tIRA to TSP and Prorata rule

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rick51
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tIRA to TSP and Prorata rule

Post by rick51 » Tue Jan 08, 2019 10:36 am

If you have a traditional IRA with non-deductible (taxed) contributions as well as deductible (tax-deferred) contributions, can you move just the tax-deferred funds to your tax-deferred TSP account? The TSP help line thinks maybe yes, Vanguard (my IRA custodian) is not sure and views it as tax question anyway. The forum has many discussions on moving IRA funds but I can't find one specific to my question. I'd also like to find some official citation, my call to the IRS was not definitive either. Its not clear to me if the prorata rule applies in this instance.

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Earl Lemongrab
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Re: tIRA to TSP and Prorata rule

Post by Earl Lemongrab » Tue Jan 08, 2019 2:30 pm

Yes. Review the forms and publications here:

https://www.tsp.gov/forms/transfersAndRollovers.html

rkhusky
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Re: tIRA to TSP and Prorata rule

Post by rkhusky » Tue Jan 08, 2019 2:42 pm

In any case, the TSP won't accept non-deductible (taxed) traditional contributions. As long as Vanguard can separate out the tax-deferred part and will certify to that effect, the TSP will accept it. See form TSP-60 at the link above.

magicrat
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Re: tIRA to TSP and Prorata rule

Post by magicrat » Tue Jan 08, 2019 3:06 pm

I once attempted to roll an IRA into an employer plan. The employer plan required Vanguard to certify that the money was pre-tax. Vanguard refused to certify, yet sent the funds anyway, creating a huge mess.

rkhusky
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Re: tIRA to TSP and Prorata rule

Post by rkhusky » Tue Jan 08, 2019 5:02 pm

If the OP has trouble with Vanguard, perhaps he should next attempt to separate the money into different funds before attempting the transfer, for example put the tax-deferred money into a money market fund.

It might also be worthwhile to have Vanguard send the TSP-60 back to the OP, to make sure they filled it out properly, before forwarding on to the TSP.
edit: This may cause delays - the TSP likes to receive the form and the check together.
Last edited by rkhusky on Tue Jan 08, 2019 8:12 pm, edited 1 time in total.

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Earl Lemongrab
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Re: tIRA to TSP and Prorata rule

Post by Earl Lemongrab » Tue Jan 08, 2019 5:17 pm

The TSP form has a section for the participant to affirm that the funds are eligible. That's similar to Megacorp's form. No need for the custodian to do anything.

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Re: tIRA to TSP and Prorata rule

Post by rkhusky » Tue Jan 08, 2019 6:28 pm

Earl Lemongrab wrote:
Tue Jan 08, 2019 5:17 pm
The TSP form has a section for the participant to affirm that the funds are eligible. That's similar to Megacorp's form. No need for the custodian to do anything.
Section II of form TSP-60 must be filled out by the custodian. (At least it doesn't need to be notarized like the withdrawal forms)

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Re: tIRA to TSP and Prorata rule

Post by jchris » Tue Jan 08, 2019 7:32 pm

You can definitely do this. I had this exact situation in 2016. Based on advice received here, I rolled the non-deductible basis portion of the IRA into my Roth, and then rolled the remaining deductible portion of the IRA into the TSP using Form TSP-60. Vanguard will not be able to certify to the TSP that your IRA contributions being rolled to TSP are pre-tax, but this is no problem. The TSP-60 form anticipates it. If Vanguard does not want to complete the certification portion of the form, the TSP will accept a letter from Vanguard on their letterhead simply confirming that the funds are being transferred from a qualified plan. My rollover went without a hitch.

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Re: tIRA to TSP and Prorata rule

Post by Alan S. » Tue Jan 08, 2019 8:17 pm

jchris wrote:
Tue Jan 08, 2019 7:32 pm
You can definitely do this. I had this exact situation in 2016. Based on advice received here, I rolled the non-deductible basis portion of the IRA into my Roth, and then rolled the remaining deductible portion of the IRA into the TSP using Form TSP-60. Vanguard will not be able to certify to the TSP that your IRA contributions being rolled to TSP are pre-tax, but this is no problem. The TSP-60 form anticipates it. If Vanguard does not want to complete the certification portion of the form, the TSP will accept a letter from Vanguard on their letterhead simply confirming that the funds are being transferred from a qualified plan. My rollover went without a hitch.

jchris,

In looking at the TSP 60, I did not see where the form anticipates that the IRA custodian is unable to represent that the rollover contains no IRA basis. Their operating practices do anticipate that and so they accepted your rollover, but their form is inconsistent with their operating practices. There are two places in the Gen Info section that state that the TSP cannot accept IRA basis, but the IRA custodian signed certification states that the IRA custodian must certify that the rollover meets the requirements on the Gen Info section. Vanguard is totally correct in refusing to sign the form.

