A Thrift Savings Plan (TSP) is a retirement plan for members of the U.S. armed forces and certain federal employees. The TSP offers many of the same features that 401(k) plans offer workers in private employment. Contributions to a TSP account are treated as tax-deferred income under U.S. tax laws. How funds can be transferred to and from a TSP account that results in changes to a Roth individual retirement account (IRA) are regulated.
According to the eligibility requirements of the Thrift Savings Plan, account holders can move funds from other retirement plans and IRAs into a TSP account. However, the option is not available if the funds are in a Roth IRA or Roth 401(k) account. Since 2008, the option has been available in reverse. TSP funds can be moved into a Roth IRA. The reason funds are not accepted from a Roth IRA is that TSP deposits must come from pre-tax money. Any outside employer plans or IRA that are subject to the same tax treatment as TSP accounts are generally eligible for transfer into a TSP account.
Roth IRAs accept after-tax dollars then distributions and earnings accumulate tax-free. TSP accounts defer taxes on contributions and tax distributions. Therefore, money can be moved from a TSP account to a Roth IRA, but funds in a Roth IRA cannot be changed to a TSP account. In the case of tax-exempt combat pay for active members of the military, transfers to a Roth IRA can be made without taxation if the particular plan certifies an agreement to accept the money as tax exempt.
Transfer or Rollover
If you have funds from an eligible IRA or retirement plan deposited into a TSP account, this is treated as a transfer. If you withdraw funds from an eligible IRA or retirement account and then subsequently deposit the funds in your own into a TSP account, this is treated as a rollover.
If the account holder chooses to withdraw funds from a TSP account after age 59 1/2, the withdrawals will be taxed prior to acceptance into a Roth IRA. Tax liability is for the year in which the money is moved. However, if the money being transferred is designated for a traditional IRA, or some form of pension plan with a tax-deferral on the principal, transfers from a TSP account are not taxed until distributed.
Roth 401(k) Feature
A new federal law signed in 2009, initiated Roth 401(k) features in TSP accounts, which will take effect in 2012. In addition, income restrictions that apply to Roth IRA contributions do not apply to this 401(k) feature. Therefore there are no restrictions as to who is eligible to participate based on income, and TSP account holders can take advantage of the additional Roth features.
- Thrift Savings Plan: Rollovers and Transfers into the TSP Eligibility
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- Thrift Savings Plan: Summary of the Thrift Savings Plan
- Thrift Savings Plan: Tax Notice: Tax Treatment of Thrift Savings Plan Payment Made Under Qualifying Orders
- Thrift Savings Plan: Withdrawing Your TSP Account After Leaving Federal Service
- Thrift Savings Plan: OC06-5, Is the TSP Offering a Roth 401(k) Feature?
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