Edward A. Zurndorfer, Certified Financial Planner

Since 2003, the Thrift Savings Plan (TSP) has accepted distributions from eligible retirement plans which are defined in Internal Revenue Code (IRC) Section 402(c)(8)(B).

Eligible retirement plans include a traditional IRA, a Savings Incentive Match Plan for Employers (SIMPLE) IRA, and eligible employer-sponsored retirement plans such as a Simplified Employee Pension (SEP) IRA, 401(k) or a 403(b) plan. This column discusses the specific requirements that must be met by a TSP participant in order to transfer a traditional IRA or eligible employer-sponsored retirement plan to a TSP account.

Form TSP-60 -- downloadable from http://www.tsp.gov -- is used to request a transfer of eligible funds into the TSP. An employee may not create a TSP account by transferring funds into a TSP account. An employee must have an established TSP account in order to transfer funds. Both current and retired/separated employees are eligible to transfer funds; however, employees who have separated from service and who already have made a full withdrawal of their accounts or those participants age 70.5 and older who are receiving "minimum required distributions" (MRD) cannot transfer money into their TSP account.

In addition to making sure that funds transferred to the TSP originate from the aforementioned IRAs or allowable retirement plans, a TSP participant is also required to certify (in section III of Form TSP-60) that the distribution that they want to transfer or rollover into the TSP meets the applicable requirements for transfer or rollover. Also, the participant must certify that all funds to be transferred have never been taxed. If the TSP participant does not sign the certification, then the TSP will not accept the rollover or transfer request.

The TSP will accept all or a portion of a distribution from a traditional, SIMPLE IRA except a distribution that: (1) is a minimum required distribution (MRD); or (2) consists of after-tax balances -- money that has already been subjected to federal income tax. A traditional IRA -- as described in IRC Section 408(a), or an individual retirement annuity - as described in IRC Section 408(b), does not include a Roth IRA, an inherited IRA, or a Coverdell Education Savings Account, formerly called an Educational IRA.

A TSP participant can transfer an amount from a SIMPLE IRA to the TSP provided he or she has participated in the SIMPLE IRA for at least two years. The TSP must receive written documentation showing the period of participation by the TSP owner in the SIMPLE IRA.

An eligible employer retirement-sponsored plan includes a 401(k) or 403(b) plan, a profit-sharing plan, a defined benefit plan, a stock bonus plan, and a money purchase plan. The distribution from an eligible employer-sponsored plan into a TSP must be an "eligible rollover distribution." This is a partial or total distribution of a participant's retirement account. But the employer-sponsored plan distribution cannot  be:

1. one of a series of substantially equal periodic payments made over the life expectancy of the employee, or the joint lives of the employee and a designated beneficiary, if applicable;
2. a series of substantially equal periodic payments made over a period 10 years or more;
3. a minimum required distribution;
4. a hardship distribution;
5. a plan loan that is deemed to be a taxable distribution  because of default; or
6. a return of excess elective deferrals.

It is important to distinguish between a "transfer" and a "rollover". A direct transfer, sometimes referred to as a "direct rollover", occurs when the IRA owner or retirement plan participant instructs the administrator or the custodian of a traditional IRA, SIMPLE IRA or an eligible employer plan to send the eligible distribution directly to the TSP rather than initially sending the eligible distribution to the participant. A rollover occurs when the IRA or eligible employer plan makes a distribution to the participant (in the case of an eligible retirement plan distribution, the plan administrator must first withhold 20 percent in federal income tax from the distribution if the distribution check is made out to the retirement plan participant) and the participant deposits the entire gross amount of the distribution into the TSP. The rollover of funds to the TSP must be completed within 60 days upon participant's receipt of the rollover funds. Otherwise, the rollover will be considered as a fully taxable distribution to the participant, and subject to an additional 10 percent early withdrawal penalty if the participant is younger than age 59.5.

