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PLANO
09-21-2013, 08:46 AM
I received this yesterday from SA Dan Jamison, who publishes the FERSGUIDE (if you're not subscribed, you should be, it's free)





Hi Folks,

Many of you are probably unaware of the serious pitfalls you will encounter if you opt to contribute to the Roth TSP. For a federal law-enforcement officer or firefighter, the Roth TSP is a poor choice. It wasn't until this week that a reader posed a question to me that caused me to realize what a bad idea the Roth TSP is for many of us.

The idea behind the Roth TSP is that you contribute after-tax monies and when you withdraw funds from the account in retirement, the earnings are tax-free. The trick here is that that the withdrawal must be a "qualified withdrawal" for the earnings to be tax-free. In order for the withdrawal to be considered a "qualified withdrawal" by the IRS, "five years must have passed since January 1 of the calendar year when you made your first Roth TSP contribution AND you are at least 59, permanently disabled (or deceased)."

Here's the problem: As a law-enforcement officer or firefighter, you can retire as early as 50 years of age and are mandatorily-retired at age 57. If you decide to take post-retirement withdrawals from the TSP (under the life-expectancy option or the age-55 exemption) you will not meet the age test for the Roth TSP withdrawal to be considered "qualified." (You may also not meet the 5-year rule as the Roth TSP has only been an option since May 2012.) Since your withdrawal is not "qualified," you will be taxed on the portion of your withdrawal that represents the attributable earnings. This eliminates the tax-advantaged nature of the Roth TSP. You'd be just as well off having a regular post-tax investment account outside of the TSP. You're contributing after-tax dollars and paying taxes on the earnings generated by the post-tax investment.

The TSP will not allow you to specify that your post-retirement withdrawals come only from your Traditional TSP balance, nor will the TSP allow you to roll-over/transfer out only the Roth TSP portion of your account. When you make any withdrawal from the TSP, the withdrawn amount will be taken ratably from both your Traditional and Roth balances under TSP rules.

If you roll-over/transfer both your Traditional TSP and Roth TSP to another custodian, then you lose your eligibility under the age-55 exemption, as that requires the funds to be left in your employer-sponsored account. If you retire between age 50 and 59, at retirement, you could roll-over/transfer your Traditional TSP and Roth TSP to another custodian and withdraw only the funds that came from the Traditional TSP account using an IRS Section 72(t) withdrawal plan and wait until age 59 to start to withdraw the portion that came from the Roth TSP funds.

Please consider these facts when deciding if the Roth TSP is right for you. If you already jumped into the Roth TSP, you can always stop and change your contributions to be 100% Traditional TSP and limit the tax damage.

Even folks who aren't covered under the special provisions get affected by these rules if they retire at their MRA.








Stay safe,





Dan Jamison
FERSGUIDE, LLC

k0nkuzh0n
09-21-2013, 06:44 PM
In order for the withdrawal to be considered a "qualified withdrawal" by the IRS, "five years must have passed since January 1 of the calendar year when you made your first Roth TSP contribution AND you are at least 59, permanently disabled (or deceased)."

The TSP will not allow you to specify that your post-retirement withdrawals come only from your Traditional TSP balance, nor will the TSP allow you to roll-over/transfer out only the Roth TSP portion of your account. When you make any withdrawal from the TSP, the withdrawn amount will be taken ratably from both your Traditional and Roth balances under TSP rules.

To me those are the 2 important parts of the message. The 1st one isn't TSP's fault, and I imagine this limitation also applies for ROTH IRAs.

The 2nd one is very nice to know, and IMO a huge pitfall. Hopefully they fix that!

PessOptimist
09-27-2013, 11:39 PM
http://www.tsptalk.com/mb/images/misc/quote_icon.png Originally Posted by PLANO http://www.tsptalk.com/mb/images/buttons/viewpost-right.png (http://www.tsptalk.com/mb/tsp-talk-news-etc/18081-roth-tsp-pitfalls-consider.html#post423714)
In order for the withdrawal to be considered a "qualified withdrawal" by the IRS, "five years must have passed since January 1 of the calendar year when you made your first Roth TSP contribution AND you are at least 59, permanently disabled (or deceased)."

The TSP will not allow you to specify that your post-retirement withdrawals come only from your Traditional TSP balance, nor will the TSP allow you to roll-over/transfer out only the Roth TSP portion of your account. When you make any withdrawal from the TSP, the withdrawn amount will be taken ratably from both your Traditional and Roth balances under TSP rules.


To me those are the 2 important parts of the message. The 1st one isn't TSP's fault, and I imagine this limitation also applies for ROTH IRAs.

The 2nd one is very nice to know, and IMO a huge pitfall. Hopefully they fix that!

Very important points.

The limitation applies to all ROTH IRAs.

You really think FRTIB or ETAC will "fix" it? They are busy with their day jobs. Last time it was published in 2007, there were 22 SES employees of FRTIB.

see http://www.gpo.gov/fdsys/pkg/GAOREPORTS-GAO-07-541/pdf/GAOREPORTS-GAO-07-541.pdf. Lots of confusing language as to the number and grade of employees.

I looked in to the ROTH option a while back. I thought that the 5 year rule would just make me wait a while before withdrawing the ROTH funds. Then I found out that I can not withdraw from TSP without taking some ROTH funds out. I haven't researched it but does that mean that I would pay taxes on both principal and interest on ROTH funds? The principal contributed would have been taxed all ready but no IRS rule would surprise me. Maybe double taxes?

So the scenario is this - I decide on 1 Jan 14 to make my $23k contribution all ROTH. I retire 31 Dec 17. In Jan 18 I take a distribution from my TSP. The portion contributed as ROTH is not a "qualified contribution" so I pay taxes on $92k I all ready paid taxes on or I pay taxes on the earnings of the $92k? Not sure but it is way too late to go there. Just more thoughts on the matter.

I will be 65.6 yo when I retire.

PO