TSP Forced Rollover

Submitted by Patricia Puglise on Wed, 2023-08-16 19:41

Hi Forum,
I went through a divorce and needed to rollover my part of his TSP account (he is a Federal employee) which includes a Roth and Traditional 401K. Unfortunately, I didn’t make the deadline because I was travelling, slipped and fell on a hike and fractured both of my legs. I was told that I could roll it over now within 60 days and get the tax withholdings back when I file my taxes. I have two checks from the IRS with random amounts and certainly not the correct amounts to put into Roth or Traditional accounts. I opened two accounts at Vanguard but the people I speak to have never heard of this situation and both checks are made payable to me. I also need to make up the tax withholding amount with my own money which is fine. The total amount to be rolled over is Would you be able to help me with this situation? I don’t want to do anything wrong to prevent me from getting that tax withholding back.

Thank you so much for your help.



Submitted by Alan - IRA critic on Wed, 2023-08-16 20:38

  • The two checks are likely for the balance of the pre tax TSP you received and another check for the Roth TSP balance.  Assuming your attorney submitted an approved QDRO to the TSP, any portion of the distribution you wish to keep will be penalty free under exception for QDRO distributions. However, the portion that you roll over to your TIRA and Roth IRA respectively will escape current taxes, but if you take distributions from your TIRA or Roth IRA you will owe the 10% penalty until you reach 59.5. Therefore, before doing any 60 day rollovers and replacing the amounts withheld, determine how much of each distribution you may wish to keep since it is penalty free. The penalty exception does not carry over to your IRA accounts. Since most of the Roth TSP distribution is probably contributions, the taxable amount for each dollar you keep from the Roth will be far less than that same amount from the pre tax account.
  • Because these distributions are rollover eligible, the TSP should have withheld 20% of the taxable portion of each distribution. Since you will be filing single for this year unless you remarry by year end, your tax rate will likely be higher than when you filed jointly. The more of the pre tax distribution you roll over as compared to the Roth distribution, the lower your 2023 tax bill will be. 
  • Be very careful that none of the pre tax distribution is rolled over to your Roth IRA as that amount will be taxable and also be very sure that none of the Roth portion is rolled over to your TIRA as that is not allowed and will result in an excess contribution to the TIRA. In order to make the right decisions on rollovers you need to secure an accounting from the TSP that clearly breaks down the pre tax v Roth amounts and breaks down the Roth amount into contributions and gain/loss. The portion you roll to your Roth IRA that is from contributions will be added to your Roth IRA contribution basis and can be withdrawn from your Roth IRA without tax or penalty. Any Roth TSP gains become Roth IRA gains in your Roth IRA.
  • For any portion that you keep (not rolled over), the 20% withheld can be considered a deposit against your final tax bill. The 20% may not be enough or it may to too much depending on your other taxable income and deductions.

Submitted by Patricia Puglise on Thu, 2023-08-17 00:33

Yes I will have three checks one from me to make up that tax withhholding amout and 2 from the IRS which was the force out from TSP. Can I just endorse the 2 IRS checks over to Vanguard, make my check out to Vanguard and write them a letter telling them what to put in the Roth and what to put in the Traditional?  The cheecks I got from the IRS are just in random amounts not the actual amount that needs to be put in each Roth/Traditional IRA Is that ok with the IRS? How would Vanguard know it’s a rollover?  I have the dollar amount  information from TSP on what amount goes into each IRA to make it whole but not an accounting of gains and losses.  Does Vanguard need to see the accounting of gains and losses? I make admin Asst salary so I wouldn’t have a tax bill. Will I just get the 20% tax withholding money from the IRS  that was take from the distribution ?  I’ve been in contact with CPA’s that don’t know the answer and always say it’s not their expertise and referred me to Ed Slott. Thank you. 

