The Federal Thrift Savings Plan (TSP) is the “401K” for military and other federally employed physicians. It is a great retirement plan, with minimal expenses (2-3 basis points total), and 5 great index funds, plus a bunch of Lifecycle funds similar to Vanguard’s Target Retirement funds. Their G Fund is a unique investment that provides intermediate term treasury yields while taking money market risks. The TSP even recently implemented a Roth option.
Tax Exempt TSP Money
When deployed to a war zone as a military doctor, you are given the option to contribute money to the TSP above and beyond the $17,500 annual limit. This money is (mostly) earned tax-free because you’re in a war zone. When it comes out of the TSP in retirement, it also comes out tax-free, but the earnings from it do not. It turns out that this acts like a non-deductible IRA, which is really inferior to a taxable account unless you’re going to hold on to it for many decades. But there is a way to get that tax-exempt money OUT of the TSP, and into a Roth IRA. All of the research I have done on this indicates it to be completely legal, but you’re not going to get any help from the TSP, the IRS, or a Roth IRA provider like Vanguard on this. Here are the required steps.
Separating Tax-Exempt TSP Money
First, make sure it actually makes sense to contribute tax-exempt money into the TSP. If you have better uses for the money, such as regular traditional or Roth TSP contributions, contributions to Roth IRAs, contributions to your spouse’s 401K, high interest debt, or even the Savings Deposit Program (SDP) you probably are better off using the money for that rather than sticking it into the TSP.
Second, get deployed. You ideally want to max out your TSP contributions for the year PRIOR to deploying or AFTER returning, so that the tax-exempt money is going in to the TSP in addition to the regular contributions. January to January deployments make this hard. Go to finance and make sure they’re doing the right thing with your money. It’ll likely require multiple trips if you’re like most of us.
Third, get out of the military. You can’t pull TSP money out until after you separate from the military.
Fourth, transfer almost all your TSP money out to a traditional IRA. If some of it is Roth, then I suppose that portion would go to a Roth IRA. The Roth TSP wasn’t available when I did this. I left $200 in the TSP. Keep in mind you can only do a partial TSP withdrawal like this ONCE.
Fifth, transfer an amount equal to your tax-deferred money (your total minus your tax-exempt money) BACK into the TSP. The TSP DOES NOT permit the transfer of “post-tax money” (such as those tax-exempt deployment contributions) so the only money that goes into the TSP is the tax-deferred money, leaving you a traditional IRA with the basis equal to the value.
Sixth, You then convert this IRA to a Roth. There should be no tax bill for this.
When all is said and done, you’ve essentially taken the tax-exempt TSP money out of the TSP and put it into a Roth IRA, while leaving the rest of the money inside a great retirement plan. Now instead of earnings on that money being fully taxable, it is now completely tax-free forever. My tax-exempt contributions were about $25K. Over the next 40 years at 8%, that might save me as much as $171K in taxes.
Beware The Step Transaction Doctrine
You should be aware there is some risk that the IRS could consider this illegal due to the step transaction doctrine. This is the same issue some people have with the backdoor Roth IRA. Basically, if a series of steps, although all legal by themselves, are simply a means of performing an illegal action, then they’re all illegal. Frankly, I don’t think anyone at the IRS cares about stuff like this (they’re too busy chasing down Tea Party groups and partying), and even if they did, I could afford it. I’m also not sure how they’d figure out I did all this from what gets reported on my taxes from the whole process. It looks very clean on your tax forms. I haven’t heard of the IRS having any kind of a problem with this, but I confess I’m the only person I know who has ever done it. Certainly many people have used similar methods to isolate the basis in their 401Ks.
Issues with the Roth TSP
Now that the TSP has a Roth option, most military docs should be using it. Not only does it allow you to shelter more money ($17,500 after-tax is more than $17,500 pre-tax), but the marginal tax rate for military docs is often comically low, especially in a year with a deployment. I believe the tax-exempt money is always considered to be put into the tax-deferred portion of the TSP, so even if all your other contributions were Roth, you’d still have fully taxable earnings in the tax-deferred portion. It would still be worthwhile isolating your basis using this method. The TSP is still considering allowing in-service conversions, but hasn’t reached a decision yet.
Those separating from the military with tax-exempt money in the TSP should consider isolating the basis to convert that tax-exempt money to Roth money.
What do you think? Have you isolated basis before? Do you have tax-exempt TSP money? Comment below!
Hi,
As a self employed 1099 independent contractor hospitalist, do you have any ideas on how can I maximize my pretax tax deferred retirement accounts and THEN convert them to a stealth self directed Roth IRA? Do you know all the possible tax deferred accounts that can be opened? My wife has a full time employed position as a nurse and has a regular employee 403b plan with Fidelity. Advice much appreciated as usual.
You can use a SEP-IRA and do a Roth conversion every year. If you have sufficient income to get $51K into it, you could do that plus $5.5K for you and $5.5K for your wife into a Roths. Your wife, as an employee, may have a Roth 403B option to explore.
Keep in mind that just because you can do this, doesn’t mean you should. In peak earnings years it is probably wiser to use traditional tax-deferred retirement accounts over Roths when possible.
I just returned from a deployment and actually addressed this topic with the folks at the TSP. The Roth TSP is absolutely the way to go when deployed because the tax-exempt contributions AND earnings will both be tax-free on withdrawal. Not so with the traditional TSP, where only the tax-exempt contributions during the deployment will be tax-free but the earnings (which after 20-30 years will be considerably higher than the contributions) will be fully taxable.
