Q. Can the employee’s contributions and their associated gains fund balance within an already established traditional TSP account be converted to a Roth TSP account, meaning one could pay the taxes due and convert a specified amount from a traditional TSP account to a Roth TSP account? I believe conversions within TSP account types should be allowed similar to a traditional IRA to a Roth IRA conversion. If so, can this conversion be done over time so as to limit taxes incurred by such a conversion in any given tax year? If conversions are not allowed, are there any plans to allow this type of TSP account conversion opportunity within the TSP in the future (I realize currently any Agency TSP matching funds and their associated gains would have to remain in a traditional TSP, although one should be allowed in the future to pay the current tax due on these funds and then also convert these funds in my opinion.)? How could someone advocate for this option, since it appears there could be several advantages to federal employees if such conversions were allowed: such as, in a Roth TSP account all the future gains will grow tax free; the requirement to withdraw funds at a specific age is not a Roth TSP requirement; with a Roth TSP withdrawal of funds there should be less adverse tax impacts on other overall taxable income (such as TSP income also possibly increasing the amount of taxable social security income under current tax law) for any future tax year.
In general, do you favor the traditional TSP versus a Roth TSP? In consideration of your answer, I noted for tax year 2013 that for my retired parents, a substantial portion of their 2013 social security wages also became taxable when the dividends, to include dividends taxed at only the capital gains rate, of their stock mutual fund investments rose significantly for the 2013 tax year. By investing in only a traditional TSP any future withdrawals, to include even potentially even minimum required distributions beginning at age 70 1/2, could raise not only the retired federal workers tax rate but also their taxable social security wages. Please advise.
Is there any effective way to advocate that federal employees should be allowed before any one-time withdrawal or annually, before the beginning of any given tax year, for any ongoing monthly withdrawals to declare how they desire their TSP withdrawals made by type of TSP account, meaning Roth, traditional, or a mix, by specific dollar amounts, of both TSP type accounts? These important financial decisions for both one-time and ongoing withdrawals appear to be options that should be both workable with the TSP’s types of account management system and of great benefit to federal employees since better overall individual TSP account management and TSP taxable withdrawal decisions could be made by federal workers.
A. TSP to Roth TSP conversions are not allowed. None of the potential advantages that you cite for the conversion are certain. You should contact the Federal Retirement Thrift Investment Board with your suggestions for improving the TSP. I don’t favor either of the account types generally. The choice depends upon a number of individual circumstances. It is often impossible to know, in advance, which will be most advantageous in the end. In these cases, it’s not productive to spend too much time and money trying to predict the unpredictable.