking money from an account that is taxed at the point of withdrawal, so the TSP withholds 20% of your funds for federal income taxes.
  • You have 60 days to redeposit your traditional TSP funds, including the 20% withheld, to your Roth IRA. If you fail to meet this deadline, the portion not rolled over will be taxed.
  • It will also be subject to a 10% early withdrawal penalty if you are younger than 59½.

If you retire early and need access to your traditional TSP funds, it’s best not to immediately transfer them to a Roth IRA. With a Roth, you’ll pay penalties on withdrawals if at least five years haven’t passed since your first contribution and you're younger than 59½ years old.

Let’s look at an example. On his 59th birthday Roy takes a $30,000 eligible rollover distribution from his traditional TSP, which he plans to roll over into his Roth IRA. He receives a check for $24,000, with the other $6,000 being withheld for taxes, and he now has 60 days to deposit the full $30,000 into his Roth IRA to avoid paying a penalty.

Before the deadline, Roy managed to acquire an extra $2,000, bringing the total amount he deposits into the Roth IRA to $26,000. The problem is that there is still a $4,000 shortfall, and now that the deadline has expired, Roy is going to get taxed on that amount as well as pay a $400 early withdrawal penalty.

The biggest issues here are having to use additional funds to plug the shortfall of the withheld 20% and being on the clock to make the transfer happen. Sixty days may sound like a long time. However, if you lead a busy life, are not very organized, or something big comes up, those days will soon pass.

Can I Convert My Traditional TSP to a Roth IRA?

Yes, you can. However, it’s important to be aware of all the implications before making such a move, especially the tax liabilities. A Roth IRA—unlike most traditional retirement accounts, including a TSP—is funded with after-tax dollars, meaning you pay the IRS up front rather than later on when withdrawing funds. Your future self will probably be grateful for you doing this. However, in the present you’ll need to pay taxes.

Will the TSP Withhold Money for Taxes When I Transfer Funds to a Roth IRA?

No, it won’t. If you do a direct transfer, it’s on you to tell the IRS the amount you are transferring. Anything you transfer is taxable in the year it is transferred and will need to be declared as taxable income on your tax return. Of course, that means you’ll need to be disciplined and find a way to put some funds aside to pay those taxes.

Is a Roth TSP the same as a Roth IRA?

No, not at all. Both are contributed to with after-tax dollars and subject to the five-year rule. However, other than that they are vastly different.

The Bottom Line

More and more former federal employees are considering the benefits of switching to a Roth IRA. The logic behind this move is understandable. Still, not everyone has the same needs and circumstances, so it’s important to be fully aware of what you are getting yourself into before making the switch.

For those who do make the jump, careful consideration over which rollover technique to use is crucial. In the majority of cases, a simple transfer, or direct rollover, represents the best option.

Article Sources

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  2. Thrift Savings Plan. "How the TSP Fits Into Your Retirement."

  3. Internal Revenue Service. "IRA FAQs."

  4. Thrift Savings Plan. "Individual Funds."

  5. Thrift Savings Plan. "Important Tax Information About Payments From Your TSP Account," Page 4.

  6. Thrift Savings Plan. "Making a Withdrawal."

  7. Thrift Savings Plan. "Important Tax Information About Payments From Your TSP Account," Page 2.

  8. Internal Revenue Service. "Roth Comparison Chart."

  9. Thrift Savings Plan "Summary of the Thrift Savings Plan." Page 3.

  10. Internal Revenue Service. “1040 (2021).”

  11. Internal Revenue Service. "About Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc."

  12. Thrift Savings Plan. "When Will Form 1099-R Be Available and Where Can I Find It on the Website?"

  13. Thrift Savings Plan. "Important Tax Information About Payments From Your TSP Account." Page 5.

  14. Internal Revenue Service. “Publication 590-B, Distributions from Individual Retirement Arrangements (IRAs).”

  15. Thrift Savings Plan. "Roth and Traditional TSP Contributions."

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