If you have a two-income household and/or can afford it, you can contribute up to $51,000 to the TSP during deployment (though I believe the Roth TSP contributions max out at $17,500 even during deployment – apparently Uncle Sam’s generosity has limits).
But I have to ask, why on earth would you want to transfer money out of the TSP to another 401K or IRA? With an incomparably low ER of 0.027% and a performance as good as the Vanguard 2040 fund in my separate IRA, why transfer the money, even after I ETS? That outside 401K better offer some truly outstanding managed funds to make up the difference for the TSPs solid performance and ridiculously low ER. I’m curious what WCI and his prior service readers think – is it really worth it?
First, I agree that the Roth TSP is the way to go when deployed, and probably even when not deployed. I haven’t seen anything definitive on how they treat tax-exempt contributions now that the Roth TSP is in place. Are the earnings still considered tax-deferred? If you have a definitive source, I’d like to see it.
Second, there are at least two good reasons to transfer money out of the TSP- to get additional investing options (like TIPS and REITS and Small Value stocks) and to get better distribution options than the TSP offers. That said, I’ve held my TSP assets in the TSP since separation, aside from the tax-exempt money I wanted to convert to a Roth.
WCI, I emailed directly with an administrator at the TSP regarding the Roth contributions and earnings. I can share her email with you offline if you’d like. But by my LES, obviously all income was tax-free. The “tax-exempt contributions”, Roth contributions/earnings are all tracked separately from regular (traditional TSP) contributions on my monthly TSP statements. But yes, it looks like both Roth contributions and earnings are tax-free.
The question is are the earnings on the tax exempt contributions tax-free. Please do forward the email.
From the email:
“The traditional tax-exempt contributions will not be taxed when you
withdraw them. However, the earnings on those contributions will
always be taxable. This differs from the TSP Roth option, as the
earnings on Roth TSP contributions have the potential to become
tax-free.”
That pretty much settles it. Even with the Roth TSP, you still would want to isolate this basis and convert it. The email doesn’t, however, address whether you can do an in-service Roth conversion on that money. Anyone want to send the TSP another email? According to this:
http://fedretire.net/?p=1458
it wasn’t allowed as of January 2013.
I know you encourage military physicians to use the Roth TSP option. Does it change anything if we are a dual military staff physician couple? Does that change things ie based on AGI?
It’s a rule of thumb, there are always exceptions. But I’m not sure dual income military docs is one of them. Either you guys are going to get out and make a lot more money or you’re going to have pensions. Either way favors Roth. Plus the fact that so much of your income isn’t taxed right now….
How about when your spouse a military physician who is deployed and you are a civilian attending? She is going to get out and not be in for the 20 years. I think we may be one of situations that doesn’t favor roth?
I dunno, I think I’d probably still do Roth in that situation but you know your numbers better than I do. At any rate, it’s not like tax-deferred is very often a bad thing, it’s just maybe not quite as good of a thing as it could be. Certainly your situation is less obvious than mine was (man I wish a Roth TSP had been available then.)
Did something similar to this when I changed jobs a while back, albeit not with tax-free money.
A few months after leaving company A, rolled over to company B’s 401k, which at the time did not have a Roth option. So only the taxable portion could be rolled over.
Immediately withdrew the rest from Company A and paid off a big chunk of debt.
I enjoy what you guys are up too. Such clever work and exposure!
Keep up the superb works guys I’ve incorporated you guys to my blogroll.
so I’m new to this and totally confused…I have a regular TSP. I am a military doc. I will consider opening a Roth TSP…but why would it be more beneficial than a regular TSP?
Unless I were married to a civilian doc or something, I’d be using the Roth TSP. It wasn’t available when I was in.
I am currently on step 3….e.g. waiting to get out. Have a countdown on my phone to working full time in civ ED’s 🙂 In addition to my regular roth ira, I am maximizing my roth tsp this year and next (my 1/2 military year and 1/2 civ year) as those will prob be the last year I am able to use a regular roth.
Now, that being said here is something tsp told me recently: According to TSP- I have to contribute 1% to regular tsp to keep the roth allotment going. Well that is not much- only $60/month
And one question: I deployed prior to roth tsp being rolled out. Tried to put as much as possible into tsp- about 27k I think. I now have a mix of tax deferred, tax exempt, and roth. I understand the steps 4-6, but really is it just moving money around. Some here, some there etc. Or is it the way it works is to pay the taxes now during the tsp move, and place already taxed money into the account so it grows tax free.
One other question: after step 6, does it make sense to keep tsp open with a small chunk of money. I also heard once you fully leave, you can’t get tsp back and is it worth it to have as an option. The reason I ask is my financial advisor eventually wants me to leave tsp- mind you he gets more money the more I invest with him. (i know i should be with an advisor that is flat fee, but I do like this guy)
Thanks.
I still have my TSP and plan on keeping it indefinitely. So you want to keep at least a little money in there so it doesn’t close on you.
I’m not exactly sure how this scheme will work now that the Roth TSP is in place. You may be able to do a conversion simply within the TSP, or you may still have to isolate basis by rolling out all the tax-deferred and tax-exempt money, then rolling the tax deferred money back in. Or perhaps rolling out all the tax-deferred, tax-exempt, and Roth money (except a few bucks) and then rolling the tax-deferred and Roth back in.
I know this is a late post but while trying to find information on how to get my tax exempt balance out of my account, I came across this article. I have found one minor flaw in your plan.
