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Financial Questions & Answers

Financial Questions & Answers


I’m a retired postal worker and have money in a TSP. Can I roll that into a Roth IRA? I do have another Roth IRA investment somewhere else. Also, what would the tax implications be? Thank you for your time. -James


You can certainly roll your TSP into a Roth IRA, but there could be significant tax implications. Since you’re TSP contributions were made while you were a civil servant, you haven’t paid taxes on any of those contributions or their earnings. If you rolled your TSP directly into a Roth, the entire balance would be included as income. So if your TSP has a balance of $150,000, rolling over to a Roth would add $150,000 to your income for 2012 — that could mean a lot of extra taxes! On the other hand, if you really like the idea of jump-starting the tax-free component of your portfolio, you could do it in a bit more tactical way.

For example, let’s say you sit down with your tax advisor and determine you could have $20,000 more income and still remain in the 15 percent tax bracket. To help keep your tax bill down, you could rollover 100 percent of your TSP to a traditional IRA (no taxes on this move) and convert $20,000 from the traditional IRA into a Roth, and then continue this approach into future years. There’s certainly a bit of "crystal ball" involved when evaluating the merits of converting to a Roth IRA. The bottom line is that converting to a Roth will cause you to pay more taxes when you convert than you would if you didn’t convert. It may make the transition to a Roth more worthwhile if you take the more measured approach we mention.