What is the difference between a TSP transfer, rollover, and withdrawal? We explore the tax consequences for Traditional and Roth TSP accounts.

The Thrift Savings Plan (TSP) is comprised of two main components, Traditional and Roth. All contributions that are made with pre-tax dollars, and all government and agency matches, go into the traditional account. If a TSP participant wishes, they can contribute post-tax dollars to a Roth TSP account, the cash in which is itself divided into two pools – contributions and earnings. It is important to note that when withdrawing from a Roth TSP, the contributions (which have already been subject to taxation) are disbursed first.

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Before withdrawing money from your TSP, it is important to understand the tax rules that apply to both types of TSP accounts. For traditional TSP accounts, all withdrawals are taxed as ordinary income. If the account owner is younger than the age of 59½, then there is usually a 10% early withdraw penalty imposed by the IRS. There are situations where this doesn’t apply, including annuity payments, 72T payments, if the participant is disabled, if the withdraw is from a beneficiary TSP account, if the disbursement is due because of the account owner’s death, if there’s a domestic court order for the withdrawal (typically for divorce settlements or child support), or if the participant leaves federal service the year they turn 55 or older. There are some situations where members of uniformed service have tax-exempt contributions in a traditional TSP account. While these contributions are not taxed, any earnings are. And as for disbursements from the Roth TSP, these are only hit with the 10% penalty if the earnings portion is taken out before age 59½ and remember – contributions come out first. The earnings from a Roth TSP are also taxed as ordinary income if the withdrawal is considered unqualified.

TSP Transfers and Rollovers

The technical difference between a transfer and a rollover is that in a transfer, money goes from the TSP directly into an IRA or other retirement plan (like a 401k) whereas in a rollover, the cash is given to the TSP account owner first and it is their responsibility to place it in the IRA or qualified retirement plan. If the owner doesn’t move the funds into one of these accounts within 60 days of receiving the funds, it is considered a withdrawal and will be taxed as ordinary income, plus the 10% penalty depending on the participant’s age. Only the following types of withdrawals are eligible to be transferred or rolled over:

  • A single withdraw from a fed who has separated from federal service
  • An unpaid TSP loan – also only for a separated individual
  • Installment payments (that are scheduled for 10 years or less)
  • Age-based in-service withdrawals
  • Death benefits paid to a spouse (but money can only go into an inherited IRA)

One last thing to consider when doing a rollover from the TSP. Law requires that the participant withholds 20% for taxes. If they wish for that 20% to not come from the TSP account, then the account owner must provide that 20% themselves from an outside account. If moving a considerable amount of cash, this withholding can be significant. A $50,000 rollover, for example, would require $10,000 be withheld. 

The Roth TSP

For a Roth TSP account, a withdrawal can be tax-free as long as it is qualified, which means that two criteria are met: 1) at least 5 years must’ve passed since January 1st of the year that the first contribution was made in the Roth TSP. And 2) the participant is at least 59½ years old. If the 5-year rule isn’t satisfied, any earnings withdrawn are taxed as ordinary income. And if the age requirement isn’t met, then any earnings withdrawn would be subject to the 10% penalty. 

You can transfer into a Roth IRA from the Roth TSP, but not vice versa. Also, keep in mind that if the 5-year rule is met in the Roth TSP, the cash diverts to the IRA’s 5-year rule once transferred. So you can’t withdraw from a Roth IRA without tax consequences until it has been opened for at least 5 years since January 1st of the year that it was first contributed to. 

Until Next TIme,

**Written by Benjamin Derge, Financial Planner, ChFEBC℠. The information has been obtained from sources considered reliable but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Benjamin Derge and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Expressions of opinion are as of this date and are subject to change without notice. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors.

sources: tsp.gov and irs.gov