Are you confused about Roth TSP rules?

Share This:
Share on facebook
Share on twitter
Share on linkedin
Share on email

“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!

Share This:
Share on facebook
Share on twitter
Share on linkedin

Leave a Reply

Your email address will not be published. Required fields are marked *

Related Articles

micah-shilanski-profile

Your Financial Planners

Get the most out of your federal retirement benefits by taking advantage of the FERS resources created by Micah Shilanski, CFP®, and the team of independent financial advisors at Shilanski & Associates, Inc. Join the thousands of federal employees who trust us to guide them in their retirement planning journey because of our unique perspective of how your FERS benefits contribute to your comprehensive financial plan.

7 CLASSIC RETIREMENT MISTAKES 
Federal Employees Make

Join Our Newsletter & Learn About
The 7 Critical Mistakes FEDs Make​
Yes! Send Me The Article
Your privacy is our top priority, and we promise to keep your email safe! For more information, please see our privacy policy.
close-link

7 CLASSIC RETIREMENT MISTAKES 
Federal Employees Make

Join Our Newsletter & Learn About
The 7 Critical Mistakes FEDs Make​
Yes! Send Me The Article
Your privacy is our top priority, and we promise to keep your email safe! For more information, please see our privacy policy.
close-link

7 CLASSIC RETIREMENT MISTAKES Federal Employees Make

Join Our Newsletter & Learn About The 7 Critical Mistakes FEDs Make

Your privacy is our top priority, and we promise to keep your email safe! For more information, please see our privacy policy.

7 CLASSIC RETIREMENT MISTAKES Federal Employees Make

Join Our Newsletter & Learn About The 7 Critical Mistakes FEDs Make

Your privacy is our top priority, and we promise to keep your email safe! For more information, please see our privacy policy.