Rollover of pre-tax tIRA earnings to TSP?

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cruzbay
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Rollover of pre-tax tIRA earnings to TSP?

Post by cruzbay » Wed Mar 27, 2019 1:27 pm

My husband has a TSP 401K account. In addition, he has an IRA-Contributory (tIRA) account to which we have made only non-deductible contributions. No pre-tax dollars have been contributed and it is recorded as such on the 8606. I would like to get this basis over to a Roth IRA and to roll the earnings portion into the TSP with the goal of paying no taxes now. Is this possible?

Spirit Rider
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Re: Rollover of pre-tax tIRA earnings to TSP?

Post by Spirit Rider » Wed Mar 27, 2019 1:37 pm

Yes, the TSP accepts rollover contributions of only pre-tax assets from an IRA.

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cruzbay
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Re: Rollover of pre-tax tIRA earnings to TSP?

Post by cruzbay » Wed Mar 27, 2019 2:01 pm

Thanks Spirit Rider! I intend to convert the post-tax basis dollars to a new Roth IRA and have any dollars in the account that are not listed on the 2018 8606 rolled over into the TSP. This is great! From now on, we will do the normal backdoor Roth conversion as we should have from the beginning.

Now for my situation:
I have a co-mingled Rollover IRA (about 50/50 pre- and post-tax contributions plus earnings) and a SEP IRA. It was suggested that I should open a Roth and convert a small amount from only the Rollover IRA, say $100 in order to test the pro-rata percentage and see what is taxed upon conversion. Also, this gets the 5 year ownership of the Roth clock ticking. For the rest, I think we need to wait until lower tax bracket years in early retirement. Any issues with doing this?

Alan S.
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Re: Rollover of pre-tax tIRA earnings to TSP?

Post by Alan S. » Wed Mar 27, 2019 2:32 pm

cruzbay wrote:
Wed Mar 27, 2019 2:01 pm
Thanks Spirit Rider! I intend to convert the post-tax basis dollars to a new Roth IRA and have any dollars in the account that are not listed on the 2018 8606 rolled over into the TSP. This is great! From now on, we will do the normal backdoor Roth conversion as we should have from the beginning.

Now for my situation:
I have a co-mingled Rollover IRA (about 50/50 pre- and post-tax contributions plus earnings) and a SEP IRA. It was suggested that I should open a Roth and convert a small amount from only the Rollover IRA, say $100 in order to test the pro-rata percentage and see what is taxed upon conversion. Also, this gets the 5 year ownership of the Roth clock ticking. For the rest, I think we need to wait until lower tax bracket years in early retirement. Any issues with doing this?
First, you no longer have a rollover IRA since regular IRA contributions have been made into that account. It is now a contributory IRA and some employers might refuse an IRA rollover of pre tax dollars for that reason. Such a rollover would allow you to convert your IRA basis amount tax free.

It is true that a small conversion or regular contribution starts the 5 year clock, but that is an overrated advantage. You can still withdraw all your regular and conversion contributions tax free anytime regardless of the 5 year clock. For most Roth owners who have recently made their first contributions, the earnings are only going to be a small portion of the total balance. Therefore, barring a unique situation, I think doing a "test" conversion is a waste of time to report it and to track it.

For example, if your pre tax IRA balance including the SEP is 100 k and you made 11k of non deductible contributions, the 89% of a conversion will be taxable. Convert $100 and your taxable income will be $89. If you were to withdraw that conversion within 5 years and are not 59.5, the taxable portion comes out first and you owe 10% penalty on it. So you have to not only keep track of the conversion year, but the split between the taxable and non taxable portions of the conversion to calculate the penalty. Therefore, I would not bother with an actual small conversion just to start the clock, but if you just want to understand the math, I suggest you complete a paper copy of Form 8606 and fill it in so you understand how the pro rating works.

Just to be clear, for each spouse, all their non Roth IRA accounts must be totaled up when completing an 8606. It does not matter which account received a ND contribution or which account funds a conversion, since Form 8606 treats all non Roth IRA accounts as one combined account.

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cruzbay
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Re: Rollover of pre-tax tIRA earnings to TSP?

Post by cruzbay » Wed Mar 27, 2019 3:06 pm

Thank you, Alan S, for taking the time to respond and educate me on this. I agree that the 'test' conversion is not worth it. I will look at the 8606 forms to calculate the pro rata split. Cheers!

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