It wold appear that when TSP distributes the money for the transfer (your fourth step) it first distributes only tax deferred funds (this is the only type of distribution that is not pro rata). The last funds to be distributed are the tax exempt ones, meaning the 200 you left in TSP was 200 in tax exempt funds. 200 of the funds that were coverted to a Roth in step 6 were taxable. Not a huge amount but wanted to share the information. (Special note on page 5 https://www.tsp.gov/PDF/formspubs/tsp-536.pdf)
Thank you for sharing. All the more reason to leave as little as possible in the account when doing this. My goal with the $200 was simply to keep the account open.
I agree leaving as little as possible for making the move. Thanks for the original post and figuring it out for the rest of us.
WCI, thanks for this article – very informative. I’m slated for deployment for 6 months starting in mid-2015, with a goal to maximize my TSP contribution for 2015, with the CZTE in mind. From what you wrote before, I have been trying to come up with a strategy. Does it make sense to maximize traditional TSP contribution of $18K prior to deployment, and then put $18K in Roth TSP while deployed, plus an additional $17K traditional while deployed, to bring the total up to the annual addition limit of $53K? Thanks in advance for any advice you may have time to give!
You can’t do $18K tax-deferred and $18K Roth in the same year. If your entire deployment is in one calendar year, I’d aim to do $18K Roth + $10K SDP + $35K tax-exempt into the TSP.
Yeah, I realized this after posting and doing more research. So convoluted! Thanks a lot for the advice.
Agree with the WCI completely. And the $10K in the SDP is simply a no-brainer. Guaranteed 10% annual return. A 6 month deployment with earn you $750. It’s a little paperwork up front, but complete visibility thru MyPay and then you’ll just cash-out thru MyPay. Oh, and one more note – leave the money in for 90 days when you re-deploy. If you’ve invested $10K you’ll accrue $500 in interest over the 6 month tour but an additional $250 for 90 days after you re-deploy. Too easy.
Another late comment/question – hoping that someone reads this in the next few days as I have a bonus payment coming up on July 1.
I am currently in a combat zone and will be until October. I’ve contributed about $10K to my Roth TSP so far this year; I currently have my TSP contributions set up so that the bonus that I will receive on July 1 will fully fund my Roth TSP.
I have already deposited $10K into the SDP and have fully funded a Roth IRA, don’t have any debts except a mortgage, so my next goal is to put my CZTE money into my Traditional TSP. I am assuming, but can’t find anything in writing, that the amount I can put in per month is limited by the monthly CZTE cap on tax-exempt income which is currently about $8100. Is this true?
What I would like to do would be to use my bonus to put the remaining $8K into the Roth TSP, and then put another ~$30K from the bonus into the traditional TSP but by my read of the rules this is not possible and I will have to put in $8100 monthly; also, will DFAS’s antiquated system allow me to contribute $8K to the Roth TSP in July and add another $8100 in tax exempt traditional contributions in the same month?
Yes, that’s true.
DFAS will probably screw it up, if my experience is any guide. But after a few trips to finance, you should be able to do all that. If you can’t get money into the Roth TSP before October, just use your income from November/December to max it out.
Thank you for this information. I have been wondering about all of the retirees out there who have FERS TSP accounts and maintain a traditional uniformed services TSP having only CZTE contributions and only a small amount of taxable earnings. I see nothing illegal about rolling the CZTE contributions into a traditional
IRA then converting to Roth. I have read everything, and the one thing I wonder is whether Vanguard or USAA will accept CZTE rollovers. The TSP website alluded to it, albeit not very clearly.
I can tell you Vanguard did.
Hi, thanks for sharing this great information.It good to learn more about transfer of TSP to Ira before someone take a step in other to avoid mistakes.
Any updates on how this works with 3 piles of money (tax-deferred, tax-exempt, and Roth) in your TSP? In theory is should still work as described in the original post, but working with DFAS/MyPay/TSP is such a pain and they constantly mess things up.
Shouldn’t be a big deal even with Roth money.
I had seen this article a few years ago, and didn’t pay much attention to it . . . I only had about $3,000 in my military TSP. Now it’s at $6,000 — I guess I should have gone through the hassle of transferring out this tax-exempt money from deployment so that I wouldn’t have to pay taxes on the earnings . . .
I guess it’s not too late.
My question is, instead of transferring back to my military account, can I transfer it to my civilian TSP account instead?? I don’t see any reason why (one less different account to look at . . . ).
Sure.Seems like a good idea.
Bobby, I actually just transferred the money in my military TSP to my civilian TSP account. I noticed that not all the money got transferred so i called TSP to ask about it. They said the money that was left over in my military TSP after the transfer was the tax exempt money and its earnings. So now i have to try to roll it into a Roth IRA. That is what has me looking thru these sites to try and figure it out.
Sounds like you may already have the basis isolated, so you may be just about done!
Ramon,
Yeah, when I got out in 2012, I transferred my military TSP to my civilian TSP account, and all that was left was my tax exempt money in my military account. That $3000 grew to $6000, so I had to separate out the basis like Jim did. I’m almost done the process. . .
WCI: can you elaborate on the last paragraph of this article and possible update the information? Specifically in the “Issues with the Roth TSP” section you say:
“I believe the tax-exempt money is always considered to be put into the tax-deferred portion of the TSP, so even if all your other contributions were Roth, you’d still have fully taxable earnings in the tax-deferred portion. It would still be worthwhile isolating your basis using this method. The TSP is still considering allowing in-service conversions, but hasn’t reached a decision yet.”