Seems like the TSP needs to update the TSP 60 to reflect their operating practices and the capability of the IRA custodian. Vanguard is totally correct not to sign the certification as they do not have the data to make the certification. In fact, even if Vanguard knew everything there was to know about THEIR IRA, they obviously know nothing about any other IRAs the participant owns and what the TSP receives reflects the composition of ALL IRAs owned by the participant, not just the one being transferred.

rkhusky
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Re: tIRA to TSP and Prorata rule

Post by rkhusky » Tue Jan 08, 2019 9:26 pm

jchris wrote:
Tue Jan 08, 2019 7:32 pm
You can definitely do this. I had this exact situation in 2016. Based on advice received here, I rolled the non-deductible basis portion of the IRA into my Roth, and then rolled the remaining deductible portion of the IRA into the TSP using Form TSP-60.
Are you sure you did it in the above order? It seems like the pro rata rule would have come into play in the Roth conversion when you have deductible and non-deductible components.

In this article (https://www.kitces.com/blog/the-impact- ... -payments/), the author says that one should transfer the deductible portion first and then do the Roth conversion.
Notably, though, since the IRA aggregation rule only applies to IRA accounts, Jenny does have a potential workaround – she can roll over the existing pre-tax IRA funds into an employer retirement plan, which separates them from the IRA-only aggregation rule. Once rolled over, she can now convert the remaining now-just-non-deductible funds in the IRA, to complete the Roth transaction. And in point of fact, the rules under IRC Section 408(d)(3)(A)(ii) explicitly state that when a rollover occurs from an IRA to an employer retirement plan, the pro-rata rule does not apply and the pre-tax funds are rolled over first. Which means, ironically, the rules operate perfectly to allow any ‘unwanted’ pre-tax dollars to be “siphoned off” from the IRA to a 401(k) or other employer retirement plan, so the after-tax remainder can be converted! The caveat, of course, is that the strategy is only feasible if the saver has an employer retirement plan that accepts roll-ins in the first place!

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Earl Lemongrab
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Re: tIRA to TSP and Prorata rule

Post by Earl Lemongrab » Wed Jan 09, 2019 2:58 am

rkhusky wrote:
Tue Jan 08, 2019 9:26 pm
jchris wrote:
Tue Jan 08, 2019 7:32 pm
You can definitely do this. I had this exact situation in 2016. Based on advice received here, I rolled the non-deductible basis portion of the IRA into my Roth, and then rolled the remaining deductible portion of the IRA into the TSP using Form TSP-60.
Are you sure you did it in the above order? It seems like the pro rata rule would have come into play in the Roth conversion when you have deductible and non-deductible components.
The pro-rata is done based on the status of the IRA accounts on 12/31 of the year of the conversion. Refer to form 8606 and its instructions. The status of the IRAs at the time of conversion does not matter. Just as you can't do a conversion with no pretax IRA amounts then do a rollover from a qualified plan into an IRA at a later point in the year and avoid pro-rata.

Doing the conversion first used to be the recommended method on Bogleheads, but the removal of recharacterization for conversions has made that riskier.

jchris
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Re: tIRA to TSP and Prorata rule

Post by jchris » Wed Jan 09, 2019 8:22 am

Alan S. wrote:
Tue Jan 08, 2019 8:17 pm
jchris wrote:
Tue Jan 08, 2019 7:32 pm
You can definitely do this. I had this exact situation in 2016. Based on advice received here, I rolled the non-deductible basis portion of the IRA into my Roth, and then rolled the remaining deductible portion of the IRA into the TSP using Form TSP-60. Vanguard will not be able to certify to the TSP that your IRA contributions being rolled to TSP are pre-tax, but this is no problem. The TSP-60 form anticipates it. If Vanguard does not want to complete the certification portion of the form, the TSP will accept a letter from Vanguard on their letterhead simply confirming that the funds are being transferred from a qualified plan. My rollover went without a hitch.

jchris,

In looking at the TSP 60, I did not see where the form anticipates that the IRA custodian is unable to represent that the rollover contains no IRA basis. Their operating practices do anticipate that and so they accepted your rollover, but their form is inconsistent with their operating practices. There are two places in the Gen Info section that state that the TSP cannot accept IRA basis, but the IRA custodian signed certification states that the IRA custodian must certify that the rollover meets the requirements on the Gen Info section. Vanguard is totally correct in refusing to sign the form.

