TSP to Trad'l IRA to Roth IRA | Ed Slott and Company, LLC

TSP to Trad'l IRA to Roth IRA

I would like to know if it is possible to do the following:1. I am retired and 59 years and 3 months old. I have mixed traditional and Roth TSP. My Roth TSP is past the 5 year rule. I would like to transfer a portion of my TSP, $250K, to a traditional IRA. And then on a monthly basis, convert $3K of the transferred traditional IRA to a Roth IRA until the traditional IRA is depleted. I do not intend to use the money until 20 years after. Actually, I intend to leave it for my children.

Thanks for any help///

I believe that under current TSP rules (for which legislation is being introduced to modify) your distribution flexibility is limited and that includes having to distribute both pre tax and Roth TSP amounts in proportion. So if 250k is half of your pre tax TSP value, to roll that out you will also have to roll half of your Roth TSP out at the same time. The Roth portion of course would have to go to your Roth IRA. For the 250k now in your TIRA, you can convert any amounts you wish to your Roth IRA. Therefore, the only challenging part of your plan is to navigate the TSP distribution restrictions for partial distributions. You might also want to track the progress of proposed modifications of these rules to provide better flexibility. You will also want to roll the entire Roth TSP balance out before the year you reach 70.5 to avoid Roth TSP RMDs. There are no Roth IRA RMDS for Roth owners, but your non spouse beneficiaries will have to take inherited Roth RMDs.

Thanks Alan. You are correct that when I roll over $250K of my mixed TSP, it will be a proportionate distribution between my Traditional TSP and Roth TSP. As of this writing, I am only allowed to do one (1) lump sum withdrawal which would be the $250K. From reading this forum, I have the notion that I can convert my TIRA to Roth IRA only once  a year.  So are you saying that I can convert my TIRA every month ($3K) to Roth IRA?

There is no limit to the number of Roth conversions that you can do in any calendar year.  The limitation that you may be thinking of is limitation on *re*converting after the recharacterization of a prior conversion.  But what is the point of doing twelve $3,000 conversions instead of one $36,000 conversion?

I agree, there is no point in doing a monthly when I can do it in annually.Another question, when I roll over my mixed TSP, will the Roth TSP go to Roth IRA or will it all go to TIRA?  Thanks for the response.

The Roth TSP balance must go to your Roth IRA if it is rolled over. It cannot go into the TIRA and if it does by accident it can be a mess to get the error corrected. Conversely, the pre tax TSP balance can either go to a TIRA or to a Roth IRA. If rolled to a Roth IRA, the rollover would be subject to tax on the pre tax portion of the balance. Rolling the pre tax balance to a TIRA enables you to convert in the amounts you choose and normally you would not want to convert too much in a single year as that could spike your marginal rate for that year.  Remember, if you convert too much and your taxes rise too much or your conversion loses money, you can always recharacterize all or part of your conversion to a TIRA to reduce your tax bill. 

Thanks Alan. More questions.1.When my Roth TSP rolls into my Roth IRA, will its start a new 5 year waiting period? MY Roth TSP is is past the 5 year waiting period. My Roth IRA is only 5 months old.2.And DMX, I remember now why I need to do small monthly amounts - I do not have a lump sum amount to pay for the taxes if I convert a lump sum of $36k every year, I would need to use the proceeds to pay for taxes. However, on a monthly basis, I might be able to swing the taxes.3. Is there  calculator to see how much it will cost me (tax wise) to convert monthly vs annually?Hooray to this forum. Thanks for all your responses.

  • The 5-year holding period for your Roth IRAs is independent of the 5-year holding period of the Roth TSP.  The holding period in the Roth TSP does not carry over to the Roth IRA.  The 5-year holding period for your Roth IRAs will begin January 1 of the year of your first Roth IRA contribution (regular, rollover or conversion).  However, your basis from the Roth TSP does transfer to the Roth IRA, so if you do end up taking funds out of the Roth IRA before the completion of the 5-year holding period, you won't pay taxes on the distribution up to the amount of your basis.  Because you've met the holding period in the Roth TSP, if you wait until your are age 59½ to do the rollover from the Roth TSP, the entire amount rolled over from the Roth TSP will be treated as contribution basis in your Roth IRA, otherwise only the amount of your original contributions to the Roth TSP will be treated as contribution basis.
  • Regarding taxes, you would typically make one estimated tax payment per quarter, so you could simplify things by doing 4 quarterly conversions instead of 12 monthly conversions.  This means that you would have to save for a few months rather than spend the money that you are allocating taxes.  Whether you do twelve monthly conversions or one annual conversion, your overall tax liability for a total amount of converted annually will not change.  Your concern is avoiding an underpayment penalty by making estimated tax payments in a timely fashion relative to the timing of the conversion distributions.  For maximum benefit, you certainly want to pay the taxes from non-retirement funds.

I have several (3) TIRA accounts. The reason being so that I can roll over (eventually ) all of my TSP.  With TSP, withdrawal rules are so rigid (as of this writing). Once I take the partial withdrawal, I have to start taking monthly distributions until the account is depleted in my lifetime or if there is still a balance after death, then the balance goes to my spouse.With TIRA, if I understand correctly from various discussions in this forum, I can stop/resume withdrawals anytime as soon as I reach age 59.5. Now the questions is, when I reach age 59.5, can I cherry pick which TIRA I can withdraw from or must I withdraw from all of them?

The limited TSP distribution options are one reason that many people roll over the entire TSP to traditional and Roth IRAs all at once.  IRAs have no such distribution limitations.  You can take distributions from any IRA want whenever you want.  Your only IRA distribution requirement will be to satisfy RMDs from your traditional IRAs beginning for the year that you reach age 70½.  The traditional IRA RMDs of multiple accounts can be aggregated and satisfied with distributions from any of your traditional IRAs.  However, the RMD for a particular IRA account must be satisfied for the year before any additional amounts are distributed (and perhaps converted to Roth) from that IRA account.

Thanks DMx and Alan for your responses


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