Steps to move from TSP to IRA to Roth IRA

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  “I am considering transferring/$10,000 from my TSP to my Roth account in Fidelity. Your presentation mentioned TSP to IRA to Roth. What’s the correct steps for my financial advisor? What’s the difference between a roll and transfer?” Not all words are synonymous! There is a difference between rolling over and transferring your Thrift Savings Plan (TSP) to an Individual Retirement Arrangement (IRA) or a ROTH Individual Retirement Arrangement. Yes, you can transfer your TSP to an IRA. Contingent on how you contributed, you can transfer your TSP to a ROTH IRA too. How you transfer these accounts, though, is extremely important to understand. When we meet with Federal Employees, and they say, “I recently rolled my TSP over to my IRA,” we find that we hold our breath and hope that it is not the case. There is a difference between conducting a transfer and a rollover. The words that you use when you’re talking with the TSP office matter. It is not the TSP agency’s responsibility to provide you with financial advice; you tell them to do the wrong thing because you did not understand the terminology or consequences. In this article, we will explain the differences between a Transfer and a Rollover.

What’s in a Word?

Taxes. The difference between a rollover and a transfer is heavily weighted by consequence.

Rollover – TSP

What happens when you Rollover your TSP to an IRA:
  • The TSP office withholds 20% of your TSP funds. These funds are sent to the IRS as an ESTIMATED withholding of your federal income taxes.
  • You are mailed a check in the post of your TSP Funds.
  • You have 60 days to redeposit 100% of your TSP funds, including the 20% withheld and sent to the IRS, to an Individual Retirement Account.
As you can see, this can be riddled with irreversible difficulties. What if you’re traveling and don’t get your mail? What if you don’t have enough funds available to cover the 20% withheld and aren’t able to redeposit the required amount before it becomes taxable? We tell most of our clients who are Federal Employees to remove the word “rollover” from your vocabulary. Rather, consider if you are trying to complete a Direct Transfer.

Transferring your TSP to an IRA

If you want to move your funds from the TSP to an IRA, you want to request a direct transfer. What happens when you do a direct transfer from your TSP to an IRA:
  • The TSP office transfers your TSP to a custodian of your choosing electronically, which is done online.
  • Your legally married spouse has to sign a spousal consent form, which must be notarized and sent to the TSP office.
  • Your investment positions are liquidated so that the account can transfer to your new custodian.
  • 0% is withheld and sent to the IRS as an estimated tax withholding.
  • The transfer process takes, on average, around 14 days.
When you complete a transfer of your TSP, you are not considered “in receipt” of the funds. Rather, the funds are transferred from one retirement plan to another. Now, just because you open an account with Vanguard, TD Ameritrade, Robinhood, etc., and think that they won’t make a mistake between the terminology: rollover vs. transfer cannot caution you enough that we have seen ALL of the horror stories possible. If YOU tell someone to do a rollover, it is your money. They will do what you tell them to. This is why we handhold our clients through this process and ensure that we are on the phone with them during the transfer process.

Do you pay capital gains on TSP?

If you conduct a direct transfer from the TSP to an IRA, you may have noticed that your investment positions will be liquidated in the process. One question that we receive is whether or not you, as the account holder, will have to pay capital gains taxes when that happens? No. You will not pay capital gains taxes on your TSP when you liquidate it to transfer the account to an IRA doing the direct transfer strategy. Your Traditional TSP is taxed as ordinary income when you withdrawal the money from the account. When you take money out of the Traditional TSP, normally to supplement retirement income, you pay capitals gains at your federal income tax rate. If you participated in the ROTH TSP, you are not taxed on your withdrawals, providing you with the plan requirements.
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