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.


USAA or its affiliates do not provide tax advice. Taxpayers should seek advice based upon their own particular circumstances from an independent tax advisor. The information is provided for informational purposes only and is not intended to substitute for obtaining professional financial advice. Please thoroughly research and seek professional representation before acting on any information you may have found in this article. This article is in no way attempts to provide advice that relates all personal circumstances.

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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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