Are you saying here that if you make tax-exempt, CZTE contributions to the Roth TSP that these contributions actually go into the tax-deferred (Traditional) part of the TSP? If that’s what you’re saying, I believe you are wrong. Reference the TSP website: https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/TaxTreatment/comparisonMatrix.html
Contributions into a Roth TSP account from CZTE tax-exempt pay go into the Roth TSP untaxed and the earnings and contributions withdraw untaxed as long as you meet the IRS rules for Roth withdrawals.
Am I missing something?
# 1 There didn’t use to be a Roth TSP account when I was in. So my experience will not be your experience.
# 2 I don’t see anything on the page you cite that says I’m wrong. Here’s what I read about CZTE tax-exempt pay:
Basically, it’s saying the contribution (but not the earnings) are tax-exempt. That’s the way it has always been.
“Basically, it’s saying the contribution (but not the earnings) are tax-exempt. That’s the way it has always been.”
Correct, for Traditional TSP contribution. But if you contribute CZTE tax exempt pay to your Roth TSP, then the contributions and the earnings are tax exempt.
TSP website:
“If you are a member of the uniformed services receiving tax-exempt pay (i.e., pay that is subject to the combat zone tax exclusion), your contributions from that pay will also be tax-exempt. Tax-free earnings if five years have passed since January 1 of the year you made your first Roth contribution, AND you are age 59½ or older, permanently disabled, or deceased”
My point being that the paragraph could be confusing for some, as it appears to confuse Brian here: https://militarymoneymanual.com/2018-asset-allocation/#comment-14374
Is there something new that CZTE pay goes into Roth accounts now and not the traditional side? I’m not seeing it.
Can you provide the link to your quote from the website. I can’t interpret what it means in its second sentence.
Yes, CZTE pay can go into Roth or Traditional accounts. Whichever the servicemember specifies.
For Roth contributions, the contribution isn’t accounted for as “YTD TSP EXEMPT” on the LES, it’s just a Roth contribution. Since anything in a Roth account the IRS assumes you’ve already paid taxes on it, the CZTE ROTH TSP contribution is tax free in and tax free out for both earnings and contributions.
So if you are a military doc deployed to a CZTE area, you should max out your Roth TSP contributions with the CZTE money. That gives you some completely tax free money in retirement.
From TSP website: “Roth (after-tax)-You pay taxes on your contributions as you make them (unless you are making tax-exempt contributions), and your earnings are tax-free at withdrawal as long as you meet certain IRS requirements.”
https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/TaxTreatment/index.html
Do they let you contribute more than $18,500 to the Roth account while deployed? Can you still contribute to the Roth account while deployed if you already contributed $18,500 to the Roth account that year prior to the deployment?
No, the $18,500 Roth TSP limit is a hard limit for the year, with or without CZTE contributions (Elective Deferral Limit). Once you hit that, you’re done for Roth contributions to the TSP. You can continue making Traditional TSP contributions with CZTE money up to $55,000 (Annual Addition Limit).
For many military families it’s more advantageous to contribute to a taxable investment account, rather then the Annual Addition Limit in the TSP. That’s because the Annual Addition Limits earnings are subject to income tax when withdrawn, versus the taxable investment account will only be subject to long/short term capital gains tax.
“If you are a member of the uniformed services, you should know that Roth contributions are subject to the elective deferral limit ($18,500 for 2018) even if they are contributed from tax-exempt pay. If you want to contribute tax-exempt pay toward the annual additions limit, you will have to elect traditional contributions for any amount over the elective deferral limit.”
https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/contributionLimits.html
Okay, so there hasn’t been any significant change. I agree that for many it’s better to invest in taxable than to put non-Roth, after-tax money in the TSP. The exception is if you can figure out a way to isolate that basis and convert it to a Roth IRA.
Has anyone tried this approach outlined below? I recently separated and I really don’t want to get the process wrong as it appears I only have 1 shot at it. Of course everyone I talk to at USAA and TSP give me different answers but it appears as if the information on this WCI post is in agreement with the TSP forms I’ve read. I’m just wondering if anyone opted to take the money as a check as in the website below and then put it into their Roth account without any issues… I only spent 4.5 years active duty and in my experience and anytime money was involved something got messed up in the process…
https://themilitarywallet.com/thrift-savings-plan-rollover-ira/
I am in a situation where I have to do this! When you “convert” the Tax-Exempt TSP balance to a Roth IRA, how long before you can withdrawal it if under age 59 1/2? Do you have to wait 5 years from the date of “conversion”? It seems like this transaction is more like doing a Roth TSP to Roth IRA transfer, where there would be no waiting period and the funds are available immediately so long as the Roth IRA account has been open at least 5 years.
I think the 5 year rule applies. https://www.nerdwallet.com/blog/investing/roth-ira-5-year-rules/
It’s not a Roth TSP to a Roth IRA transfer. It’s a traditional IRA to Roth IRA conversion.
Agreed. Its a conversion (the ole back door Roth). It’s just that portion of the contribution to the traditional was not taxable (it’s earnings are).
FWIW I never ended Up doing it and have just left the money in the TSP for now. It’s management seems to have gotten better over the years and keeps all my eggs from being in one basket.
Thank you. I believe this post is out of date with regards to how you get the tax-exempt money into a Roth IRA. On the TSP withdrawal form (TSP-70 for full withdrawal, or TSP-77 for partial withdrawal) there is a line that states:
“Check this box if tax-exempt balances are accepted into the account identified above.”
