Ask The Experts: Money Matters

By Mike Miles

Time restrictions for voluntary contributions to private Roth

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Q. I understand that it is possible to transfer Voluntary Contribution account deposits to a private Roth IRA (with any pre-tax interest earned going to TSP), but I’ve also been told there’s a five year ‘holding’ requirement for the Roth. I currently have a private Roth account that is more than five years old. Does the five year requirement mentioned in conjunction with the VC mean that the money should be placed into a new and distinct Roth account, so that an additional five years holding can be tracked, or can the VC contributions (without interest) be added to the existing account?

I was hoping to consolidate several small taxable IRAs into my non-Roth TSP, and all my non-taxable Roth accounts into one private account to consolidate and simplify matters when I retire — but I’m still confused as to whether the newest funds (VC transfer to Roth) would have to be put into yet a third account to isolate them and leave them untouched for five additional years — or if that five year time requirement is referring to the establishment of Roth accounts in general, not the specific date various funds are deposited in it. The account is over five years old. The money is ‘new’. Is there still an additional five year holding requirement for the new funds? Is there a requirement to isolate funds in a Roth based on the date of deposit?

A. There is no requirement to isolate Roth IRA funds based on the date of retirement, but the five year rule can be tricky to navigate, and it might be a good idea to keep the converted money separate. I suggest that you review the rules in IRS Publication 590 and consult a CPA for specific advice for your situation. Someone needs to come up with a workable plan. If you’re not up to it, find someone who is and who will take responsibility for the outcomes.

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Traditional TSP vs. Roth TSP

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Q. I am 24 years old and I have been contributing 15 to 20 percent of my pay to a traditional TSP for 3 years now. When I started my TSP, the option to invest in a Roth TSP was not available. I have a decent amount of money in my traditional TSP right now. I’m curious if it would be better to stop contributing to my traditional and let it grow and start contributing to a Roth TSP or continue to invest in my current plan and maintain my current compounding interest? I’m nervous that if I change my contributions I will lose out on a significant amount of money that I could have gained by maintaining my contributions in my already established traditional TSP.

A. It will only matter if the effective tax rate on your contributions is different from the rate on withdrawals, and that’s something you can’t know this far ahead of time. There’s no way to know if contributing to one or the other, or both, will work out best for you, so do it the way you like. In the end, it won’t matter nearly as much where you saved the money as it will matter that you saved it.

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TSP, Roth and IRA transfers

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Q. I understand that you can transfer funds into and out of your Thrift Savings Plan from either eligible pretax plans and/or after-tax plans. However, withdrawals (loans, withdrawals and interfund transfers) are made proportionately from both the traditional and Roth. Thus, you cannot specify withdrawals from only the traditional or the Roth. This is seen as a major drawback for some who would like to participate in the Roth option only or make withdrawals from only the traditional or the Roth option.

Would it be possible, at or near retirement, to transfer a major amount of your TSP balance — for example, 90 percent of your TSP (which would take 90 percent of both the Roth and traditional balances on the day of the transfer — leaving 10 percent in each) to a traditional IRA and Roth IRA outside of the TSP, then later transfer from the traditional IRA back into the traditional TSP? This would result in a small Roth TSP balance and restore the traditional TSP balance.

Doing that would provide greater flexibility for accessing the tax-free funds in the Roth (with the possibility of leaving those tax-free funds to your heirs) and still taking advantage of the lower management costs associated with the TSP for the traditional balance.

A. It seems to me that this will work as long as the traditional IRA does not contain any after-tax money when it’s time to move it back into the TSP.

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Paying taxes at retirement on TSP balance

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Q. Is it possible to pay all taxes on the Thrift Savings Plan at retirement and then still keep money in a Roth TSP? If not, is there any way to convert money in TSP before I turn 70 to avoid having to take minimum distribution? I do not want to pay taxes again on money that I may not need if it is paid out as a minimum distribution.

