Thrift Savings Plan Rollover that has Combat Zone non taxed dollars in it

Submitted by Richard Hewitt on Thu, 2015-07-23 16:16

I have a client, retiring career Army, who has both a Roth TSP and a Regular TSP. Inside the Regular TSP he has elective deferral dollars AND dollars that were contributed while deployed to Iraq and later Afghanistan and those dollars fell under the combat zone exclusion rule.

Question: For the Regular TSP rollover, can we do a trustee to trustee transfer for the pre tax elective deferral dollars and simultaneously roll the combat zone dollars to his Roth IRA? The issue is getting the gaining custodian to accept that the combat zone dollars are not “basis” per se and thus would go into the traditional IRA but tax free dollars.

Thanks for any insight!



Submitted by Alan - IRA critic on Thu, 2015-07-23 20:48

  • TSP literature lacks clarity on how they would report a rollover on the 1099R. IRAs do not recognize “tax exempt” status of contributions, and 5498 reports of IRA contributions do not differentiate on the tax composition of incoming rollovers. An IRA account either contains basis or not, there is no intermediate “tax exempt” category. The TSP literature states that the “tax exempt” sub account is eligible for rollover to a TIRA or Roth IRA. Accordingly, these amounts should be treated the same as after tax contributions are in private DC plans if they are rolled to a Roth IRA.
  • However, the risk lies with the TSP 1099R. If they decide to show the tax exempt money as taxable in Box 2a, the IRS will be looking for taxable income. While the client could recharacterize that rollover to eliminate the tax, and could file an 8606 to add basis to his IRA account, if there is any other pre tax IRA balance, a conversion would then be pro rated for the taxable amount.
  • Notice 2014-54 affects this as well since if the TSP complies with the Notice, the client can direct the pre tax money to his TIRA and the tax exempt money to his Roth – or in order to avoid a TSP blindsiding on the 1099R, they might ask for a distribution of the tax exempt amount while the balance goes to a TIRA. Then they roll the tax exempt distribution to their Roth IRA tax free. TSP instructions are clear that distributions to the participant of tax exempt money is tax free.
  • It is clear from a google search that this question has never been clearly resolved over the last few years. The TSP literature is not clear and neither is any IRS guidance. Client should try to find out how the TSP reports rollovers of tax exempt money on the 1099R before acting aggressively and treating them as basis.

Submitted by [email protected] on Fri, 2015-07-24 16:42

On form TSP-70, when asking for a full withdrawal, under section X, you would indicate you want your Traditional balance to go to a Traditional IRA.  Box 40 would be checked if your accepting custodian will take one check from TSP for your Traditional balance, which includes Tax Exempt, and carve out the Tax Exempt portion to go to the Roth IRA.  TSP will issue one check for the Traditional balance, with the balances broken out.  If the custodian won’t do that, then leave box 40 blank, and TSP will mail the check to the client.  As Alan inidcated above, this would then be eligible for a rollover to Roth IRA.

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