You do not want to check this box and you do not want to have your direct deposit information on the form. By not checking the box, the TSP will send you a check for the tax-exempt portion which you can then endorse and then send it to Vanguard (or whomever) to have it deposit into your Roth IRA. If you don’t do this, then it will get rolled into your Traditional IRA and you won’t be able to separate it, and you will eventually get double-taxed on it.
Please correct me if I have misunderstood. I gleaned this information from looking at the TSP site and also from themilitarywallet.com, and the individual that writes the blog states that he has done the procedure.
https://themilitarywallet.com/thrift-savings-plan-rollover-ira/
It’s entirely possible the post is out of date, it’s 6 years old. There was no Roth TSP when it was written.
That said, that line shouldn’t cause you a problem. You want the IRA to accept tax-exempt balances. That’s the whole point. You roll it all out to the IRA, but only the tax-deferred dollars back in. That isolates the basis and allows for a tax-free Roth conversion of the tax exempt balances.
I agree you don’t want a check sent to you.
No reason to get double taxed on any of it. You just keep track of your basis.
Now, does this other method work fine? It probably does. It might even be better. But don’t blow it by not getting that check to Vanguard.
Hey Tom,
You are correct. The article over complicates a process that has been and still is very simple. The TSP tracks Traditional, Roth and Tex Exempt basis for you very well. For Roth earnings they attribute to Roth so that amount is easily rolled over. For both Traditional and Tax exempt earnings, they attribute to traditional (taxable) growth. This makes it simple when you roll the money out. You receive one check for the Roth monies that goes straight to a Roth IRA, a second check for traditional monies that includes all traditional basis and growth along with tax exempt growth, and a third check for the tax exempt basis. You can confirm all of these amounts at the time of the rollover/ transfer by comparing the check amounts to your most recent statement in the section that lays out lifetime TSP contributions. If the process is done right, the Roth and Trad checks will go straight to your IRA trustee and the tax exempt check will go straight to you. Simply endorse the tax exempt check to the trustee and the full amount can be deposited into your Roth IRA.
A no brainer for most folks who get out of the military, doc or not.
Geoff,
The article was written in August of 2013 and a lot has changed over the years. Thank you for updating with some current information but it was not always so simple. Heck even the TSP people had trouble figuring out what would happen back in the day.
Funny people still come across the article though.
It is a top result on google for whatever reason. I don’t think there are many people asking the tax exempt question so the new volume is probably minimal and old articles just kind of hang around.
Anyways, here’s a link to the military wallet article that outlines the new and improved process pretty well.
https://themilitarywallet.com/thrift-savings-plan-rollover-ira/
While the TSP is famous for low cost, they are equally infamous for the worst customers service and user interface on the planet. Hope the link and my ramble helps some folks out.
Sounds like it is now easier than when this article was written nearly a decade ago.
Hello WCI,
Thank you so much for the helpful information. I was hoping to get your advice on my situation, since it is a bit complicated.
I am currently of retirement age. I worked for a county hospital for years in a different state, and was eligible for pension there, and was also enrolled in a 457 plan.
I retired from that job, and moved out of state and now collecting pension (have not touched the 457 yet). I wanted to still work for a few more years, and just started a VA position, and am enrolled in the TSP. I am contributing the 19k, as well as the 6k catchup limit to the pretax TSP.
Had a few questions for you…
1. Would it make sense to contribute to the Roth TSP, rather than the pretax TSP? I hadn’t thought of doing this initially but after reading your post it seems like this could be an option?
2. Do you have any insights on the annual addition limit for TSP? I wasn’t aware of this at first but is it true that I could contribute up to 56k if I wanted?
3. I was initially lead to this article from your article on the mega back door conversion. Would I be eligible in some way to do this? Such as using my 457 fund from my old job? (On a side note, I was considering trying to somehow withdraw or convert some of this money before selling my house in my old state, since my old state does not tax retirement withdrawals, whereas my new one does). I’m currently in the 24% federal tax bracket rate, and would have a little leeway to withdraw maybe some money and state within this bracket. Alternatively, I could leave as is and withdraw in the future after fully retiring from the VA, or even transfer those funds to TSP since their rates are so low.
Hope that was not confusing, and thank you for all your great content.
1. It’s an option but if you’re still at peak earnings it might not be the best choice, especially since you’re also getting a pension. Tax-deferred still may be the way to go.
2. Not sure for VA folks, but in the military you can only do after-tax contributions to $56K when you’re deployed.
3. The TSP really doesn’t allow that. You might be able to do a Roth conversion of the TSP though. Separate issue. Residency isn’t just about selling a house so look at each state’s residency rules. The TSP does allow IRA rollovers into it so if that is a governmental 457 you could roll it into an IRA then into the TSP.
I have a fairly complex questing and I was hoping someone could assist.
As you are aware TSP has slowly increased their fees/costs to manage their funds over the years, and as it now stands, the total cost (Net administrative cost and other fees) of the individual TSP funds as of 2019 are: 0.043% G fund; 0.046% F fund, 0.043% C fund, 0.06 S fund, 0.049 I fund. In addition, TSP has so many restrictions regarding inter-fund transfers etc. and the fact that a TSP ROTH account is subject to RMD which is not the case with a regular Roth account.
Therefore, I am considering transferring my TSP account to my solo-401K at Schwab because my Schwab 401k account has no annual fees, no management fees, and is a self-managed/self-directed account which allows me to buy what I what when I want. Therefore, I can buy index funds/ETF similar to or better then the funds at TSP at a lower cost or buy fund/ETF which have the same cost as those held by TSP, but with less restrictions. I just plan on getting a few ETFs such as VTI, VOO, VEA, BND etc and hold them in my account and re-balance as needed.
