Tax on a TSP Transferred to a Roth IRA

by Cindy Quarters

A Thrift Savings Plan (TSP) is a retirement savings plan offered to federal government employees and members of the military. This plan provides for an ongoing payroll deduction that goes into a savings account. The money can be withdrawn without penalties when the account holder reaches retirement age, but taxes will be due on it at that time. It can also be withdrawn at other times, but may incur additional penalties. Taxes and penalties may both apply even if you transfer the money to a Roth IRA, depending on the situation.

Number of Payments

How many payments are received from a TSP affects whether or not the money is eligible to be rolled over into a Roth IRA. If a person receives less than 120 payments, the funds are categorized by the IRS as being eligible for rollover, and may be transferred into a Roth IRA. If a person receives 120 payments or more, they are considered to be regular periodic payments. The amount of withholding on these will be the same as that for someone who is married and has three dependents. An account holder can change the withholding by submitting form W-4P.


In some cases, military personnel may have money in a TSP account that is exempt from federal taxes. Normally this is due to the fact that the money was taken from pay issued while the account owner was in a combat zone, and such pay has a tax exclusion attached to it. This money can be transferred into a Roth IRA, but to do so the IRA must first certify that it will accept money that is tax-exempt. No federal taxes will ever be due on these funds.


To roll over all of the money in a TSP to a Roth IRA, the account owner must request to have the balance in the account transferred to him as a single lump sum. Taxes will be due on the amount transferred in that year, since all Roth IRA funds must have already had taxes paid on them. If the money is transferred from the TSP to the account holder and then placed in a Roth IRA, 20 percent income tax and possibly a 10 percent penalty tax will be withheld from the amount.

State Taxes

State and local taxes are not withheld from TSP disbursements no matter what they are used for, but the amount is reported to the state via a 1099-R when the payment recipient lives in a state that has income tax. In most cases, this will result in some level of tax liability, because the funds are considered to be part of the recipient’s income for the year.