Understanding the Roth IRA Five-Year Rules and Their Application to the Roth TSP- Part II
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Another consideration with respect to the “five-year forever” rule and the Roth TSP is with respect to Roth TSP rollovers to a Roth IRA. The Roth TSP can be rolled over tax-free to a Roth IRA. However, if the Roth TSP account has not met the “five-year forever” rule requirement and is rolled to a Roth IRA (which has a separate “five-year forever” rule requirement and has been met), then once the rolled over Roth TSP funds are merged into the Roth IRA funds the Roth IRA funds will become “tainted”. In that case, the Roth TSP participant will have to wait to withdraw the merged Roth IRA funds until the Roth TSP “five-year forever” rule period has been satisfied. The following example illustrates:
Example 2. Francine, age 60, is a federal employee who retired from federal service with 25 years of service on July 29, 2023. Francine made her first contribution to the Roth TSP on October 30, 2020. She also has a Roth IRA in which she made her first Roth IRA contribution on June 13, 2014. Francine’s Roth IRA is “qualified” because: (1) She is over age 59.5; and (2) It has been more than five years since January 1 of the year that Francine made her first Roth IRA contribution (January 1, 2014). However, Francine’s’ Roth TSP account is not “qualified” because Francine has not met the “five-year forever” rule with respect to her Roth TSP account. Francine will fulfill the “five-year forever” rule as of January 1, 2025. If Francine were to rollover her Roth TSP account to her Roth IRA before January 1, 2025, then her Roth IRA would become “tainted”. She would then have to wait until January 1,2025 in order to make income-tax free withdrawals from her merged Roth IRA account which consists of Roth IRA and Roth TSP funds.
Note that the “five-year 10 percent penalty” rule is not an issue when it comes to the rollover of the Roth TSP to a Roth IRA. This is because a Roth TSP participant cannot withdraw from his or her Roth TSP account until the participant is at least age 59.5.
Keeping Track of the “Five-Year” Rules with Respect to Roth IRA and Roth TSP Distributions
It is the responsibility of a Roth IRA owner and a Roth TSP participant to keep track of the “five-year forever” rule and the “five-year 10 percent penalty” rule. A Roth IRA custodian may have indicated that the rules have been satisfied on Form 1099-R when a Roth IRA distribution is taken, but not always. When Roth IRAs are transferred or rolled over, the Roth IRA custodian or the TSP (when it comes to the Roth TSP) will specify whether the five-year rules have been satisfied.
Adding to the problem of keeping track of the five-year rules is the fact that there is no requirement that a Roth IRA owner or a Roth TSP participant report their contributions on a federal income tax return. It is therefore important for both Roth IRA owners and Roth TSP participants to keep close track of both Roth IRA and Roth TSP contributions and traditional IRA conversions to Roth IRAs. In so doing, they can monitor the five-year rules.
With respect to a Roth IRA, the best source for “five-year rule tracking” is IRS Form 5498 (IRA Contribution Information). Roth IRA custodians report both Roth IRA contributions and conversions on Form 5498. Since Form 5498 essentially “timestamps” when a Roth IRA contribution or conversion is made, the Roth IRA owner can simply add five years to determine when each five-year rule has been satisfied.
When it comes to the Roth TSP, a Roth TSP participant is encouraged to contact the TSP Service Office and ask in which year the participant made his or her first contribution to the Roth TSP. The “five-year start date” is January of that year, no matter which month during the calendar year the TSP participant made the Roth TSP contribution.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.