However, I also do not want to burn my bridges with my TSP account and would like to keep $200.00 in my TSP account (min. to keep it open) to keep my options open, if for some reason in the future I want to transfer money back into TSP from my solo-401k which I should be able to do as long as I leave 200.00 in my TSP account.
The catch–my traditional TSP account has a balance of about 330,000 of which about 15,000 is tax exempt which I contributed when I was stationed in tax exempt combat zone—at the time I made my contribution TSP only had the tradition TSP accounts and did not have the TSP-ROTH accounts.
Unfortunately, although TSP keeps track of the total amount I contributed which was tax exempt, the tax-deferred and tax-exempt money is comingled in my TSP account, and TSP has no method to separate this money, nor can they transfer the tax-exempt money to a ROTH at TSP or another institution, nor can TSP do a split distribution which was what the Schwab retirement representative suggested (i.e. direct the tax deferred portion of my TSP account to my 401K and the tax exempt portion of my TSP account to my ROTH IRA both of which are at Schwab).
When I spoke to TSP, the representative informed me that my only option was to request a 100% withdrawal, and complete the TSP transfer form. The TSP representative said that I should request for my entire TSP account to be transferred to by solo-401K at Schwab, but ensure that ensure Schwab checks the box on the form which indicates that Schwab CANNOT accept tax-exempt balances in this account since Schwab cannot track the tax-exempt portion either. Then TSP will transfer the majority of the balance in my account to my solo-401K at Schwab and for the tax-exempt portion TSP will mail me a check; however, I need to be aware of the tax implications of doing this and referred me to another document on the TSP website.
However, the document she referred me to actually explained tax implications of different types of withdrawals (i.e. early distributions, rollovers etc), rather than transfers (direct rollovers) which is what I wanted to do. The TSP representative, told me that because Schwab could not except my tax-exempt portion of my TSP account as part of the transfer, TSP would send me a check TSP which would include send the tax exempt portion of my TSP account and any gains attributed to these tax-exempt contributions. She said that I would be responsible to pay taxes on these gains, as well as would have to pay a 10% early withdrawal penalty on the gains. In addition, she said that although I would not have to pay taxes on the tax exempt principal, this would only be the case if I was 59 ½, but because I am 55, I would also have to pay a 10% penalty on the early withdrawal of my tax-exempt contributions.
I explained to the TSP representative that my intent was not to take an early withdraw, nor did I want to do an indirect rollover, but rather I simply wanted to transfer (direct rollover) my TSP funds to another retirement account. The TSP representative explained that because these funds are comingled in my TSP account and TSP cannot designate the contributions into separate buckets, and Schwab cannot accept my tax-exempt balance as part of the transfer, and I cannot request to just transfer the tax deferred portion this was my only option. In addition, she also said that she had no method to tell me exactly how much of the gains in my TSP account were directly attributed to the tax-exempt contributions; therefore, she could not provide me with a total amount which I would owe taxes on once I did the aforementioned transaction. was uncertain of my tax liability. She said the only way to determine this was to request 100% withdrawal; however, when I used the “withdrawal wizard” on the TSP and went through all the steps prior to confirmation this information is not available.
Furthermore, there does not appear to be any way that I can leave $200.00 in my TSP account to keep it open if I want to transfer most my money out of TSP.
Therefore, I am at a loss as to how to accomplish what I want to do:
1. Transfer Tax deferred balance in TSP to Schwab solo-401K
2. Transfer Tax exempt balance in TSP to Schwab ROTH IRA
3. Keep 200.00 in TSP just to keep my options open.
I’ve searched the internet and have yet to find an answer other than one person who did the first two steps in what I described above and wrote an article which was posted on Military wallet https://themilitarywallet.com/thrift-savings-plan-rollover-ira/
The aforementioned article is well written; however, it was written in 2018 prior to the changes in the tax laws. In addition, the author did a complete transfer of TSP account into another retirement account, thereby he closed his TSP account, and what I wanted to do was leave the minimum allowed amount (200.00) in my TSP account to keep it open.
In regards to the tax-exempt portion of my TSP account, according to the aforementioned website, the author states that after I request 100% withdrawal/transfer of my account to another eligible retirement account and check the box stating that the receiving firm cannot accept tax exempt balances, TSP will send a check which should represent the tax-exempt portion of my account and I can do whatever I want with this money including sending the check to Schwab with instructions to depot it into my ROTH IRA along with a letter of explanation.
Anyway, as I mention at the opening of my discussion what I am describing is very complex and I was hoping someone has some experience with this situation, and can confirm if I do the above process and receive a check from TSP will it merely represent my tax-exempt contributions or will the check include both my tax exempt contributions (i.e. my principal) and GAINs on the contribution. And can I simply depot the check I receive into my ROTH IRA without having any tax implications. Lastly, is there a way to do the above transfer and still keep $200 in my TSP account to keep it open.
Any advice would be most appreciated.
L
I don’t see what the big deal is. You’re describing exactly what I did years ago and could do today. I left a couple hundred bucks in there and rolled the rest out to an IRA. I rolled all the pre-tax money into a 401(k) (in my case, back into the TSP) and converted what was left, the tax exempt money, to a Roth IRA. Why can’t yo do that except roll the pre-tax money to your Schwab account (by the way, that account also will have RMDs, just like the TSP).
Just do a partial TSP withdrawal. It’ll come out pro-rata, but who cares about the tax exempt portion of $200?
