Understanding TSP Rollover Rules

This is the fourth of s series of five columns discussing withdrawal options for separated Thrift Savings Plan (TSP) participants Separated TSP participants include civilian federal employees and members of the Uniformed Services who have retired or left federal service or the Uniformed Services, respectively.

Also included in this category of separated TSP participants is a “beneficiary” participant who is a spousal beneficiary of a deceased federal employee/retiree or a Uniformed Services TSP participant and who established a TSP account in his or her name.

SEE ALSO:

• TSP Fixed Payment Option (Part 1)
• TSP Withdrawal Payments Based on Life Expectancy (Part 2)
• TSP Annuity (Part 3)

This column will discuss the TSP rollover option of a separated participant’s TSP account to an IRA or to an eligible employer-sponsored retirement plan.

An eligible employer-sponsored retirement plan includes a 401(k) plan, a profit-sharing plan, a 403(b) tax-sheltered annuity or an eligible 457(b) plan maintained by a government employer.

A separated TSP participant can rollover all or part of a partial/total distribution or eligible TSP installment payments to an IRA or to an eligible employer-sponsored retirement plan. Before requesting a rollover, a separated TSP participant should check with his or her IRA provider or the employer-sponsored retirement plan administrator and inquire whether the IRA or retirement plan will accept a TSP rollover. Any tax-deferred amounts coming from the traditional TSP will retain their tax-deferred status until they are distributed.

Separated TSP participants should note the following:

(1) Traditional TSP funds can be rolled to a Roth IRA. However, the separated TSP participant will have to pay federal and state (if the TSP participant is a resident of a state with a state income tax) on the amount of traditional TSP funds rolled over; and

(2) Roth TSP funds cannot be rolled to a traditional IRA.

This is because if it could occur, the Roth TSP account participant would have paid income taxes on the same money twice – once at the time the contributions were made (via payroll deduction) into the Roth TSP account – and once when the funds would be withdrawn from the traditional IRA.

Rolling Over a Partial/Total Distribution

A separated TSP participant who requests a rollover of a partial/total distribution or TSP installment payments must do so by logging on to his or her “My Account”. They should not use forms provided by the new IRA custodian, employer-sponsored retirement plan or by a financial institution.

If a separated TSP participant has only one TSP account – a traditional TSP account or a Roth TSP account, in his or her partial or total distribution then the separated TSP participant can direct all or part of it to only one IRA account or eligible employer retirement plan.

If the separated TSP participant has both a traditional TSP and a Roth TSP balance in their distribution, then the Roth portion of the distribution can be rolled to a Roth IRA or to an employer-sponsored Roth retirement plan (like a Roth 401(k) retirement plan) assuming the employer-sponsored plan accepts the Roth TSP account rollover.

The following example illustrates.

Example 1. Eugene is a retired TSP participant. He has a balance of $750,000 in his traditional TSP account and a balance of $250,000 in his Roth TSP account. Eugene requests that $50,000 from his traditional TSP be directly rolled over to a traditional IRA. He requests that $150,000 of his Roth TSP account be directly transferred to a Roth IRA. Eugene plans to convert the $50,000 traditional TSP rollover to a traditional IRA to a Roth IRA over the next few years.
Rolling Over TSP Installment Payments

Separated TSP participants who have elected TSP installment payments can choose to have the TSP rollover eligible installment payments to an IRA or to any eligible employer-sponsored retirement plan. Eligible installment payments are those installment payments that are expected to last less than 10 years and are not based on life expectancy.

Traditional TSP installment payments can be rolled over to a traditional IRA or to a traditional eligible employer-sponsored retirement plan such as a traditional 401(k) plan.

What Is An “Indirect” Rollover?

A “direct” rollover occurs when the TSP issues a check made out to the IRA custodian or to the eligible employer retirement plan administrator and mails the check to them.

With an indirect rollover, the TSP sends a check made out to the TSP participant, and the TSP participant then deposits the check into a retirement account within 60 days of receiving the check. With an indirect rollover, the TSP must withhold 20 percent in federal income taxes. This is because the check is made out to the TSP account holder.

Required Minimum Distributions May Not Be Rolled Over

Those separated TSP participant who have reached their required beginning date (RBD) must begin receiving TSP required minimum distributions (RMDs). The RBD depends on when the separated TSP participant was born and is listed in the table below:

RMD Applicable Age and Required Beginning Date

The TSP calculates the RMD each year for a separated TSP participant, sending a notice to the separated TSP participant in January of each year. The notice informs the separated TSP participant the RMD amount for that year. The TSP calculates the RMD amount using the separated participant’s age, prior year-end account balance, and the IRS Uniform Lifetime Expectancy table.

Under current rules, a separated TSP participant’s entire TSP account, both traditional and Roth, is subject to RMDs. However, beginning January 1, 2024, only the traditional TSP account will be subject to RMDs.

A separated TSP participant may not rollover any portion of a TSP RMD to an IRA or to an eligible employer-sponsored retirement plan. If a separated TSP participant chooses to rollover all or part of a distribution in a year in which the separated TSP participant has a TSP RMD, then the TSP is required to make sure the separated TSP participant satisfies the RMD before any rollover takes place.

The TSP must do this beginning with the first requested rollover of the year, whether or not the separated TSP participant intends to satisfy the RMD later in the year.

The following example illustrates:

Example 2. Charlotte, age 76, is a separated TSP participant. During 2023, Charlotte has a TSP RMD of $26,785. She plans to take her $26,785 TSP RMD during October and November 2023. On May 11, 2023, Charlotte requested a direct rollover of $120,000 from her traditional TSP to a traditional IRA. The TSP will rollover $120,000 less $26,785, or $93,215. to the IRA and send $26,785 (less any federal income tax withholding) to Charlotte.

If a separated TSP participant who has reached his or her TSP RBD and who has elected to receive installment payments of a fixed dollar amount expected to last less than 10 years, the option to rollover money will not be available until the TSP RMD has been satisfied.