Seems like the TSP needs to update the TSP 60 to reflect their operating practices and the capability of the IRA custodian. Vanguard is totally correct not to sign the certification as they do not have the data to make the certification. In fact, even if Vanguard knew everything there was to know about THEIR IRA, they obviously know nothing about any other IRAs the participant owns and what the TSP receives reflects the composition of ALL IRAs owned by the participant, not just the one being transferred.
Alan - I just now pulled up from my file archives the TSP-60 I used in 2016 for my rollover. I don't know whether TSP has changed this form recently, but here is what the instructions for the (then) form said regarding Section II. These are instructions to the IRA custodian:

"If you are unwilling to complete this section, submit an IRS Letter of Determination or a letter on the organization’s letterhead confirming that the funds are being transferred (or rolled over) from a qualified plan. Otherwise, we cannot deposit the funds into the participant’s account."

So this is what I meant by the form anticipating that the custodian may not want to certify that IRA contributions are pre-tax.

jchris

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Re: tIRA to TSP and Prorata rule

Post by jchris » Wed Jan 09, 2019 8:30 am

rkhusky wrote:
Tue Jan 08, 2019 9:26 pm
jchris wrote:
Tue Jan 08, 2019 7:32 pm
You can definitely do this. I had this exact situation in 2016. Based on advice received here, I rolled the non-deductible basis portion of the IRA into my Roth, and then rolled the remaining deductible portion of the IRA into the TSP using Form TSP-60.
Are you sure you did it in the above order? It seems like the pro rata rule would have come into play in the Roth conversion when you have deductible and non-deductible components.

In this article (https://www.kitces.com/blog/the-impact- ... -payments/), the author says that one should transfer the deductible portion first and then do the Roth conversion.
Notably, though, since the IRA aggregation rule only applies to IRA accounts, Jenny does have a potential workaround – she can roll over the existing pre-tax IRA funds into an employer retirement plan, which separates them from the IRA-only aggregation rule. Once rolled over, she can now convert the remaining now-just-non-deductible funds in the IRA, to complete the Roth transaction. And in point of fact, the rules under IRC Section 408(d)(3)(A)(ii) explicitly state that when a rollover occurs from an IRA to an employer retirement plan, the pro-rata rule does not apply and the pre-tax funds are rolled over first. Which means, ironically, the rules operate perfectly to allow any ‘unwanted’ pre-tax dollars to be “siphoned off” from the IRA to a 401(k) or other employer retirement plan, so the after-tax remainder can be converted! The caveat, of course, is that the strategy is only feasible if the saver has an employer retirement plan that accepts roll-ins in the first place!
I transferred the non-deductible contributions to my Roth first. I did this in order to prevent the situation where, when rolling the deductible contributions first, during the few days that the remaining non-deductible contributions are sitting in the TIRA, their value increases prior to rolling them to the Roth. Then I would have been left with a non-zero value in my TIRA after both transfers were done. I was not aware of the IRS instructions to do it the other way. Both stages occurred within several days, so hopefully this should not be any problem.

jchris

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Earl Lemongrab
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Re: tIRA to TSP and Prorata rule

Post by Earl Lemongrab » Wed Jan 09, 2019 11:33 am

jchris wrote:
Wed Jan 09, 2019 8:30 am
I transferred the non-deductible contributions to my Roth first. I did this in order to prevent the situation where, when rolling the deductible contributions first, during the few days that the remaining non-deductible contributions are sitting in the TIRA, their value increases prior to rolling them to the Roth. Then I would have been left with a non-zero value in my TIRA after both transfers were done. I was not aware of the IRS instructions to do it the other way. Both stages occurred within several days, so hopefully this should not be any problem.
That quote was from a blogger, not the IRS. The IRS has no instructions on how to accomplish backdoor Roth.

jchris
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Re: tIRA to TSP and Prorata rule

Post by jchris » Wed Jan 09, 2019 1:12 pm

Earl Lemongrab wrote:
Wed Jan 09, 2019 11:33 am
jchris wrote:
Wed Jan 09, 2019 8:30 am
I transferred the non-deductible contributions to my Roth first. I did this in order to prevent the situation where, when rolling the deductible contributions first, during the few days that the remaining non-deductible contributions are sitting in the TIRA, their value increases prior to rolling them to the Roth. Then I would have been left with a non-zero value in my TIRA after both transfers were done. I was not aware of the IRS instructions to do it the other way. Both stages occurred within several days, so hopefully this should not be any problem.
That quote was from a blogger, not the IRS. The IRS has no instructions on how to accomplish backdoor Roth.
OK - thanks. Given what you said above regarding the pro rata rule applying to the status of IRA accounts as of 12/31 of the year of the conversion, I think I am probably ok.

