TSP — New Withdrawal and Transfer Considerations
Pension reforms allow TSP transfers to Roth IRAs
By TIM KAUFFMAN
August 22, 2006
Beginning in 2008, Thrift Savings Plan participants will be able to transfer their TSP savings directly to a Roth IRA and avoid paying taxes on the funds when they’re withdrawn, under pension reforms signed into law Aug. 17.
Currently, TSP participants wishing to transfer savings to a Roth IRA must first place them in a traditional IRA. Just as with a TSP account, a traditional IRA allows participants to defer paying taxes on earnings until that money is withdrawn.
Under the new law, which takes effect in January 2008, participants will be able to transfer TSP savings directly to a Roth IRA. They will have to include the amount transferred as taxable income on their annual tax returns. However, when the funds — and their earnings — are withdrawn, they are tax free.
The Roth IRA provision is one of several sections of the 2006 Pension Protection Act that apply to TSP. The law also:
• Allows military reservists called to active duty for at least 179 days between Sept. 11. 2001, and Dec. 31, 2007, to withdraw funds from their TSP accounts without the customary 10 percent early withdrawal penalty. Participants have two years from the end of their active duty to contribute the amount withdrawn to a personal IRA. This section takes effect immediately.
• Allows non-spouse beneficiaries of TSP participants to transfer TSP monies to an existing IRA when the TSP participant dies and avoid having to declare those funds as taxable income. Currently only spouses have this option. This section will take effect Jan. 1, 2007. Read full article here:
A lot of things happening in the new retirement legislation that affects TSP participants. This kind of thing could affect the timing of moving assets in separation or divorce. As of today if a non-employee spouse wins all or a portion of the employed spouses TSP he or she can transfer it directly to a conventional IRA. certain strict rules and procedures have to be followed, so don’t undertake this without a competent financial advisor.
However the non-TSP spouse may not want to put the money in a conventional IRA. Starting in 2008, the options will be much more broad while still avoiding many of today’s taxes and penalties.
I see TSP’s divided all too often based strictly on the date of final orders in a divorce. Of course, division at that time may in fact be the best deal for the parties. But if a non-TSP spouse wanted to, let’s say, put the money in a Roth IRA the attorneys should consider advising him or her to let the court retain jurisdiction over the proper division amount but wait until this new law takes affect … the tax and flexibility savings may be considerable. As always:
Disclaimer
As always remember that this site, although written by a retiree with substantial experience in the school of hard knocks, it is for personal, lay opinions and informational purposes only. If you have a legal question you should seek help from a legal professional. If you have questions involving current or future values of pensions you need an actuary or competent pension valuation expert. If your questions are tax-related, seek a competent tax advisor. In other cases, I recommend the base chaplain.
Related posts:
- TSP — New Withdrawal and Transfer Considerations
- TSP — Thrift Savings Plan — Division and Conservation
- TSP — Thrift Savings Plan — Division and Conservation
- HERO Act and Divorce Division
- Rollover IRA’s — Pluses and Minuses
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