TSP

John Grobe, Federal Career Experts

If you contributed to a Roth Individual Retirement Arrangement (IRA) in 2019 and now regret that contribution, you have until October 15, 2020 to “recharacterize” that contribution into a contribution to a traditional IRA. The same is true if you contributed to a traditional IRA and now wish you would have contributed to a Roth. The tax law allows you up to the final due date of your tax return (with extensions) to recharacterize IRA contributions. For 2019 returns, even though the normal due date was changed to July 15 from April 15, the due date for extensions remains October 15.

If you rolled money from a traditional IRA or company plan into a Roth IRA in 2019 and now regret that contribution you’re out of luck. Thanks to the “Tax Cut and Jobs Act” of 2017, IRA conversions cannot be recharacterized no matter how much you regret the conversion.

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I swear that our elected representatives deliberately try to make it hard for us to understand the tax laws. Don’t blame the Internal Revenue Service for any confusion, they are tasked with enforcing the laws enacted by Congress and signed by the President.

Be aware that, within the Thrift Savings Plan, you cannot now, nor could you ever, recharacterize contributions from your Roth to your traditional balances. You are also not allowed to transfer money from one balance to the other within the TSP.

Why would one want to recharacterize an IRA contribution? It often has to do with one’s income level. Above a certain level of income, one cannot deduct their contributions to a traditional IRA and above another level of income, one is precluded from contributing at all to a Roth IRA.

For example, a person might have thought that their income would be low enough to contribute to a Roth IRA and made a Roth contribution. When tax time rolled around they discovered that their income was over the Roth threshold and, unless they recharacterized their contribution, they would have an excess contribution to the Roth and would have to pay the annual 6% excise tax for each year the contribution remained in the Roth.

With all the confusion that surrounds the rules on IRAs, recommended reading are IRS Publications 590A (Contributions to Individual Retirement Arrangements) and 590B (Distributions from Individual Retirement Arrangements). When it comes to taxes, penalties, and the like, it’s always better to check things out in advance. The last thing you want is a nasty surprise at tax time.

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