By the way, don’t obsess over expense ratios. The only reason I see to do what you’re doing is to isolate your basis and do the Roth conversion. If you really want to do investments that can only be done in a self-directed account, that would be another reason. But just to save 2 basis points? No point in that.
https://www.whitecoatinvestor.com/expense-ratios/
P.S. I don’t think the TSP person on the phone gave you the correct info.
https://www.tsp.gov/living-in-retirement/making-a-withdrawal/
https://www.tsp.gov/publications/tsp-536.pdf
Even if they won’t send the tax-exempt money to your IRA, they should send you a check for it and you should have sixty days to put it in an IRA yourself and then you can roll it to a Roth IRA and then do whatever you want with the pre-tax dollars in the other IRA.
Although the rising expense/fees for TSP have become a little irksome given that the primary TSP funds are simply index funds, the primary reason I have been considering transferring most my account out of TSP, is that I’m uncertain that my long term returns are equal to that if I invested in other similar funds/ETFs, and as you know TSP has a bunch of limitation in regards to trading/interfund transfers as well as different rules regarding ROTH TSP and RMD as compared to other retirement funds(i.e. if you have more than one IRA, you must calculate the RMD for each IRA separately each year. However, the IRS allows you to aggregate your RMD amounts for all your IRAs, and you can withdraw the total from one IRA or a portion from each IRA. However, the TSP representative informed me that unlike external IRAs, the RMD distributions from the TSP account cannot be used to satisfy RMD for any external account. Also eve if I could do a Traditional to Roth TSP conversion for my tax-exempt portion, ROTH TSP accounts are treated differently than regular ROTH IRAs).
Anyway, I just figure it would be advantageous to move my tax deferred to my solo-401K and tax-exempt to my ROTH (I only have about 15K, but at least in a regular ROTH all gains remain tax deferred and no RMD).
However, I was told to by the Schwab representative to be aware that a solo-401K not an ERISA qualified plan. Therefore, it does not have federal anti-alienation asset protection and limited CA creditor protection.
Other than trying to decide whether I should just leave my money in TSP or move it out so that I have more control/flexibility, my main concerns are exactly how TSP reports the tax exempt transaction to the IRS (early distribution or indirect rollover) and what TSP actually considers “tax exempt balance” (i.e. does this merely represent the total amount of tax exempt contributions while I was on active duty, or does the “tax exempt balance” include my tax exempt contributions PLUS any gains attributed to those contributions ). The reason I am uncertain is because I have received conflicting information from different TSP representatives. Some have told me that my “tax exempt balance” simply refers to the 15K cumulative tax-exempt contributions on my quarterly statement and there will be there are no tax consequences when I get the check for the tax exempt portion of m account, whereas other representatives informed me that my “tax exempt balance” is composed of the 15K plus the gains on my account. However, no one can tell me exactly the amount of my accounts gains is attributed to my tax-exempt contributions because I was told that the calculations were complex and the gains are determined by the portion the different types of my contributions over the entire period that has been invested rather than my cumulative tax-exempt (15K) and tax deferred contributions (196,097) and total gains (128,925). All I was told is that any gains attributable to my tax-exempt contributions would be subject to Federal/state income tax and l would also owe a 10% early withdrawal penalty; however, because I have no method of determining the gains on the tax-exempt portion of my account, I am uncertain if it is worth it to do the transfer.
Also TSP was also very non-committal regarding whether it was permissible for me to depot the check with the tax-exempt funds into my outside ROTH IRA as you described—i.e. indirect rollover, all they would tell me was that TSP cannot directly transfer the tax-exempt portion of my account into my outside ROTH IRA, nor convert my tax-exempt portion of my account to a ROTH account at TSP and I needed to talk to a tax advisor since anything I did was irreversible. Therefore, prior to doing anything I wanted to weigh all the pros and cons.
If you’re already 72 and retired, an IRA rollover probably makes a lot of sense. If you’re not, why are you concerned about RMDs? Also, if you’re 72 and retired from medicine, why the big concern about asset protection?
The $15 an hour TSP line phone answerers aren’t going to explain this process to you. That’s what the above blog post is for.
Your gains are not tax exempt, only the tax exempt contributions are.
The main con these days is the loss of the G fund. If that doesn’t bother you, then feel free to roll it over into other accounts.
Jim – I just retired (both from the military and FIREd at 54) and need to work the tax exempt balance in my TSP. It is a bit over 6 figures in a nearly 7 figure TSP account, so obviously I need to do this. As you point out, when you call I am not overwhelmed with confidence. It seems simple when I read your original article and the comments (since some rules have changed), but big numbers and I don’t want to make a big mistake. Two options I am looking at:
1) Just move it all to Vanguard – simple as Vanguard says they will transfer the exempt part directly into my Roth when it arrives (I have to check the “cannot accept” part of the form and Vanguard believes 2 checks are then generated) and not sure the G fund is all that big of deal (I get the advantage, but feels like playing for a few basis points). Long term advantage is having all my retirement IRAs and nearly all (except RE) of my taxable investments in one location (Vanguard). Not that big of deal, but TSP site is mildly more painful than even Vanguard.
