“Hi, I have a question regarding Roth TSP which I have not gotten a clear answer on. I will be 54 this year. I plan on retiring at 62 which is 8 years from now. I started contributing to a traditional TSP when I started my Federal employment. I now want to start a Roth TSP account. However, I have heard that an employee has to contribute to a Roth TSP for 10 years before the withdrawal. Otherwise, a penalty applies. Is this true? Thank you for your consideration.” – Tat
This question is about avoiding taxes and penalties when withdrawing money from the Roth TSP. First, let’s review this TSP option:
- On June 22, 2009, the TSP was authorized to add a Roth feature to the plan.
- After-tax contributions that grow tax-free
- Matching contributions are always “traditional”
- The same elective deferral limit applies to both traditional and Roth
- $19,500 2021 Elective deferral limit
- $6,500 2021 Catch-up contributions limit
What is a “Qualified Distribution?”
- Allows Roth distributions to be tax-free
- Five years have passed since January 1 of the first year you made Roth contributions to your TSP
- You are 59 ½ or older OR you have a permanent disability OR you have died
Contributions vs Earnings
- Contributions already taxed
- Earnings tax-free if “qualified”
You may transfer or roll over to a Roth IRA or employer Roth account
- 5-year rule does not carry over
- Count from January 1 of the first year you contributed to any Roth IRA
- Distributions from Roth IRAs are paid first from contributions
As long as earnings are “tax-qualified,” you will not be penalized for the distribution of those funds. They will come out tax-free. The 10% early withdrawal tax penalty never applies to contributions made to Roth balance or to qualified distributions of earnings
This tax penalty may apply to non-qualified distributions.
You must specify if you wish to take your withdrawal from traditional, Roth, or both balances, for example, if you want to take a $10,000 withdrawal from a $150,000 TSP balance that is invested:
- Roth $30,000 (20%)
- Traditional $120,000 (80%)
Then, the pro-rata withdrawal would come out as:
- $8,000 Traditional
- $2,000 Roth
You may specify if you would like it all to come from traditional during the withdrawal process.
- Payments specified from traditional, Roth, or both
- Cannot transfer Roth money to traditional IRA
- Can transfer traditional money to Roth IRA (taxable distribution)
Warning: Taxes can be complicated, it might be best to consult with a professional if you are not sure how to withdraw from your TSP to your best tax advantage!