The back door to convert Traditional TSP to Roth TSP?

“Is there a back door in which I can transfer money from a traditional TSP account to a Roth TSP account understanding I would be responsible for the tax implications?” – Tony

Can you convert a Traditional TSP to a ROTH TSP

You cannot directly transfer your Traditional Pre-Tax contributions within your TSP to your ROTH After-Tax TSP – that is a prohibited transaction.

The TSP does not allow ROTH Conversions within the plan.

However, you can consider whether or not doing a ROTH Conversion indirectly is advantageous.

Caution: this scenario is not for everyone. This can get complicated quickly and you could make irreversible decisions that have tax consequences if you make a misstep.

Before you proceed you need to ensure that you understand tax laws, how investments operate and what the TSP office permits.

You must be age 59 1/2 or older to complete this conversion.

If you are age 59 1/2 or older you can make a partial in-service transfer from your TSP to an Individual Retirement Agreement (IRA).

Key word here: transfer! You are not doing a roll over which has different financial ramifications. Again, this is why you want to work with a professional who understands Federal Employee benefits.

Once the funds arrive in your IRA you can then look at completing a ROTH Conversion to a ROTH IRA account.

Keep in mind, once the funds leave from a tax-deferred status to a tax-free account you have to pay income taxes on the funds at your current tax rate.

You do not need to transfer all the funds at the same time. You can do this over time transferring only amounts up to your tax tolerance levels for the current year.

Now, once your money is in a ROTH IRA you can conduct a transfer BACK to the TSP into the ROTH TSP Account. You can contact the TSP office to complete this or go online for Form TSP-60R.

Again, we cannot express caution here enough. This can get complicated and you need to be confident that you understand all aspects before completing on your own.

Tax-Deferred vs After-Tax Contributions

The Pre-Tax and After-Tax accounts have different rules as to when you can access those funds.

In the private sector, people participate in Individual Retirement Accounts (IRA’s) which have an age requirement that you reach 59 1/2 before you can withdrawal your monies from an IRA without penalty.

The TSP, for Federal Employees, is different. Here is how:

Pre-Tax:

You can access your Traditional TSP funds at:

  • Age 55 if you leave Federal Service OR
  • Age 50 if you are special provisions and leave federal service.

However, any monies you take out of this account are subject to income taxes. This account was made on a pre-tax basis so when you withdraw those funds, taxes are owed at your ordinary income tax rate.

After-Tax:

The ROTH has different eligibility rules to withdrawal monies. To take your monies out penalty and tax-free, from the ROTH TSP you have to be:

  • Age 59 1/2 AND
  • Have had the ROTH TSP open for the last 5 years.

If not, the withdrawal you make is subject to penalty and taxes.

Employer Contributions

Employer contributions to the TSP are always made to the Pre-Tax Account.

Even if 100% of your contributions are made to the ROTH TSP, your Employer’s contributions will be made to the Pre-Tax TSP account.

ROTH TSP Limits

Every year the Internal Revenue Services establishes the maximum contribution levels that Employees can contribute to their employer plans.

In 2019, the maximum contribution that a Federal Employee can make to their TSP account is $19,000 if they are younger than age 50.

If they are older than age 50, they can make a $19,000 contribution and elect to make a “catch-up” contribution of $6,000 additionally. This is a total of $25,000 that can be contributed to the TSP if you are age 50+.

Each year the IRS reassess this amount and publishes new guidelines as to what the annual contribution limits are. Changes, from year to year, are generally around $500.00.

How many ROTH’s can I have?

Yes. You can have and contribute to both a TSP ROTH and a ROTH IRA each year.

If you are age 50 and younger, you can put:

  • Up to $19,000 a year into your TSP ROTH account AND
  • Up to $6,000 into a ROTH IRA.

If you are age 50+, you can put:

  • Up to $25,000 into the TSP ROTH (including $6,000 catch-up contribution) AND
  • Up to $7,000 into a ROTH IRA (including $1,000 catch-up contribution).

Remember, with an IRA, ROTH IRA, and TSP ROTH you have to reach age 59 1/2 before you can withdraw those funds without penalty. Also, with the ROTH IRA and TSP ROTH, you have to have had the account open for longer than 5 years.

I earn too much to contribute to my ROTH TSP…

The TSP ROTH is not subjected to income limitations for participants. You can contribute to the TSP ROTH even if you are a high-income earner without a phase out qualifications.

However, the ROTH IRA is subject to income limitations. If the adjusted gross income for your household exceeds $180,000 a year, you will want to talk with a financial professional. They can see if a “back door ROTH IRA” potentially makes financial sense for you.

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