Roth IRAs and the Roth TSP Option

It was twenty years ago today when Senator William Roth, R-Del., finally convinced his colleagues to approve a new type of IRA, one funded with already taxed dollars and, if certain qualifications were met, offered tax-free earnings on compound interest.

The TSP began accepting contributions into the eponymously named Roth TSP on May 7, 2012, though many agencies didn’t implement the Roth TSP until July of that year.

So what sets them apart? In 2018 you can contribute up to $18,500 to your Roth TSP, and an additional $6,000 if you have reached your 50th year of birth. Contributions to your Roth TSP must come out of payroll deductions. Your Roth IRA contributions in 2018 are limited to $5,500, with another $1,000 if you have reached your 50th year of birth. You must have earned income (exception for spousal IRAs) to contribute to a Roth IRA.

You are not allowed to contribute to a Roth IRA if your income is above certain levels, but there is no income limit on contributing to the Roth TSP.

A Roth IRA is separate from any traditional IRAs you might have, but your Roth TSP is actually a separate balance within your one TSP account. This means that, under current rules, you cannot separate withdrawals between your traditional and Roth balances; they must be proportional.

In a Roth IRA, all withdrawals come first from contributions and are taken from earnings only after the amount due to contributions has been exhausted. If you withdraw from your Roth TSP, those withdrawals are viewed as coming proportionately from your contributions and earnings.

In a Roth IRA, you never have to take required distributions, regardless of your age. In the Roth TSP, you are required to take minimum distributions beginning at age 70 ½ (if you are still working at your federal job at that age, no distributions are required).

You are allowed to roll money from a traditional IRA into a Roth IRA, regardless of your income (and you’ll pay taxes on the amount you transfer into the Roth). Within the TSP you are not allowed to roll or transfer money from your traditional balance into your Roth balance.

Other Key Points

Now that we’ve looked at some of the differences between the Roth IRA and Roth TSP, let’s look at some other interesting facts about the Roth IRA.

You can roll money out of your TSP into an IRA. The Roth portion of your TSP can be rolled into a Roth IRA and the traditional portion of your TSP can be rolled into either a traditional IRA or a Roth IRA (again, taxes would have to be paid on the traditional money at the time of rollover).

You can convert money in a traditional IRA to a Roth IRA and there are no income limits restricting your ability to do so. Taxes would have to be paid on the traditional IRA at the time of conversion.

If your income is too high to contribute to a Roth IRA ($189,000 for individuals, $199,000 for married filing jointly), you can contribute to a traditional (non-deductible) IRA and convert that IRA into a Roth. This goes by the name of “backdoor conversion”.

You can re-characterize a traditional IRA contribution into a Roth IRA and vice versa up to the initial due date of your tax return. The Tax Cuts and Jobs Act eliminated the ability to re-characterize a Roth conversion – so once you convert that money there’s no going back if you don’t like what the market did in the interim or change your mind.

The IRS has two helpful publications on IRAs: 590A deals with contributions and 590B deals with withdrawals.