Thrift Savings Plan (TSP) Tax-Exempt Funds
51 year old has a TSP with tax-exempt dollars. Can he do a direct rollover of the pre-tax dollars (including the earnings from the tax-exempt dollars) to an IRA, direct rollover of Roth dollars to a Roth IRA, and an indirect rollover of the tax-exempt funds to a Roth IRA? Will he be required to withhold taxes on the indirect rollover of the tax-exempt funds? If he doesn’t have any Roth IRAs, what are the rules regarding accessing the portion rolled into Roth without incurring penalties?
Permalink Submitted by Alan - IRA critic on Mon, 2025-06-02 16:41
I assume that he has separated from service, otherwise would not be eligible for most of these rollovers.
If separated, he should be able to request a split rollover of the after tax and tax exempt balances to his Roth IRA and the pre tax portions to his TIRA.
If the TSP will not do a direct rollover of the tax exempt balance and will distribute that balance to him, there is no withholding required since that balance is tax exempt. He could then do a 60 day rollover of that distribution to his Roth IRA.
For the Roth TSP portion, the amount of his contributions (shown in Box 5 of the 1099R) are treated as regular Roth IRA contributions and can be withdrawn any time from the Roth IRA without tax or penalty. The earnings portion will be treated as Roth IRA earnings and come out of the Roth IRA last.
The non Roth TSP after tax balance will be treated as a non taxable conversion in the Roth IRA, which means that they come out after the Roth TSP contribution amount, but also tax and penalty free because the Roth IRA 5 year conversion holding period does not apply to after tax amounts.
In short, only the earnings in the Roth TSP would have to be held in the Roth IRA until age 59.5 in order to be qualified and tax free.
Permalink Submitted by Roth Fan on Tue, 2025-06-03 17:34
At 51 and a former Qualified Public Safety Employee that separated service after age 50, he has an exemption from the 10% additional early distribution tax on withdrawals from the TSP. Will he still qualify for this exemption if he rolls funds into an IRA?
Permalink Submitted by Alan - IRA critic on Tue, 2025-06-03 18:52
No, the penalty exception is only allowed for distributions taken directly from the TSP or other similar govt retirement plan employer for which the person worked as a PSO.