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Earl Lemongrab
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Re: tIRA to TSP and Prorata rule

Post by Earl Lemongrab » Wed Jan 09, 2019 2:22 pm

jchris wrote:
Wed Jan 09, 2019 1:12 pm
OK - thanks. Given what you said above regarding the pro rata rule applying to the status of IRA accounts as of 12/31 of the year of the conversion, I think I am probably ok.
It's not like you could do much about it now anyway.

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rick51
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Re: tIRA to TSP and Prorata rule

Post by rick51 » Thu Jan 10, 2019 8:32 am

Thanks to all for the replies. I did speak with the TSP again and they confirmed what jchris has said about section II of form TSP- 60. They will accept a letter certifying its a qualified plan, if they won't complete the TSP-60, and I can specify the amount to transfer. I'll give Vanguard another call with this information.

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rick51
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Re: tIRA to TSP and Prorata rule

Post by rick51 » Wed Mar 13, 2019 4:41 pm

So if I can complicate my original TSP post, which I think might apply to any 401(K) type plan that allows IRA to employer plan transfers - What if one transfers most of the pretax dollars back to the employee plan (TSP in my case) leaving a tIRA that is now mostly post tax dollars. I assume if you move the remaining tIRA dollars to a ROTH you just pay the tax on the few pre tax dollars remaining; furthermore, what if you wait a few years and the value of the tIRA falls below your basis? I ask all this to better understand how the pro rata rule might apply to the original transfer, if it does at all?

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Earl Lemongrab
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Re: tIRA to TSP and Prorata rule

Post by Earl Lemongrab » Wed Mar 13, 2019 5:14 pm

rick51 wrote:
Wed Mar 13, 2019 4:41 pm
So if I can complicate my original TSP post, which I think might apply to any 401(K) type plan that allows IRA to employer plan transfers - What if one transfers most of the pretax dollars back to the employee plan (TSP in my case) leaving a tIRA that is now mostly post tax dollars. I assume if you move the remaining tIRA dollars to a ROTH you just pay the tax on the few pre tax dollars remaining; furthermore, what if you wait a few years and the value of the tIRA falls below your basis? I ask all this to better understand how the pro rata rule might apply to the original transfer, if it does at all?
You can do that and many people do. See numerous threads on the topic.

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Re: tIRA to TSP and Prorata rule

Post by Alan S. » Wed Mar 13, 2019 8:11 pm

rick51 wrote:
Wed Mar 13, 2019 4:41 pm
So if I can complicate my original TSP post, which I think might apply to any 401(K) type plan that allows IRA to employer plan transfers - What if one transfers most of the pretax dollars back to the employee plan (TSP in my case) leaving a tIRA that is now mostly post tax dollars. I assume if you move the remaining tIRA dollars to a ROTH you just pay the tax on the few pre tax dollars remaining; furthermore, what if you wait a few years and the value of the tIRA falls below your basis? I ask all this to better understand how the pro rata rule might apply to the original transfer, if it does at all?
The original transfer to the TSP? Pro rating does not apply to transfers from IRAs to qualified plans. There is a special rule that all pre tax dollars in all IRAs transfers first. This special rule is in Pub 590 A (approx. p 21) and in the tax code. The amount that is pre tax is determined at the time of the direct rollover and is not subject to change later in the year or in later years. Of course, if you roll over more than your pre tax balance, then you are rolling over basis and there are problems created for the TSP, which must distribute those amount back out of the plan.

After the transfer, your IRA value could fall below the amount of Form 8606 basis, meaning all conversions would be tax free. But you would have basis left over. Depending on your transactions, this leftover basis could be erased, or it could be preserved for future use.

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rick51
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Re: tIRA to TSP and Prorata rule

Post by rick51 » Thu Mar 14, 2019 6:36 am

Thank you Alan S. Pub 590A, p. 21 is exactly the sort of reference I was looking for.

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