Repetition is sometimes necessary. The Thrift Savings Plan (TSP) is not an Individual Retirement Arrangement (IRA) – and vice versa. Though they are both similar in that they are tax advantaged retirement savings plans, the rules can vary significantly, and those that are not aware of the differences can pay a price at tax time.
Readers commenting on a recent article on the Roth tax trap questioned whether the tax trap really existed because (to quote one), “When one withdraws from the Roth TSP, their withdrawals are treated as coming first from their contributions. Only after they have withdrawn an amount equal to their contributions from their Roth balance will withdrawals be viewed as coming from their earnings and, therefore, be subject to federal income tax.” This is not correct. This statement is true of withdrawals from Roth IRAs, it is not true of withdrawals from the TSP (or from other employer sponsored retirement plans for that matter). A person who thought this IRA and TSP rule were interchangeable and acted on that belief would receive a nasty surprise at tax time.
Other major differences between TSP and IRA rules are:
There are rules that preclude one from contributing to a Roth IRA, or from deducting their contributions to a traditional IRA if their income is above a certain level. There are no such limits in the TSP.
You can only contribute to the TSP from your federal salary through payroll deduction. You can contribute to an IRA from any source of earned income.
You can convert a traditional IRA to a Roth IRA. You cannot take money from your traditional TSP and move it to your Roth TSP.
If you’re still working in the year you turn age 70 ½, you can no longer contribute to a traditional IRA and you must begin to take required minimum distributions. If you’re still working at your federal job at 70 ½ (or older) you can still contribute to the TSP and will not have to begin required minimum distributions until you separate from federal service.
If you separate from federal service in the year in which you turn 55 (or later) you will have penalty free access to monies in your Thrift Savings Plan. This is age 50 for special category employees (Law Enforcement Officers, Firefighters, Air Traffic Controllers, Nuclear Materials Couriers, Customs and Border Protection Officers, Supreme Court and Capitol Police, and DSS Agents with the Department of State). Within an IRA you will be subject to a 10% early withdrawal penalty for anything you take out before reaching the age of 59 ½.
Don’t assume! Check the rules on IRAs (in IRS Publications 590A and 590B) and the TSP (in Summary of the Thrift Savings Plan) before you act.
Read more about Roth TSP balances at ask.FEDweek.com