2) Transfer all my Traditional TSP into my Vanguard Traditional IRA and leave my Roth TSP as is, which I believe moves out all tax exempt funds. This is another part I am uncertain about as the TSP agent would not give me a firm “yes” to this, but more of a “I believe that is correct”. If it turns out to be wrong, no big deal as you can now do partial transfers more than once and I move out all but $200 of the Roth TSP (when the “error” is discovered). Then I decide how much of my Traditional IRA I want to convert to Roth. Certainly not all of it but I for sure will fill out the 12% bracket (if any room left after dividends) and maybe some of the 22% bracket -taxes will almost certainly go up down the road (although my crystal ball is cloudy) and I don’t have a lot of room left in the 12% bracket, so the 22% bracket is my future (24% seems unlikely) ) and I will transfer the rest back into Traditional TSP.
See any glaring errors in process or judgement? This feels very niche, but if you would like me to ask on the SpeakPipe, happy to do so.
No, I think you’re looking at your options fine. I don’t know that I’ll keep my TSP forever, but it is a nice 401(k). Now that most other good index funds have similar expense ratios it isn’t as awesome as it once was. They used to be my cheapest funds and had the G Fund. Now they’re pretty much the same as everything else and the G fund doesn’t pay anything due to low interest rates.
Thanks Jim – you are amazing!
I always get a kick out of the post coming back from the dead. It interesting to see how others approach this subject every few years and he changes that happen.
I love this post and all the comments, what a great resource for a very niche cohort.
I am part time in National Guard and find myself forecasted for deployment to a CTZE (tax-exempt zone) in 2021. I just spoke with our base’s financial advisor (nice little perk at no additional cost for military), who states that if designating contributions to Roth TSP while in CTZE, not only do the $19,500 employee contribution get treated as Roth, but the additional contributions up to $58K also get treated as Roth (can be eventually withdrawn tax-free). This seems to be in contrary to older comments that the additional contribution beyond $19,500 is treated as traditional TSP (obviously per this thread, TSP changes over time).
Can anyone else verify this to be the case? That the entire $58K contributed in the CTZE be treated as true Roth? Also, this planner said that medical incentive bonuses received during this active duty time could be contributed to TSP as well. Confirmation from anyone with recent experience would be appreciated (for me, and the legacy of this thread). Thanks!
It’s been ten years since I was active duty. There was no Roth TSP at all then.
But I don’t think that’s true that it can go straight into Roth. I also don’t think the TSP allows for in-plan conversions. It may allow for inservice withdrawals though, which is pretty much at least as good. But I couldn’t find anything that said you could do that. See page 12 here:
https://www.tsp.gov/publications/tspbk12.pdf
https://the-military-guide.com/tsp-tax-exempt-rollovers-withdrawals/#:~:text=If%20you're%20trying%20to,that%20amount%20directly%20to%20you.
You can check with finance though. I was in the finance office every week when I was deployed trying to maximize all my benefits. Don’t forget the SDP either.
I would assume the bonuses could go in, yes, but you’re probably going to have to go to finance 3 times to get it to happen in my experience!
Dr. A,
I have a good friend who is Army finance. I’ll send this over to him to see if he can confirm.
Just rooted around on the TSP website and found this language in the Additional Contribution section:
“The excess contributions go into the traditional portion of your account from tax-exempt pay earned in a combat zone.”
So it seems that the previous info on this thread is correct, that only the standard $19,500 amount, and not the entire $58,000 can be treated as true Roth. Agree that taxable account (and/or SDP) is probably the better destination for amounts over $19,500.
I wouldn’t say that is necessarily true. If you have a way to get that money into a Roth IRA eventually, it’s definitely a better place than a taxable account.
Good point, that would be a nice chunk to eventually get into Roth. “Eventually” may be 6 years away or so…
Well, here’s another twist to the riddle: by diverting my employee contribution to TSP and not using my civilian employer’s 401K, I’d be sacrificing employer match.
401K plan:
The Company will match your 401(k) deferrals. The match is 50% up to 4% that you contribute to the Plan. This means for every $1.00 of the first 4% contributed to the 401(k) Plan, the Company will match $0.50.
Important items to keep in mind:
– An Annual Compensation limit for 401(k) Plan is set each year by the IRS and this will
impact the maximum match that can be contributed to your account. For 2020 this limit
is $285,000.
So I’d like opinions on ways to analyze this to see if any or all contribution of CTZE money to Roth TSP makes sense while also sacrificing employer match as listed above. Assume that the $285K of salary will be reached.
Thanks!
Interesting. You’re going to blow the minds of those in your finance office. Obviously you want to get the entire match but they’re going to have to do something manually to fix your situation.
I guess if finance can’t handle it then I’d calculate out how much you’d lose in match and then compare that to the long-term benefits of more Roth money.
The other thing you could do is pretend you’re still ignorant of how these things work and just do both and hope the IRS doesn’t catch you (which is unlikely), but I’m not going to recommend dishonesty.
Option A: $19,500 of tax-exempt contribution into a Roth TSP, while sacrificing $5,700 of civilian company contribution to traditional 401k (which the’ve indicated company contribution may be less due to COVID hit on company finances).
Option B: contribute $11,400 of my civilian pay into 401k to capture $5,700 company match, and remaining $8,100 of tax-exempt military pay into Roth TSP.
Option C: mix of anywhere in between.
Core question being: does the opportunity to contribute tax-exempt earnings into a Roth justify leaving company match unclaimed?
That’s a lot of match dollars. I don’t think I’d pass that up.
On the surface I vote B but only to the extent needed to get the max company match (as best you can estimate).
1. $11,400 with a match of $5,700 is a 50% immediate return on investment. End Story.
2. In option A you were going to fork over the $5,700 to max out so you’re just adding another $2,400 to that to hit that total $19,500
3. So in the end, option A costs you $19,500 with no guarantee on return and option B costs you $19,500 with an immediate 29% return