Managing Money
How to Convert Traditional TSP Money to a Roth IRA
A
s more Thrift Savings Plan (TSP) participants become aware of the potential benefits of a Roth conversion, I’m being asked many questions regarding how to
convert traditional TSP money. While I’ve written a number of Roth conversion columns for NARFE Magazine, they’ve mainly focused on the “why.” To address several prevalent questions on this topic, most of which relate to the mechanics of converting traditional TSP money to a Roth account, this month’s column will focus more on the “how.” The most common question is, “How do I convert my traditional TSP to the Roth TSP?” Unfortunately, at this time, the TSP doesn’t allow what’s known as an “in-plan” conversion—the process of converting money from a traditional tax-deferred account to a Roth account within an employer-sponsored retirement plan, such as the TSP. Therefore, the only way for TSP participants to convert traditional TSP money to a Roth account is to convert funds from the traditional TSP to a Roth IRA. This often leads to the follow-up query, “Do I need to transfer the traditional TSP money to a traditional IRA before converting to a Roth IRA?” The answer to this is simply, no. Both IRS rules and TSP withdrawal rules allow participants to transfer a withdrawal directly from the traditional TSP to a Roth IRA. The most efficient method for doing this is to instruct the TSP to transfer a withdrawal (known as a direct rollover) from the TSP to 42
NARFE MAGAZINE AUGUST 2021
a Roth IRA. The TSP withdrawal paperwork requires your Roth IRA custodian’s signature confirming that he or she accepts the transfer from the TSP. There’s no reason a custodian should
ONLY ELIGIBLE ROLLOVER DISTRIBUTIONS MAY BE MOVED FROM THE TSP TO ANOTHER RETIREMENT PLAN. refuse a direct transfer; if it does, it’s time to move your Roth IRA to a different custodian. An alternative to transferring the money directly from the TSP to a Roth IRA is an indirect rollover, which involves the TSP participant taking possession of a withdrawal paid directly to him or her (depositing the withdrawal into a personal bank account) and then moving the money into the Roth IRA.
When taking this approach, there are several rules to be aware of that make this approach less desirable. For instance, 60 days is the maximum time one may take to get the money deposited into the Roth IRA. Failure to meet this deadline will result in the TSP participant being stuck with a taxable withdrawal that may not be put back into any retirement plan. Furthermore, a single withdrawal paid directly to a TSP participant is subject to a mandatory 20 percent tax withholding. Participants may deposit the gross TSP withdrawal, including the 20 percent withholding, into the Roth IRA, but since the withholding went to the U.S. Treasury, the participant will have to come up with the money from another source. Finally, any amount from the TSP withdrawal not converted to the Roth IRA (or deposited into another retirement plan) may be subject to the 10 percent early distribution penalty if no exception applies. Bear in mind, only eligible rollover distributions may be moved from the TSP to another retirement plan. Many TSP participants ask if they may convert their required minimum distributions (RMDs) to a Roth IRA, and the answer is no. RMDs are not eligible rollover distributions, and, therefore, may not be converted to a Roth IRA. Some people wonder, Is my income too high for a Roth conversion?
