A Thrift Savings Plan (TSP) is a type of retirement account that is offered to federal employees and to members of the military. It works much the same as other retirement plans, with the account owner making regular contributions to the plan in anticipation of having the money available when she retires. Money from a TSP can be rolled over into another eligible retirement plan, such as an IRA. It is important to be aware of any possible tax consequences when doing this.
You cannot roll over money from your TSP under certain conditions. The first of these is if the money you get from the TSP is in the form of regular monthly payments, based on your life expectancy. You also cannot roll over required minimum distributions or hardship distributions, and you generally cannot roll over the nontaxable portion of a distribution, but there are some exceptions to that rule. There are other exclusions as well, so it is best to check with a tax professional before removing your money for a rollover.
Taxes and Penalties
In most cases if you withdraw money from your TSP before you have reached the age of 59 1/2, you are not only liable for taxes but also may have to pay an additional 10 percent penalty for early withdrawal. There are some exceptions to the penalty, such as distributions that are made to a qualified reservist. In all cases, the distribution of funds from your TSP is taxable and will be taxed at your applicable rate for the year the money was received, if you take physical possession of the funds.
When you take money from your TSP, taxes will be withheld from all money paid directly to you. If you want to avoid the withholding, have your TSP plan administrator transfer the money directly into your IRA. Because you do not ever touch this money, no withholding is required and the full amount of your TSP account will be transferred. If you do receive a check, you have 60 days to deposit the full amount of your withdrawal, including the withheld amount, before you must pay taxes on it.
If you roll over untaxed funds to a Roth IRA, you will have to report the amount as part of your income for the year. You must also pay taxes on the funds rolled over, since TSP money is untaxed, and Roth IRA funds have already had the taxes paid on them. For military personnel with tax-exempt funds in a TSP, you must be certain that if you choose a Roth IRA the plan will accept tax-exempt money before attempting to roll over your TSP.
- IRS.gov; Rollovers from Retirement Plans
- Thrift Savings Plan: Requesting a Withdrawal
- IRS.gov: Taxes on Early Distributions From Retirement Plans, Other Than IRAs
- Invest Safe: Frequently Asked Questions -- Thrift Savings Plan
- Federal Retirement Thrift Investment Board: Tax Information for TSP Participants Receiving Monthly Payments