Ask The Experts: Money Matters

By Mike Miles

Paying insurance premiums

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Q. What factors determine whether it is better to pay insurance premiums with pretax dollars or waive that and pay with after-tax money? My thought is that by paying with after-tax money, taxable income is increased, thereby increasing the Social Security entitlement. How do you determine if that is more beneficial than the reduced tax liability now?

A. The answer depends on your circumstances and a number of assumptions about the future. The issue is discussed on the Office of Personnel Management website at www.opm.gov/insure/archive/health/pretaxfehb/qanda/23.asp.

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Rolling over deferred compensation pretax fund

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Q. I have a State of Kansas deferred compensation 457(b) pretax fund from when I worked for the state. Can I roll this into the Thrift Savings Plan without tax consequences?  If so, how do I go about the process?  If I have to receive a check from the fund directly — not made out to me — I believe I have 60 days in which to get it into another fund.

A. If it contains only pretax money, you may transfer it to the TSP. Use Form TSP-60 and follow the instructions.

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Pre- and post-tax rollover

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Q: I understand that when an federal employee, through a rollover, transfers funds from an individual retirement account to the Thrift Savings Plan that the money transferred can only be pre-tax. My wife has both pre-tax and post-tax contributions in the same IRA. The IRA has grown for 20-plus years, so a lot of its value has had no tax has paid on it. Most of what I have read on the issue seems to indicate that because the IRA has some after-tax money in it, none of the money can be transferred into the TSP even though the amount to be transferred is either before-tax money or earnings that have accumulated without taxes paid on them.

Is it proper to transfer money from an IRA which contains pre-tax contributions and after-tax contributions so long as the amount rolled over does not include the after-tax contributions?

A: I refer you to Page 18 of IRS Publication 590, which allows for rollover of only the taxable portion of an IRA account into a plan like the TSP. The logistics of accomplishing this can be tricky, however. You should be careful and consider seeking professional help if you do this.

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Conversion of voluntary contribution to Roth IRA

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Q: I will be retiring on Jan. 1. I recently contributed $50,000 to my Voluntary Contribution account. This is my first contribution to this account, and upon retirement I would like to transfer the entire balance directly to a Roth IRA. I have an existing Traditional IRA (never taxed and balance of approximately $65,000) and a Thrift Savings Plan account of approximately $245,000. My goal is to transfer the entire amount of my voluntary contibution directly to an existing Roth IRA upon retirement. My thought is that the only tax I would owe on this conversion would be the few hundred dollars I earned in interest on the Voluntary Contribution account.

My questions are: Will the Office of Personnel Management permit the direct transfer from a Voluntary Contrtibution account in a Roth IRA? And, if so, is my assumption correct that the only taxes I would owe would be the few hundred dollars in earning on this account (since I will not be co-mingling this money with either my Traditional IRA or TSP account)?

A: The OPM will permit you to roll or transfer your withdrawal to any account you designate, except that the contributions portion may be rolled directly into a TSP account, since the TSP will not accept post-tax dollars.

While I can’t comment on how much tax you will actually owe, you will have to aggregate your Traditional IRA balances for purposes of determining the taxability of your conversion. This means that your conversion amount will be deemed to include a portion of your untaxed IRA balance that is proportionate to the share of the aggregate IRA balance you’ve converted.

For example, if you covert $50,000 from a VC account and you have a pre-tax $50,000 Traditional IRA balance at the time, $25,000 of your converted amount will be deemed to be a coversion of pre-tax money and subject to tax. After the conversion, your Traditional IRA will then be deemed to have a tax basis of $25,000, so you will ultimately be able to withdraw that money without tax later.

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