A participant is permitted to transfer or rollover all or a portion of an eligible retirement account to his or her TSP account provided the distribution meets the applicable requirements discussed above and that it does not include any "after-taxed" funds. If an eligible employer plan withholds taxes before making the distribution, then the TSP participant can rollover the entire employer plan distribution by reimbursing the difference with personal funds. If at a later date it is determined that the funds were an ineligible rollover or transfer, the funds will be removed from the TSP account and returned to the sender.

Any portion of the distribution from a traditional IRA, SIMPLE IRA or eligible employer plan that the participant chooses not to transfer or rollover into the TSP will be taxed as ordinary income. A ten percent early withdrawal tax penalty will be applied to the amount not transferred or rolled over into a TSP only if the participant is younger than 59.5 at the time of distribution.

There is no limit as to the number of transfers or rollovers or to an overall dollar amount that an TSP participant can transfer into the TSP. Money that is transferred or rolled over to the TSP in not applied to the annual elective deferral limit ($16,500 during 2010) and the "catch-up" contribution limit ($5,500 during 2010) that is imposed on regular employee contributions.

Why would a TSP participant want to consider rolling over funds from a traditional IRA or from an eligible employer retirement plan into his or her TSP account?

Possible reasons include:

1. low administrative fees associated with the TSP whereas many IRAs have both above average custodian and maintenance fees;
2. poor past and current investment performance of the IRA or eligible employer retirement plan;
3. eligible employer retirement plan is associated with a company that may be considering filing for Chapter 11 bankruptcy with a possibility that company-sponsored retirement may be under-funded and losing money; and
4. the potential for maintaining all of one's retirement accounts under "one roof".   

Once the funds are transferred or rolled over to the TSP, the funds will be allocated according to the participant's most current contribution allocation schedule. The funds will be posted to the participant's account and subject to the same plan rules as all other employee balances in the account.

Section I of form TSP-60 requires that current and retired/separated employees provide their name, TSP account number, date of birth, daytime telephone number and current address. For current employees whose address is different than is shown in the TSP record, they should request that their agencies submit an address change. Current employees cannot use TSP-60 to update their TSP records. But retired or separated employees are permitted use form TSP 60 to update their address on their TSP records.

The TSP participant needs to complete section II to indicate whether the funds are being directly transferred from the financial institution holding the participant's IRA or from the participant's eligible employer plan. A box must be checked to state whether this is a "transfer" or a "rollover". If the monies were rolled over to the participant, then the participant will have already been paid and would then send a check in the amount of the distribution to the TSP. The participant has to indicate when the participant received the distribution, the total amount being transferred to the TSP, and where the distribution is from - an eligible employer plan, traditional IRA, or a SIMPLE IRA.

Section III of form TSP-60 is used for the participant to print his or her name, sign and date the form. This certifies that the distribution being transferred or rolled over meets all the requirements for transferring into the TSP.

Section IV of form TSP-60 must be completed by the representative of the participant's traditional IRA, SIMPLE IRA or eligible employer plan. For a direct rollover or transfer, checks should be made out by the IRA or eligible retirement plan administrator to the "Thrift Savings Plan" and contain the participant's name and TSP account number or Social Security number on the check. If the information cannot be provided on the check, then a document must be enclosed providing this information. Form TSP-60 and check should be mailed by the IRA custodian or eligible employer plan administrator to:

TSP Rollover and Transfer Processing Unit
P.O. Box 385200
Birmingham, AL 35238-5200

or faxed to:

1-866-458-1452 (within the U.S. and Canada) or
205-439-4501 (outside the U.S. and Canada)

TSP participants who have question about transfers and rollovers into the TSP can call the ThriftLine at 1-877-968-3779, or the TDD at 1-877-847-4385. Outside the U.S. and Canada, the number is 404-233-4400 (not toll-free).

About the Author

Edward A. Zurndorfer is a Certified Financial Planner, Registered Health Underwriter, Registered Employee Benefits Consultant and Enrolled Agent in Silver Spring, MD and the owner of EZ Accounting and Financial Services, an accounting, tax preparation and financial planning firm also located in Silver Spring, MD.  He is an instructor at federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. and writes numerous columns and books on federal employee benefits.

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