Thinking of Rolling Over Your TSP? Read This

Many separated TSP participants choose to roll their money out of the Thrift Savings Plan.  And by far, the most common rollover out of the Thrift Savings Plan is into an IRA.  Before we get into a discussion of the pros and cons of rolling money from the TSP into an IRA, it will be helpful if we review the types of IRAs that are available, and the rules that govern them.

Let’s get one topic covered right away – you are allowed to contribute to both your Thrift Savings Plan and an Individual Retirement Arrangement; they are not mutually exclusive.

I have found that some participants in pre-retirement seminars are not aware that they can do this.  This lack of knowledge keeps them from setting aside more money in tax advantaged retirement plans.  The TSP and IRAs are both tax advantaged and have some similarities; yet they are different in many ways.

One (the TSP) is an employer-sponsored retirement plan; and the other (an IRA) is an individual retirement plan.  Some of the rules that govern them are the same (e.g., the definition of a “qualified withdrawal” for a Roth), while others are different (e.g., the age at which one will face an early withdrawal penalty).

In order to contribute to any IRA, you must have earned income, though there is a provision where you can contribute to an IRA for your non-working spouse as long as you have enough earned income.  There is no age limit on contributing to an IRA if you have earned income.

As with the TSP, the amount you can contribute to an IRA is limited, and that limit is quite a bit lower for an IRA.  The dollar amounts that follow, both in this paragraph and throughout this article, are the dollar amounts that are in effect in 2024.  You are allowed to contribute up to $7,000 a year to an IRA, with an extra $1,000 allowed as a catch-up contribution from the year in which you turn age 50 and beyond.

Traditional IRAs have been around since 1974 and there is no income restriction in contributing to a Traditional IRA.  However, your income can affect your ability to deduct your Traditional IRA contributions from your federal income tax if you belong to a retirement plan at work (as all federal employees do).  The income restriction is based on your filing status and is as follows (for the year 2024):

Single filing status

• Full deduction allowed if income is below $77,000
• Partial deduction allowed if income is between $77,000 and $87,000
• No deduction allowed if income is over $87,000

Joint filing status if spouse also belongs to a retirement plan at work

• Full deduction allowed if income is below $123,000
• Partial deduction allowed if income is between $123,000 and $143,000
• No deduction allowed if income is over $143,000

Joint filing status if spouse does not belong to a retirement plan at work

• Full deduction allowed if income is below $230,000
• Partial deduction allowed if income is between $230,000 and $240,000
• No deduction allowed if income is over $240,000

Traditional IRAs

A Traditional IRA has the following features:

Contributions may be deductible from your federal income tax.

The money in the IRA grows tax deferred.

When the money is withdrawn:

• All of it is taxed as ordinary income if you were able to deduct your contributions from your federal income tax;
• Only the earnings are taxed if you were not able to deduct your contributions from your federal income tax.

There is a 10% early withdrawal penalty for money taken out before 59 ½, although the penalty can be avoided by following a life-expectancy based withdrawal strategy for the longer of five years or until you reach the age of 59 1/2.

• If you were able to deduct your contributions from your federal income tax, the early withdrawal penalty will apply to everything you withdraw; or
• If you were not able to deduct your contributions from your federal income tax, only the earnings withdrawn will be subject to the early withdrawal penalty.  You are viewed as withdrawing proportionally between your contributions and your earnings.

*The same 25% penalty for failing to take a required minimum distribution after reaching 73 (75 in 2033 and beyond) that applies to the TSP, applies to a traditional deductible IRA.

Rolling Over

You can also roll money from your TSP into a Roth IRA.

You can roll directly from your Roth TSP into a Roth IRA, or you can roll money to a traditional IRA and then convert it into a Roth IRA. Taxes will be due on any monies moved from your traditional TSP into a Roth IRA.

The Roth IRA has several differences from traditional IRAs that may be to your advantage if you meet the Roth’s income restrictions.

To contribute to a Roth IRA, you must have earned income.

Other features are:

• Contributions are from already taxed dollars.
• Earnings are tax free if you make qualified withdrawals.  For a withdrawal to be considered qualified the account must have been open for at least five years; and you must be at least age 59 ½.
• There is a 10% early withdrawal penalty for any earnings taken out before 59 ½.  And you are always viewed as taking your contributions out first.
• Minimum distributions are not required.

There are, however, income restrictions on contributing to a Roth IRA.

Single filing status

• Full contribution allowed if income is below $146,000
• Partial contribution allowed if income is between $146,000 and $161,000
• No contribution allowed if income is over $161,000

Joint filing status

• Full contribution allowed if income is below $230,000
• Partial contribution allowed if income is between $230,000 and $240,000
• No contribution allowed if income is over $240,000

Does it make sense to roll money from your TSP into an IRA?  Consider the pros and cons before you take any action.

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See also,

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