What You Need to Know about TSP Accounts & Traditional IRAs
What You Need to Know About TSP Accounts and Traditional IRAs
Federal employees are eligible to contribute to both the traditional Thrift Savings Plan (TSP) and a traditional IRA. The value of a traditional TSP account can be bolstered by traditional IRAs while a TSP participant continues working in federal service and after retiring.
Contribution Limits
The Internal Revenue Code (IRC) determines limits on the amount an employee can contribute to the TSP and to an IRA (traditional and Roth IRAs). IRA contribution limits are independent from TSP contribution limits, and those limits typically increase each year. For example, all federal employees in 2021 can contribute a maximum of $19,500 to the TSP with an additional $6,500 in “catch-up” contributions for those older than 49 as of December 31, 2021. For an IRA, federal employees can contribute a maximum $6,000; if over 49 by the end of the year, an employee can add up to $7,000.
Transfer From a Traditional IRA to a Traditional TSP
Aa a traditional TSP participant, there are two ways to move traditional IRA money to a traditional TSP account. First, traditional IRA money can be directly transferred into the traditional TSP account. The transfer of money is between the IRA custodian and the TSP. Second, a traditional TSP participant can roll over money from a traditional IRA to the traditional TSP. Here, the IRS custodian cuts a check to the TSP participant. The TSP participant will need to deposit the check within 60 days of receipt, otherwise, the IRA distribution will be taxable and possibly subject to an early withdrawal penalty. Complete Form TSP-60 to initiate a transfer or rollover from a traditional IRA into a traditional TSP account.
Why Transfer During Federal Service
Consolidation of one’s retirement accounts may be a reason to transfer money from a traditional IRA to a traditional TSP account while still in federal service. Additionally, the TSP allows the transfers of qualified retirement plans, such as 401(k) retirement plans, 403(b) retirement plans, and 457 retirement plans, into a traditional TSP account. TSP participants who own multiple retirement accounts may want to consolidate into the traditional TSP, simplifying and minimizing expenses. Additionally, one can use the traditional IRA as a source of cash to transfer to a traditional TSP account and invest in TSP funds.
Options After Retiring From Federal Service
One option after retirement is to transfer or roll over the traditional TSP account to a traditional IRA or Roth IRA. A TSP participant can request an unlimited number of transfers from the traditional TSP to a traditional IRA. Although not limited in total number, there is a limit of no more than one such transfer every 30 days. Provided that the TSP directly transfers the TSP funds to an existing IRA, the TSP will not withhold any federal income taxes from the traditional TSP funds. Once withdrawn from the traditional IRA, the IRA funds will be subject to federal and state income taxes. This option can allow for more investment opportunities with an IRA, and more flexibility of withdrawing funds from an IRA account to the TSP. Custodial fees, however, are associated with every IRA. These fees will have an effect on the investment performance of the IRA investment. Also, traditional IRAs can be withdrawn penalty-free only once the IRA owner turns 59.5. Meanwhile, penalty-free traditional TSP withdrawals can be made when a traditional TSP participant is age 55. The traditional IRA, like the TSP, is subject to required minimum distribution once the TSP participant/IRA owner turns 72.
As another option, a TSP participant can request an unlimited number of transfers of the traditional TSP to a Roth IRA. With the number of traditional TSP to IRA transfers limited to no more than 12 per calendar year, this includes transfers to traditional IRAs, Roth IRAs, or a combination of both. Advantages of a traditional TSP to a Roth IRA transfer include no income limitations for a transfer, and the transfer will ultimately benefit TSP participants if tax rates increase in the future, which they most likely will. On the flip side, full federal and state income taxes are due on the transfer. The TSP does not withhold federal income taxes on the transfer as it normally does on traditional TSP withdrawals, and the TSP never withholds state income taxes. TSP participants are responsible for paying federal and state taxes due on transfer. Depending on the amount of the transfer, the transfer could push the TSP participant into a higher federal marginal tax bracket. Additionally, a transfer cannot be reversed, unlike a transfer of the traditional TSP to a traditional or Roth IRA.
At Federal Educators, we can help you better understand your TSP investments and federal retirement benefits. Give us a call and request your free analysis at 866-226-8160.