Essential facts to comprehend prior to transferring your Roth TSP into a Roth IRA:
Transferring funds from a Federal Thrift Savings Plan (TSP) to a Roth IRA has significant implications for qualified distributions. Here's what you need to know:
When you roll over traditional TSP funds to a Roth IRA, it is treated as a Roth conversion and is subject to income tax in the year of the rollover. The five-year clock for qualified Roth distributions starts fresh in the Roth IRA. This means the five-year holding period to make tax-free qualified withdrawals begins on January 1 of the year you make the rollover into the Roth IRA, regardless of how long the funds were held in the TSP.
In Scenario #1, if all Roth IRA contributions are withdrawn and earnings are distributed, the two-prong test for qualified Roth IRA distributions applies. For a Roth IRA, a qualified distribution can be made if five years have passed since the first contribution and the account holder is either 59 1/2, disabled, deceased, or distributing up to $10,000 under the first-time homebuyer exception. If both prongs for qualified Roth IRA distributions are not satisfied, earnings distributed are subject to income tax and a 10% penalty if the account holder is under 59 1/2.
It's important to note that the Rule of 55, which allows certain early withdrawals from employer plans without penalties, does not apply to Roth TSP dollars. This rule vanishes once money moves from an employer plan to an IRA. The Rule of 55 only applies to employer plans like the TSP, not to IRAs.
Transferring Roth TSP funds that didn't meet the five-year rule within the TSP will not ruin your Roth IRA clock. The IRS lets you go back in time when looking at the five-year requirements. For example, if you contribute to your first Roth IRA in December 2025, your clock starts on January 1, 2025.
Roth IRAs have ordering rules for distributions: contributions are distributed first, followed by conversions, and then earnings/growth. When transferring Roth TSP to Roth IRA with qualified dollars, the entire amount lands in the Roth IRA as if it were an original Roth IRA contribution.
When considering whether to rollover or transfer a federal Thrift Savings Plan (TSP) to an individual retirement account (IRA), it's crucial to take fees, taxes, and conflicts of interest into account. The Financial Industry Regulatory Authority (FINRA) advises careful consideration in this decision.
In summary, the rollover to a Roth IRA resets the five-year clock on qualified distributions for those funds, meaning the waiting period restarts in the Roth IRA, not continuing from the TSP account holding period.
- When transferring Roth TSP funds to a Roth IRA, it's essential to consider the fees, taxes, and potential conflicts of interest, as advised by the Financial Industry Regulatory Authority (FINRA), given that the rollover resets the five-year clock on qualified distributions, and the waiting period restarts in the Roth IRA, not continuing from the TSP account holding period.
- Investing in personal-finance strategies should include considering the implications of transferring Roth TSP funds to a Roth IRA, as doing so treats the transfer as a Roth conversion, making it subject to income tax in the year of the rollover, and starting a fresh five-year clock for qualified Roth distributions.