Submitted by Alan - IRA critic on Thu, 2023-08-17 01:58

  • The distribution checks are from the TSP, not the IRS, but the TSP sent the withholding to the IRS and perhaps some to your state if your state requires it. While VG may allow you to endorse these checks over to them, if you instead deposit them into your checking account, then determine the amount you wish to roll over and the amount of withholding you wish to replace, presenting a single check for the TIRA rollover deposit and another for the Roth IRA rollover deposit will reduce the chance of confusion at VG that could result in the wrong amount being deposited to the IRAs due to their being 4 rollover checks instead of 2. However, the calculations on your end could be challenging and you will need complete data from the plan on the gross distribution and the amount withheld from both the pre tax and the Roth portions. You also need to clearly indicate to VG that these are rollover contributions broken down for deposit to each IRA type so VG can correctly report them on Form 5498 for each IRA.
  • VG does not need the accounting for gain or loss as you must track that yourself for your IRAs. If the amount withheld from the pre tax TSP distribution is 20% of the gross distribution, that confirms that there are no after tax dollars within the pre tax account. Unless you already have IRA basis from prior non deductible contributions you may have made in the past to your TIRA and reported on Form 8606, all later distributions from your TIRA will be 100% taxable. For your Roth IRA distributions, unless your Roth IRA is qualified (meaning you are over 59.5 and first contributed to a Roth IRA over 5 years earlier) you will have to report Roth distributions on Form 8606. Any gains you have will come out last, but if you do not take any Roth IRA Distributions before the Roth is qualified, then all your Roth IRA distributions will be tax free and you will not need the 8606.
  • When you file your 2023 tax return the amount that was withheld from the TSP distribution will be listed and credited to the amount you paid in along with any other tax withholding or quarterly estimates you may have paid for 2023. Your tax return will determine your total tax liability for the year, and if the amount you paid in including the withholding mentioned is higher, you will get a refund of the difference.However, if it is lower you will owe the difference in April. If you replace the amount withheld and eliminate current tax liability for the entire distributions, more than likely you will get a sizeable refund next spring.
  • The real challenge is correctly doing the math to determine the amounts you will roll over to VG to the respective IRA accounts. You should triple check that math because if you make an error it will be difficult to correct it. After you send your rollover checks to VG (separate for TIRA and Roth IRA and properly earmarked for each IRA, check your IRA account on line about a week after the rollovers to make sure that the correct rollover amounts were deposited in each IRA. Do NOT send a single check for VG to split, write separate checks for each IRA.
  • Finally, because this was a QDRO distribution and therefore penalty free, you may NOT want to rollover the entire gross distributions. If you are under 59.5 it would make no sense to not keep some money to pay your expenses penalty free, only to later take an IRA Distribution subject to penalty. Alot of this depends on your age, which was not stated.

Submitted by Patricia Puglise on Tue, 2023-08-22 01:29

First of all, thank you so much for you help. Now I’m rolling over to the Traditional IRA and Roth IRA with 2 checks. I’m not sure what amount ro Rollover to Roth and Traditional. Roth the amount that was on the check plus the taxes that I made up per the numbers that TSP gave me. should I do the same with Traditional?. BUT the force out statement says Gross Distribution which is the total rollover amount MINUS Non taxable credit received. I’m worried that I just should put that non taxable money in the Roth but that wasn’t the money on the check they gave me olus the money I owed in taxes to make it whole. So the total money  equals the the total tax withheld but some of it went to the Roth and some to the Traditional per the calculations with TSP. Plus Junes statement says Your non taxable Roth Balance equals X which is $10,000 lower than what the check the IRS sent me which was from TSP. I guess that’s how they do it in my state instead of TSP sending me a check that says Vanguard FBO and then my ne. Which amount do I put in each account ?  For the Roth. The amount that says Roth on the statement and check plus taxes or the amount that says your non taxable Roth balance on the statement and also that was the amount on my online account under Non taxable credit received included on the force out calculations. Thank you. 

Submitted by Patricia Puglise on Mon, 2023-08-21 23:50

First o

Submitted by Alan - IRA critic on Tue, 2023-08-22 02:13

  • The gross distribution on the statements you received with the distribution checks should include the total of what you received plus any withholding (federal and state, if any). Without seeing the distribution statements, it is not possible to be more specific for these amounts. Suggest you look at those statements to determine gross distribution for the pre tax portion of the TSP and gross distribution for the Roth portion. These are the amounts to be rolled into your TIRA and Roth IRA respectively, which requires you to replace the amounts withheld from both distributions.
  • One other thing to check is whether there were any after tax contributions in the pre tax TSP. If the statement does not break this out, you could then determine if the federal withholding from the pre tax distribution equals 20% of the gross pre tax distribution. If it does, then there are no after tax contributions in the pre tax TSP distribution. 
  • If you have an accountant do your tax returns, if you are unsure of the math or confused by the statements, get some help from the accountant or tax preparer.
  • NOTE: If the distribution statement was dated after the end of June, you can ignore the June statement as the extra amount you received (10k?) was probably investment gain between 6/30 and the date the distributions were processed.

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