Are you confused about Roth TSP rules?

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“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.

 

Bottom line:

  • Payments specified from traditional, Roth, or both 
  • Cannot transfer Roth money to traditional IRA
  • Can transfer traditional money to Roth IRA (taxable distribution)

 

 

Reference:  Important Tax Information About Payments From Your TSP Account

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!

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