Taxes and Your Roth TSP Account

By on August 27, 2013 in News, Retirement

Could funds in your Roth TSP be taxed when you withdraw them?  The answer is “yes, if you are not careful.”  Consider the following which is taken directly from the TSP publication Withdrawing Your TSP Account After Leaving Federal Service.  “If you have both a traditional (non-Roth) and a Roth balance in your TSP account, any withdrawals you make will be paid proportionally from each balance”.  The bold typeface was included in the TSP booklet.

This means that you could have federal income tax to pay on withdrawals from your Roth balance if you have had the account open for less than five years and/or are under the age of 59 ½ at the time of the withdrawal.  For example:

Benny is a FERS employee who is eligible to retire at his minimum retirement age (MRA) of 56.  He has had a Roth balance in his TSP for five years.  The Roth balance represents 20% of his total TSP balance.

Benny elects to begin receiving monthly payments from the TSP shortly after his retirement.  The 80% of his payments that is considered to be from the traditional TSP balance is fully taxable.  Regarding the portion of his payments that is from the Roth balance, the part that is considered as coming from his contributions is not taxable, but the part that is considered as coming from the growth of his contributions will be subject to federal income tax at his rate for ordinary income.  Benny will continue to pay federal income tax on the part of his Roth withdrawals that are due to the growth of his contributions until he reaches the age of 59 ½.

Conversely, Lenny is not retiring until he is age 60, but he has not had a Roth balance in his TSP for five years.  He will be paying tax on the part of his payments that are considered as coming from the growth of his Roth contributions until he has had the Roth balance for at least five years.

To recap, when withdrawing money from the TSP:

  • If you’re under 59 ½ when taking payments from a Roth TSP – you pay taxes on the growth.
  • If you haven’t had the Roth TSP open for at least five years – you pay taxes on the growth.
  • If you are both age 59 ½ or older and have had the Roth TSP open for at least five years – the growth is tax free.

Any federal employee who has a Roth balance in their TSP and is planning to retire and begin withdrawals from the TSP either before they reach the age of 59 ½ or before they have had the Roth balance for at least five years needs to be aware of the requirement that withdrawals be made proportionally from both Roth and Traditional balances, and will want to take steps to avoid having to pay unnecessary taxes.  (Tax avoidance is perfectly legal; it’s tax evasion that’ll get you in trouble.)  What can they do?

They can wait to take money from the TSP until they are 59 ½  and the Roth balance has been open for at least five years; then there will be no taxes on the Roth portion.

They can also roll-over or transfer their TSP to an IRA.  The following also appears in a discussion of single or partial withdrawals in the TSP publication Withdrawing Your TSP Account After Leaving Federal Service.  “If you have both traditional (non-Roth) and Roth balances in your TSP account, you can direct all or a part of the traditional (non-Roth) portion to one IRA or plan, and all or part of the Roth portion of the payment to either another IRA or plan or to the same IRA or plan…”  This allows an individual to separate their Roth and Traditional TSP balances into separate IRAs that can be withdrawn from separately and allows them to leave the Roth account alone until it is entirely tax free.

John Grobe’s latest book, The Answer Book on Your Federal Employee Benefits, has just been released by LRP Publications. The book is written in an easy to understand question and answer format and covers all areas of federal benefits from the perspective of an employee at various stages of their career. Order your copy at shoplrp.com.

© 2016 John Grobe. All rights reserved. This article may not be reproduced without express written consent from John Grobe.

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About the Author

John Grobe is President of Federal Career Experts, a consulting firm that specializes in federal retirement and career transition issues. He is also affiliated with TSP Safety Net. John retired from federal service after 25 years of progressively more responsible human resources positions. He is the author of Understanding the Federal Retirement Systems and Career Transition: A Guide for Federal Employees, both published by the Federal Management Institute. Federal Career Experts provides pre-retirement seminars for a wide variety of federal agencies.

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  1. msgrowan says:

    The unknown factor here is whether or not the TSP program will eventually be altered to allow current TSP account balances to be converted to a Roth-type basis. This possibility was included in last January’s legislation dealing with the “fiscal cliff” conundrum, and permits the Federal Retirement TSP board to offer such an option. As per a recent phone call discussion with TSP staff, however, the board is still weighing whether or not to do so, with no indication as to when a “yay or nay” decision will be announced.

