Ask The Experts: Money Matters

By Mike Miles

VCP and Roth IRA conversion

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Q. I’m a CSRS employee nearing retirement. I have read numerous articles touting the advantages of opening a Voluntary Contributions Program account with up to 10 percent of your lifetime civil service earnings and then converting it to a Roth IRA at retirement. In your professional experience, would you recommend qualified individuals follow this approach? Are there potential pitfalls I’m unaware of?

A. I certainly recommend that you consider it. I don’t know of any pitfalls other than botching up the transactions and violating some rule. I suggest that you pursue it with the help of a qualified tax adviser — the one who will prepare your return for the year.

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Exceeding Roth IRA qualifications

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Q. If, during the course of my federal career, my income (filed either individually or jointly with my spouse) exceeds the maximum allowed under the Roth IRA rules, do I have to convert my Roth to a traditional IRA? Can you maintain an existing Roth regardless of your income?

A. This limit only applies to new money contributions. It does not affect your ability to maintain an existing account.

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TSP to Roth IRA

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Q. What are the negatives and positives as far as changing a Thrift Savings Plan account to a Roth IRA?

A. The negatives are that you have to pay taxes now and that you’ll likely incur higher investment costs, greater investment risk, or both in a Roth IRA. The positives might include an advantage if your tax rate rises sufficiently between the time you convert and the time you ultimately withdraw your money from the Roth IRA.

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IRA conversion to TSP

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Q. I am a federal employee contributing to the Thrift Savings Plan. I have a traditional IRA, with a large brokerage firm, which I no longer contribute to. Would it make sense to transfer the IRA to TSP and possibly a Roth?

A. The TSP is the best investment environment you’ll find, so you should maximize its use.

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Tax basis in IRA

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Q. I am a retired government worker who has contributed the maximum amount to the Thrift Savings Plan. After being retired for several years, I transferred the TSP to a traditional IRA. If I convert the traditional IRA to a Roth IRA, how do I figure my “basis” in the IRA to determine the amount that is taxable?

A. If the only thing you ever put into the IRA was your traditional TSP assets, then the account has no tax basis and is all taxable upon distribution (or conversion). If you have contributed nondeductible or other after-tax money to the IRA, you’ll need to figure out how much. That’s your tax basis. You should consult a CPA for help if this is the case.

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Voluntary Contribution Plan account

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Q. I will be retiring June 30. I contributed $100,000 to my Voluntary Contribution Plan account between September 2010 and the present. I plan to roll over the $100,000 to my Roth IRA upon retirement; have the Office of Personnel Management withhold 20 percent for tax on the interest that it earned; then roll over the remainder to the Roth IRA also. Is that doable?

A. The accrued interest will be considered a conversion. I believe that is doable, but you should check with your tax preparer to be sure.

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IRS ‘special rule’ on conversions

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Q: You answered a question in March about a “special rule” that allows for a tax-free transaction if someone split a traditional individual retirement account, converting some into a Thrift Savings Plan account and the rest into a Roth IRA. Please tell us the special rule so we have it when questioned.  Also, can a retiree do this?  I would convert my (pre-tax) earnings in my traditional IRA to TSP and then roll the basis into the Roth.

A: You’ll find the information you’re looking for on Page 23 of IRS Publication 590. If you’re not sure about how to proceed, you should consult a tax adviser about your specific situation.

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IRAs, TSP and tax rules

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Q: My husband and I want to convert all or a portion of our traditional individual retirement accounts into Roth IRAs in 2010. Our contributions have been nondeductible, and our IRA accounts are about double the investments we have made (value versus basis). So, we will be paying tax on the earnings.

Then I thought about our Thrift Savings Plans. Are these considered IRAs for the purposes of this conversion opportunity? I read that the IRS will consider all IRAs; you can’t pick and choose among or within our IRAs regarding the conversion, but I certainly would not want to have to deal with my TSP in this equation. 
 
A: No. Your TSP is an employer-sponsored retirement plan and is not included in the aggregation rule that applies to IRAs.

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