How Does a Roth TSP Rollover to a Roth IRA Work?

Federal employees who contribute to the Roth TSP have an option after they retire to rollover all, or a portion, of their Roth TSP account to a Roth IRA. However, a rollover of a Roth TSP account may not be appropriate for every Roth TSP participant. There are two questions that every Roth TSP participant should ask before requesting a rollover.

They are: (1) What is the purpose in making this rollover distribution?; and (2) What “five-year” clocks apply with respect to a Roth TSP to Roth IRA rollover? This column will answer these questions.

SEE ALSO:

• Roth vs. Traditional TSP: Which One Should You Choose?
• Using the TSP, IRAs and HSAs to Help Pay for Future Long-Term Care Expenses

Why a Rollover a Roth TSP to a Roth IRA?

There are at least two reasons a Roth TSP participant may want to rollover his or her Roth TSP account to a Roth IRA.

The first reason is for investing the Roth TSP account in something different than what the TSP offers.

The second reason is that the Roth TSP participant wants to name a different beneficiary of his or her Roth TSP account than the designated beneficiary of his or her traditional TSP account. Under TSP rules, a beneficiary(s) is designated for a TSP account in which the designated beneficiary(s) is for both the traditional TSP account and the Roth TSP account. Separate beneficiary(s) cannot be designated.

The first determination that has to be made with respect to making a tax-free Roth TSP rollover to a Roth IRA is whether the Roth TSP distribution is a “qualified” distribution. A Roth TSP “qualified” distribution means that the Roth TSP participant made his or her first Roth TSP contribution at least five years ago and the Roth TSP participant is at least age 59.5 at the time of distribution. The five-year period begins on January 1st of the year when the first Roth TSP contribution was made, no matter when during the calendar year the Roth TSP contribution was made. The following example illustrates:

Example 1. Jerome, age 43, is a federal employee and made his first Roth TSP contribution on October 28, 2020. Jerome’s five-year Roth TSP “qualified” distribution period started on January 1,2020 and ends January 1, 2025.

If either the age 59.5 or older requirement, or the five-year Roth TSP ownership requirement is not met, then the Roth TSP distribution is a “nonqualified” distribution.

A five-year holding period also applies to the Roth IRA. This means that if a Roth TSP participant wants to rollover his or her Roth TSP account to a Roth IRA, and the Roth IRA was the first Roth IRA the Roth TSP participant owned, then there would be a five-year waiting period for any subsequent Roth IRA earnings to be withdrawn tax-free. The following examples illustrate:

Example 2. Elizabeth, age 62, is a federal retiree with a Roth TSP account. She made her first Roth TSP contribution on July 27, 2015. However, Elizabeth never contributed to a Roth IRA. On June 15, 2024, Elizabeth requests that $140,000 of her Roth TSP be directly rolled over to a new (“rollover”) Roth IRA, never funded until now. Of the $140,000 of Elizabeth’s Roth TSP account being rolled over, $50,000 is Roth TSP contributions and $90,000 was accrued earnings. Since the “rollover” Roth IRA is Elizabeth’s first Roth IRA that she has contributed to, Elizabeth will have a five-year holding period (which started January 1, 2024) before she can withdraw tax-free $90,000 from the earnings portion of the “rollover” Roth IRA. However, she can withdraw the $50,000 from the “rollover” Roth IRA at any time. This is because the $50,000 was Elizabeth’s contributions to her Roth TSP account that were made via payroll deduction with after-taxed dollars.

Example 3. Frank, age 60, is a federal employee with a Roth TSP account. He made his first Roth TSP contribution on April 17, 2013. Frank also owns several Roth IRAs. He made his first Roth IRA contribution in 2007. He requests that the TSP directly rollover $40,000 of his Roth TSP to one of his Roth IRAs. Since Frank’s Roth TSP and Roth IRA accounts have met the five-year holding period requirement and Frank is over 59.5, he can make tax-free withdrawals from any of his Roth IRAs, including the Roth IRA that contains a rollover of the $40,000 originating from the Roth TSP.

If a Roth TSP participant cannot check both “5-year boxes” (that is, the 5-year box of the Roth TSP and the 5-year box of the Roth IRA), meaning that it has not been at least five years since the Roth TSP participant made his or her first Roth TSP contribution and/or it has not been at least five years since the Roth TSP participant made his or her first Roth IRA contribution, then any Roth TSP rollover to a Roth IRA would be considered a “nonqualified” distribution. As such, former Roth TSP monies “maintain their same character” when they rollover into a Roth IRA. Roth TSP contributions will go into the Roth IRA “contribution bucket” as “basis,” while Roth TSP earnings will go into the Roth IRA “earnings bucket.” As with a “qualified distribution,” the five-year holding period will be the period applicable to the Roth IRA.

It is important for TSP participants to understand the distinction between “qualified” and “nonqualified” Roth TSP distributions. For example, a Roth TSP participant made his or her first Roth TSP contribution four years ago. The Roth TSP participant never contributed to a Roth IRA. The Roth TSP participant elects to directly rollover his or her Roth TSP account to a “rollover” Roth IRA. In requesting a rollover of the Roth TSP account to the “rollover” Roth IRA, the Roth TSP participant would then lose the four-year holding period associated with the Roth TSP account. This is because the Roth IRA “5-year” clock takes precedence. On the flip side, if the same Roth TSP participant had made his or her first Roth IRA contribution more than five years ago, then the Roth TSP account would zoom forward and adopt the more advanced five-year Roth IRA period. Upon enacting a rollover, the Roth IRA 5-year clock takes precedence, whether that is beneficial or not.

In summary, when a Roth TSP participant rolls over Roth TSP dollars to a Roth IRA, the following questions and facts must be considered:

• Is the Roth TSP rollover a “qualified” distribution (the Roth TSP participant is age 59.5 or older and it has been at least five years since January 1st of the year that the first Roth TSP contribution was made).

• Has it been at least five years since the year the Roth TSP participant made his or her first Roth IRA contribution? The Roth IRA “clock” takes precedence.

• A “qualified” Roth TSP distribution means all Roth TSP contributions come over as “basis” (after-taxed dollars, and therefore not taxable when withdrawn at any time), and

• With a “nonqualified” Roth TSP distribution, the rollover Roth TSP monies “maintain their character” when deposited into the Roth IRA; that is. already taxed Roth TSP contributions go into the Roth IRA “contributions” bucket and can be withdrawn tax-free at any time, and accrued Roth TSP earnings (never taxed) go into the Roth IRA “earnings” bucket. These accrued earnings are taxable upon withdrawal, unless held for five years. The starting point for the five-year period is January 1 of the year in which the Roth TSP rollover to the Roth IRA was performed.