    • Fella says:

      Won’t you have to pay taxes on all the money you’d roll into the Roth option, assuming they do allow it? That brings up a whole new set of issues itself.

      • Rambo1957 says:

        That’s my issue. If my balance is, say $500000 and I have to pay taxes on it to get into the Roth option, what point would it be? Instead of $500000 growing (hopefully) I’d have about $350000 or so. So if I am lucky enough for my account to grow even 10%, I could get $50000 or $35000. I’m not that up on the Roth because it is new and I’ve never given it a thought. I’m thrilled with how my TSP experience has been. Why change?

        • retired worker fed says:

          If you are young, then convert the future contributions to Roth. Of course, your salary will not be reduced, but your withdrawls will be tax free. For those who have much money in their TSP, then you must make your own decision. I would suggest a financial advisor if you are not sure.

  2. B. Graham says:

    Only the present is certain. I’ll take my tax deduction now by contributing only to the traditional TSP. Given the horrendous national debt (as much as $70 trillion by some estimates), it’s not too much of a stretch of the imagination to envision a future day when the government, desperate for funds, decides to tax some or all (as with a non-deductible IRA) of the earnings in Roth accounts.

  3. $31427826 says:

    John, I’m glad that you clarified which portion of the Roth is taxed if the withdrawal is done under age 59 and 1/2 or before 5 years. The beginning of the article leads you to believe the entire amount is taxable which is not true because the contributions were never deductible as a Roth.

  4. 56_at_retirement says:

    In your example, assume Benny is withdrawing $1000 per month. $800 from the traditional and $200 from the Roth. Benny will pay tax on the portion of the $200 that was from growth if he actually withdraws it instead of transfers it to another Roth account.
    To avoid this tax, Benny could direct the $800 to be deposited into his checking account and the $200 be transferred to an external Roth IRA where it can sit for the 3.5 years it needs to meet the 59.5 age limit and be tax-free.
    I think this is how it works but the TSP doesn’t have a straight-forward example of it spelled out in their publications yet.

    • ImusJunkit says:

      Becareful of new tax rules starting in 2015, A “Rollover” is not the same as a “Withdrawal & Reinvestment”. Specifically, “withdrawing” monthly amounts (as in your post to get at your TSP funds) are not “Rollovers” under the tax code even if the Roth portion is reinvested into another Roth account. And, beginning in 2015 you will be limited to 1 (ONE) tax free rollover (where you take posession of the funds) within a 1 (ONE) year period of time. The IRS Man is now calling multiple rollovers (between the same two accounts) as separate rollovers vs. one having them be considered a single rollover as in the past. Be careful with the IRS – get professional help or end up paying the tax boogyman…

  5. Opinionated_Lady says:

    In addition to meeting the tax code requirements on Roth withdrawal, the trick is in having both types of IRA, both at the same financial institution, I believe. Pretty complicated for many folks. Wish the transfer and withdrawal info from TSP were more explicitly stated, with examples.

  6. Anonymous says:

    Beware…this article fails to mention once TSP is rolled into an IRA you are now subject to IRS withdrawal (age) requirements. IRS and IRA pentalties are usually very steep. Be sure to do your homework and don’t depend on brief articles such as this.

    • bbobb says:

      Before you say something like this you should make sure you know what you are talking about(in this case you do not). The IRS withdrawal requirements you are referring to are Required Minimum Distributions(RMD’s). RMD’s are required from both the traditional and Roth TSP, however, there are no RMD’s if you transfer your Roth TSP to an IRA. So…. there are no withdrawal requirements or “penalties” as you say once money has been transferred to a Roth IRA. Under current law you could leave money in a Roth IRA for the rest of your life with no RMD’s but not from the Roth TSP.

      This article is a rather well written article and very accurate.

      • ImusJunkit says:

        Actually to the extent that an early withdrawal penalty for your age DOES apply once you roll it over into a Private IRA (59.5 yrs vs 55 Yrs under TSP) – Anon is correct. It isn’t always about RMDs.

  7. Always Paying says:

    The government always finds a way to get your money, even when you’ve paid all your taxes.
    No matter how long it takes, they just “wait” for it.

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