A. You may not convert a traditional TSP balance to a Roth TSP balance. You should also reconsider the logic of what you’re trying to do, which is electing to pay tax on a large sum now rather than pay tax on a series of much smaller sums later. There is no risk of double taxation, and you’re likely to wind up paying a higher rate using your proposed strategy.

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Combining TSP accounts

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Q. I was enlisted in the Marine Corps from 2004 to 2008 and have been a full-time employee at the Social Security Administration since March 2012.

So, I have a uniformed services Thrift Savings Plan account and a civilian TSP account (using pretax and Roth contributions).

Nothing has been contributed to the uniformed services account since I left the Marines in 2008, so I asked someone in human resources here if I could combine the accounts. I was initially told this wasn’t possible, but after my own research, I found Form TSP-65 – Request To Combine Civilian and Uniformed Services TSP Accounts.

After I showed this to the HR office, I was told it wouldn’t be beneficial to combine the accounts because I would take a tax hit on the tax-free money that I made overseas while deployed to combat areas. This explanation doesn’t make too much sense to me because my TSP contributions were pretax contributions anyway (there was no Roth option at the time). Also, I don’t trust the info from my HR office after they were wrong about the ability to combine accounts.

Should I combine the accounts or leave them separate?

A. If you contributed tax-free combat pay to the TSP, you should keep the military account to preserve your ability to withdraw that money later without having to pay tax on it. Combat pay contributions are not the same as Roth contributions, and the two are not interchangeable.

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Roth TSP and Roth IRA combined contributions

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Q. I have a Roth IRA and Roth TSP, and I am not eligible for catch-up contributions at this time due to my age. What is the maximum I can contribute to both for FY13?

A. There is not a combined maximum, and the limits apply to calendar years, not fiscal years. The most that you can contribute to the Roth TSP for 2014 without catch-up is $17,500. The limit for Roth IRA contributions for 2014 is $5,500, but this might be reduced for you based on your tax filing status and income for the year. You should consult IRS Publication 590 for more information. These limits were the same for CY 2013.

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Roth TSP vs. TSP income limits

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Q. I’m a little unclear on the Roth IRA vs. Roth TSP differences. I’ve been told that I can’t contribute to a Roth IRA since my adjusted gross income (married, filing jointly) is too high. Does that same rule apply to the Roth TSP? It seems to me, if I can go with the Roth TSP and max it out at the 2014 maximum of $17,500, I can also max out the Veterans Affairs Department contribution (which goes to my traditional TSP).

A. The Roth IRA contribution limits do not apply to Roth TSP contributions. Separate and distinct rules apply to each.

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In-plan Roth rollovers

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Q. Will the Thrift Savings Plan allow for in-plan Roth rollovers? If so, how will they work and who will benefit from these rollovers?

A. No.

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Best plan for maximum returns

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Q. I have been using a Vanguard Roth IRA Target Fund for my retirement account. Now that I work for the federal government, I have a Thrift Savings Plan standard account and contribute the additional 5 percent to take full advantage of employee matching. I’m 37 and plan on working until at least 67. I believe my best bet is to just keep maxing out my Vanguard Roth IRA, taking full advantage of my employee matching and putting away anything extra I can into my Vanguard Roth IRA. Do you think that is my best bet, or should I stop investing in the Vanguard account and:

a.) Start maxing out the standard TSP with employee contributions?

Or b.) stop investing in the Vanguard IRA, keep investing the 5 percent to take advantage of employee matching in the standard TSP account and max the rest of my allowable annual contribution in the Roth TSP.

The reason I think I should stick with my Vanguard IRA and 5 percent employee matching instead of Option A or B is due to the advantage of dollar cost averaging from all of the years I already have invested in the Vanguard IRA.

A. I prefer maximizing the TSP contribution first, but it probably won’t matter much in the grand scheme of things. Your dollar cost averaging argument makes no sense, however, and should not be factor in your decision-making.

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Changing TSP contributions

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Q. If I am contributing to a traditional Thrift Savings Plan, can I now change my future contributions to a Roth TSP, or do I have to wait until open season?

A. You may start, stop or change your TSP contributions at any time.

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