I cashed out my TSP, is it too late to rollover to an IRA?

Retirement Fund Lockbox

Q:  I retired from the Air Force Reserve last Jan­u­ary. I trans­ferred from Davis Mon­than AFB in Tuc­son, Ari­zona, in Feb­ru­ary to con­tinue to work Civil Ser­vice until I have my time in. I thought I was going to retire this Feb­ru­ary but looks like that is not going to hap­pen until later in the year. I cashed in my two TSP accounts plan­ning on using the money to pur­chase a home in Ari­zona. Now that we aren’t return­ing to Ari­zona now I have the cash. My wife and I both have Roth IRA accounts. I con­tribute $100.00 a pay day. How­ever, my wife has not worked this year but may return to work when we move back to Ari­zona. I am 61 and she will be 62 in May. I won­der if we can take some of the TSP cash and put into our Roth IRA’s?  If so, how much can we add? What would you sug­gest we do with the cash? We have about $110,000.00.

–Gary, DuPont, Washington

A:  I’m answer­ing this as quickly as I can because time, I hope, is of the essence.  That’s cer­tainly the case when eval­u­at­ing your options with the money you pulled out of the TSP.  Based on your ques­tion, it sounds as if you’ve got $110,000 that you with­drew from your Uni­formed Ser­vices TSP at some point in the last year.  The tim­ing of this move will have a big impact on your options, so I’ll break down my answer accord­ing to when you might have closed out the TSP.

It’s been less than 60 days

If this is the case, then you still have time to make a rollover con­tri­bu­tion into a tra­di­tional IRA and avoid pay­ing income tax on the tax­able por­tion of your with­drawal.  Remem­ber though, when you cashed out, the TSP with­held money (at least 20%) for Fed­eral income taxes.  So, if you want to avoid any taxes on your with­drawal you’ll prob­a­bly have to rollover what you have and pony up a bit more than $25K to replace the part of your dis­tri­b­u­tion that was sent to the IRS.  These num­bers are not exact and you’ll want to dis­cuss your strat­egy with your tax advi­sor, but if you’re in the 60-day win­dow you still have options that could help avoid a big tax bill.

Beyond the 60 day window

If the 60 day win­dow is over and passed, then the TSP will send you a 1099 and you’re going to have to pay tax on the income when you file your 2013 tax return (assum­ing the with­drawal was made last cal­en­dar year).  If this turns out to be the case, be pre­pared for a poten­tially large tax bill since any pre­tax money you received will added to your other income for the year and taxed accord­ingly. So, no mat­ter what you decide to do with the money make sure you set aside enough to pay your taxes.

Adding to a Roth

If you’re inside the 60 day win­dow dis­cussed above, you could rollover your money to a Roth IRA.  Of course, you would have to pay income taxes on the tax­able por­tion of the rollover—so tax wise for this year’s return, rolling over to a Roth would have the same result as just keep­ing the money in your sav­ings account…you’ll have an extra $100K+ of income on your tax return. That might not be palat­able!  It’s pos­si­ble you made tax-exempt con­tri­bu­tions or even Roth con­tri­bu­tions to the TSP/Roth TSP. That money could (if you’re in the 60-day win­dow) be rolled over to a Roth IRA with­out hav­ing to pay any taxes.

If your rollover options have expired (you’re beyond 60 days), we are at the point in the year when you can make both a 2013 and 2014 con­tri­bu­tion to your Roth IRA.  Since you and your wife are both over age 50, you could each con­tribute up to $6,500 for both years. That means at total of $26,000.  But remem­ber, in order to make any IRA con­tri­bu­tion you have to have earned income in the year of the con­tri­bu­tion of at least as much the con­tri­bu­tion.  How­ever, you’ve noted that you’ve already made some monthly con­tri­bu­tions to your Roth, so you have to include that fig­ure when deter­min­ing how much you can contribute.

Talk to tax advisor.

As I said up front, tim­ing is every­thing.  Be pre­pared for the tax impli­ca­tions of what’s already hap­pened and if you still have time, move quickly and with your tax advi­sor map out a strat­egy that works best in your situation.

 

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Scott Halliwell and JJ Montanaro are CERTIFIED FINANCIAL PLANNER™ practitioners with USAA Financial Planning Services, one of the USAA family of companies. Certified Financial Planner Board of Standards, Inc. owns the certification marks CFP® and Certified Financial Planner™ in the United States, which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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