Going from Trad & Roth TSP to Roth 457(b)?

Submitted by Maria KU on Wed, 2023-09-13 20:52

My 27yo daughter changed her job mid-year from the federal to a municipal government. She has already contributed the full $22,500 to Roth TSP during 2023.

Questions:
1. Is my understanding correct that she cannot contribute any to her new employer’s Roth 457(b) during 2023?
2. She has a small balance in Trad TSP & most of her funds are in Roth TSP. Is my understanding correct that she will have to set up a Trad 457(b) just for accepting that small balance of the Trad TSP? And that there is no way to get the balance of her Trad TSP into her Roth 457(b)? And the only “kind of” way around would be to roll it over (taxable) to a Roth IRA?
3. Anything else I need to be watching for in (mostly-) Roth TSP to Roth 457(b) rollover?

Thank you for your advice,

MK



Submitted by Alan - IRA critic on Wed, 2023-09-13 22:44

  1. 457b plans have separate contribution limits from qualified plans, so she can contribute to the 457b, but no more to any qualified plan.
  2. Pre tax TSP can either be directly rolled to the 457b as a separate sub account or to a rollover TIRA or Roth IRA (taxable). The Roth TSP can be directly rolled into the Roth 457b or a Roth IRA.
  3. Roth TSP can only be rolled into the Roth 457b by direct rollover.
  4. Of course, the 457b plan does not have to  accept rollovers from other plans.

Submitted by Maria KU on Wed, 2023-09-13 22:54

And if 457b does accept rollovers from TSP & IRAs, then the pre-tax Trad TSP can be rolled over to a Roth IRA, then Roth IRA to Roth 457b, right? One cannot rollover Trad pre-tax TSP to a Roth 457b via a taxable transaction, directly, right?

Submitted by William Tuttle on Wed, 2023-09-13 23:09

  • Also, there would be no benefit to rollover from the TSP plan to the 457b plan. External funds rolled over to 457b plans do not receive the more favorable 457b exception to the 10% early withdrawal penalty.
  • She should generally leave the funds in the TSP. If she really wanted to do a Roth conversion of the traditional TSP, a direct rollover to a Roth IRA would be preferred. However as mentioned, the funds would have to remain in a Roth IRA.

Submitted by David Mertz on Thu, 2023-09-14 00:54

A Roth IRA is not permitted to be rolled over to anything other than a Roth IRA.  Even if a rollover to a Roth 457(b) was permitted, as spiritrider said, there would really only be downsides to doing so, no benefits.

Submitted by Maria KU on Thu, 2023-09-14 01:39

Would 457 withdrawals be ordered pro-rata or 457-proper funds first if a 457 were to contain Roth TSP rolled over funds?Wouldn’t Roth 457 withdrawals be ordered as Roth 457 contributions coming out first until they’re fully exhausted (new under IRA?) before anything else comes out? Thus the chance to incur a 10% penalty be very slight, yet the ease of managing a single account a great benefit, given that she has about 40 years of work ahead of her (even not losing touch with TSP for 40 years may end up being a challenge)?

Submitted by Alan - IRA critic on Thu, 2023-09-14 02:43

The Roth 457b plan will have it’s own rules determining whether rollover funds from outside the plan can be distributed while in service. But even if the plan allows this, the contribution basis of the entire Roth 457b would be pro rated with the gains in the entire Roth 457b (Ref 1.402A-1, QA 9). Therefore, if the participant believes they may need Roth distributions from the Roth 457b, they should instead roll any funds into a Roth IRA rather than the Roth 457b. They will then have unlimited access to the Roth IRA money with clear and favorable Roth IRA ordering rules determining how the distribution will be taxed. 

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