Federal employees have had the option to contribute to the Roth TSP since 2012. Over the past 13 years, employees have contributed millions to the Roth TSP, particularly since 2023 because of the passage of SECURE Act 2.0 in late December 2022.
One of the provisions coming out of the passage of SECURE Act 2.0 removes the Roth TSP account in the calculation of a TSP participant’s required minimum distribution (RMD). A retired federal employee with a TSP account becomes subject to the RMD rules once the retired TSP participant reaches his or her required beginning date (RBD). The RBD is currently April 1 following the year a retired TSP participant becomes age 73.
Under this provision, only a TSP participant’s traditional TSP is used in the calculation of the participant’s TSP RMD. Before this provision became law, a TSP participant with a Roth TSP account was advised to directly roll over his or her Roth TSP account to a Roth IRA at least one year before the TSP participant reached his or her RBD. In so doing, the Roth TSP account would not be included in the calculation of the TSP participant’s RMD, thereby resulting in a lower RMD and less taxable income. In the meantime, the Roth TSP account that was rolled over to a Roth IRA which is not subject to an RMD.
Over the last few months, thousands of federal employees have lost their jobs. Many of these employees are leaving federal service or they are retiring early from federal service. Although they do not have to rollover their TSP accounts (both the traditional TSP and the Roth TSP), many departing employees are choosing to do so. This column discusses the tax rules that apply to the Roth TSP rollover to a Roth IRA.
The tax rules associated with the rollover of the Roth TSP to a Roth IRA are complicated. One reason they are complicated is because the rules involve two five-year holding periods, namely one five-year holding period for the Roth TSP and the other five-year holding period for the Roth IRA.
Determining if the Roth TSP distribution is “qualified.”
A Roth TSP distribution is a qualified distribution if the Roth TSP participant fulfills two requirements, namely:
(1) The Roth TSP participant is at least age 59.5; and
(2) It has been at least five years since January 1 of the year that the Roth TSP participant made his or her first Roth TSP contribution. Note that the Roth TSP has been available to federal employees since May 7, 2012.
If a Roth TSP rollover to a Roth IRA is a distribution of the Roth TSP that is qualified, then the Roth TSP participant can immediately withdraw tax-free the entire rolled over amount (both the Roth TSP contributions and associated earnings) from the Roth IRA. But what about earnings generated after the rollover? The Roth TSP participant cannot withdraw those earnings tax-free until the five-year holding period for the Roth TSP participant’s Roth IRA has been satisfied. Note that the Roth IRA “five-year clock” begins on January 1 of the year an individual made his or her first Roth IRA contribution. The Roth IRA has been available to individuals since 1998.
It is important for federal employees and retirees to understand that a Roth TSP participant cannot carry over the Roth TSP five-year holding period and use it to satisfy the Roth IRA holding period. But if the Roth IRA holding period has been met, then the entire “rollover Roth IRA” (consisting of the entire Roth TSP account and accrued Roth IRA earnings) can be immediately withdrawn, tax-free and penalty-free. If the Roth IRA holding period has not been met because, for example, the “rollover” Roth IRA is the Roth TSP participant’s first Roth IRA, then the Roth TSP participant has to wait five years before withdrawing any post-rollover Roth IRA earnings tax-free. But the entire rolled over Roth TSP account can always be withdrawn without tax or penalty. The following examples illustrate:
Example 1. Janice, age 66, recently retired from federal service on December 31, 2024. On April 1,2025, Janice requested a direct rollover of her Roth TSP account worth $427,500 to an unfunded “rollover” Roth IRA. Janice’s Roth TSP is qualified. Janice made her first Roth IRA contribution in 2014 and therefore her “rollover” Roth IRA is also qualified. Going forward, Janice can make tax-free and penalty-free withdrawals from her “rollover” Roth IRA. This is because Janice’s Roth TSP account and her Roth IRA account have met the requirements of being qualified.
Example 2. Andrew, aged 63, retired from federal service on December 31, 2024. On February 24,2025 Andrew requested a direct rollover of his Roth TSP account worth $593,100 to an unfunded “rollover” Roth IRA. Andrew’s Roth TSP account is qualified. However, Andrew has never contributed to a Roth IRA. His first Roth IRA is the unfunded “rollover” Roth IRA he set up with a brokerage in order to accept Andrew’s Roth TSP rollover proceeds. Because Harvey’s Roth TSP account is qualified while his Roth IRA is not qualified, he can request a tax-free and penalty-free distribution from the entire $593,100 Roth TSP rollover proceeds in the “rollover” Roth IRA. However, Andrew will have to wait until at least February 24,2030 to request a withdrawal of any post-Roth TSP rollover earnings generated from the $593,100 Roth TSP rollover.
What happens if the Roth TSP distribution is not qualified?
If a Roth TSP participant requests a Roth TSP direct rollover to a Roth IRA in which the Roth TSP is not qualified, then the Roth TSP participant can immediately withdraw only the Roth TSP contributions from the “rollover” Roth IRA. However, both the rolled-over Roth TSP earnings and the post-rollover earnings come out tax-free only if the Roth IRA distribution is qualified. That is, the Roth TSP participant is age 59.5 or older and the Roth TSP participant has satisfied the Roth IRA five-year holding period.
If the Roth IRA distribution is not qualified, then the Roth TSP participant will pay federal and state income taxes (and possibly the 10 percent early withdrawal penalty if under age 59.5) on both the rolled-over Roth TSP earnings and post-rollover earnings out of the Roth IRA. But the rollover Roth TSP contributions can always be distributed free of income taxes and penalties. The following two examples illustrate:
Example 3. Elizabeth, age 62, retired from federal service on December 31, 2024. On April 8, 2025, Elizabeth requested a direct rollover of her Roth TSP account worth $72,399 to an existing Roth IRA. Elisabeth made her first Roth TSP contribution on May 15, 2022. Elizabeth’s Roth TSP distribution is therefore not qualified because Elizabeth’s five-year holding period started on January 1,2022 and will end on December 31, 2026. She made her first Roth IRA contribution on June 20,2011. Therefore, because Elizabeth’s Roth IRA is considered qualified, she can request immediate tax-free withdrawals from her “rollover Roth IRA,’ consisting of the rolled-over Roth TSP account and her existing Roth IRA.
Example 4. Carlos, age 62, retired from federal service on December 31, 2024. On March 26, 2025 Carlos requested a direct rollover of his Roth TSP account worth $42,300 to an unfunded rollover Roth IRA. Carlos has never contributed to a Roth IRA and made his first Roth TSP contribution on January 15, 2023. Carlos’ Roth TSP distribution is not qualified. His five-year Roth TSP holding period started on January 1,2023 and ends December 31, 2027.
Between January 1,2023 and December 31, 2024, Carlos contributed a total of $26,000 to the Roth TSP. Between now and December 31,2027, Carlos can withdraw tax-free and penalty-free from his “rollover” Roth IRA only the $26,000 Roth TSP contributions he made. He cannot withdraw any of the $16,300 of his Roth TSP accrued earnings and post-March 26,2025 rollover Roth IRA earnings tax-free until January 1, 2028.
