Q: I have pretax contributions and Roth contributions in my TSP. Now that I have left federal service, can I start withdrawals of just the pretax money so the Roth balance can continue to grow?
A: The Roth option within the TSP provides some great planning opportunities, however, for those CSRS participants who started out with pretax contributions and then switched, and also for any FERS participants since the match received will be pretax, there will now be two types of money in the TSP account.
The account statements do a good job of laying out these portions so the owner is aware, but once it comes time to access the money, the rules can be a little complex.
In the event of a withdrawal, the TSP will send a pro rata amount of pretax and Roth money. In a basic example of pro rata, if you have $100,000 in your TSP, and it is evenly split between pretax and Roth types of funds and you need to take a withdrawal of $20,000, it will be comprised of $10,000 of each kind to stay with that even split. This means $10,000 will be taxable as income and $10,000 will not.
But what if you don’t want this? What if you would prefer to have the withdrawals be entirely taxable or entirely tax free?
There are a few reasons why one might one or the other. Say this is happening in the first year of retirement, and the only other income is the pension so the tax bracket is as low as it’s going to be, so pretax withdrawals are preferred. Or, alternatively there is a large windfall, but money is needed for some reason so avoiding tax on this additional needed would be better.
In the circumstance where TSP funds are commingled, the only option would be to open up a Roth IRA and a traditional IRA and complete a rollover. In this case, the TSP will process the rollover according to your tax status so the funds will become separated. Once in their respective accounts, you may withdraw the amount you would like from the account you want without affecting the other IRA.
