Tax Exempt Contribution --> Roth TSP

[Aaron27]

This is a rather technical question, but about 80% of my current TSP holdings are tax exempt and not just tax deferred, as a result of the contributions being made when I was in a combat zone tax exclusion area. When the Roth TSP option finally gets implemented, do any of you know whether or not I'd be able to transfer the portion of my TSP that is tax exempt to the new Roth portion of my account?

Logically, it makes sense that I should be able to do this. I know that Roth accounts are much more flexible, so I'd hope to take advantage of those different rules. Another question is whether or not this would even be advantageous. Can anyone see a downside to converting tax exempt TSP money to a Roth?

 

[domingo3]

There is no provision that would allow you to do this, though it would be advantageous if you could. The main benefit I see is that in the Roth TSP, gains will also be non-taxable. In the traditional TSP, the CZTE money that you put in will come out tax-free, but any gains on it will be taxed upon withdrawl. I don't see any disadvantage. Too bad you can't do it.

If you are anywhere near leaving government service, you can take that money out and roll over to an IRA, then convert to a Roth IRA. I'm not certain if you have the ability to choose which money you move and only take the CZTE money out, though.

 

[Frixxxx]

I'm a little confused.

Only your earnings should have been tax exempt. Once you put any of those funds into your current TSP fund, they would be subject to all the rules associated with the tax requirements upon withdrawal.

The problem is that you deposited those funds it into this type of account and moving it will be subject to the penalties required by law. You may want to call TSP and say there may have been a clerical issue from Finance and they took too much out of your check to see if you can get it back.

I had a member of my unit fall under the same issue, but no one explained it well enough to ensure that his/your money was being invested as he/you expected it.

Let us know what TSP says. Their counselors should be able to provide you information and direction.

 

[Frixxxx]

Just needed to add, TSP contributions made with tax exempt pay are not taxed when withdrawing those funds. All interest is taxed at the rate when retiring.

 

[Aaron27]

Yeah, I definitely would not have made any contributions while deployed if it would have meant that it would turn tax-exempt funds into tax-deferred savings. But I'm sure the reason they implemented the tax exempt scheme is to avoid a situation where some participants have an absolute disincentive to contribute.

I guess maybe the heart of the issue, and one that is more likely to have an answer since it's not nearly as rare, is whether or not once the Roth TSP is implemented anyone will be allowed to convert any of their current TSP to the Roth and pay the taxes up front. It actually would be good policy, both for young workers who can anticipate higher taxes later in life and the government who might reap a windfall from the transfers. It almost makes so much sense that I'm sure they ruled it out long ago.

I will send the TSP a note and let you know what they say.

 

[Warrenlm]

My Vietnam tax exempt combat pay was $60 every two weeks, if I recall correctly, paid in cash, and after entertainment I did not have anything left to invest.

 

[wvango]

According to my sources, you will not be allowed to transfer current TSP over to the Roth TSP, 2 separate pots of money. Once Roth TSP is up and running, they are looking into allowing you to roll your Roth into Roth TSP.

I guess maybe the heart of the issue, and one that is more likely to have an answer since it's not nearly as rare, is whether or not once the Roth TSP is implemented anyone will be allowed to convert any of their current TSP to the Roth and pay the taxes up front. It actually would be good policy, both for young workers who can anticipate higher taxes later in life and the government who might reap a windfall from the transfers. It almost makes so much sense that I'm sure they ruled it out long ago.

 

[domingo3]

According to my sources, you will not be allowed to transfer current TSP over to the Roth TSP, 2 separate pots of money. Once Roth TSP is up and running, they are looking into allowing you to roll your Roth into Roth TSP.

This is correct. The only way to get current TSP money into a Roth tax treatment is to leave the service, roll over to an IRA and convert to Roth.

It's not just those of us in TSP; there's no provision to convert 401ks to Roth 401ks either. It would require an act of congress to change the rules, which I don't see happening.