[Can an inherited TSP be transferred to an inherited Roth IRA?]

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
CCRewards
Posts: 16
Joined: Tue Feb 23, 2016 10:49 am

[Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by CCRewards »

[Moved into a new thread from: Improving the TSP [for current participants] --admin LadyGeek]

Just a side question (the only reason I ask it here is b/c this is where all the "TSP Knowledge" is located on the forum)...

Can an inherited traditional TSP (non-spousal) be transferred to an inherited Roth IRA like Vanguard, all in one fell swoop?

I know that a traditional TSP can be transferred to a Roth IRA (like Vanguard) all in one fell swoop (and this avoids state taxes in many many states). I've had one Vanguard agent refer to it as an "on the fly" transfer.
retiredjg
Posts: 42270
Joined: Thu Jan 10, 2008 12:56 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by retiredjg »

I think your only choice is to transfer the inherited TSP to an inherited IRA. However, my understanding is that an inherited IRA cannot be converted to Roth IRA.
User avatar
celia
Posts: 11547
Joined: Sun Mar 09, 2008 6:32 am
Location: SoCal

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by celia »

No. Inherited retirement accounts can’t be converted to Roths. However, you can withdraw and pay the same taxes as if you converted which will bring down the account value to help lower future RMDs.
User avatar
Swee'pea
Posts: 11
Joined: Sun Jan 06, 2019 2:15 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by Swee'pea »

Interesting question. I am collecting information on the TSP for my eventual beneficiary(ies). I agree that an inherited traditional TSP account can be transferred to an inherited traditional IRA (and Roth to Roth), but an inherited traditional to Roth conversion is not allowed. In addition, be aware of the statement below (from the TSP web site).

“Your Beneficiaries
In the event of your death, the money in your beneficiary participant account cannot remain in the TSP. We must distribute it directly to your beneficiary(ies). These payments cannot be transferred or rolled over into a traditional IRA, an eligible employer plan, a Roth IRA, or an inherited IRA.”

I understand this to mean that the entire balance of a beneficiary TSP account will be immediately paid out and taxed upon the death of the original beneficiary. Although this isn't directly relevant to your question, it might factor into your decision to move funds from an inherited TSP to an inherited IRA, depending on your circumstances.

Helpful information in these publications.

Managing Your Account for Beneficiary Participants
https://www.tsp.gov/publications/tspbk32.pdf

Your TSP Account A guide for Beneficiary Participants
https://www.tsp.gov/publications/tspbk33.pdf
chemocean
Posts: 267
Joined: Mon Dec 19, 2016 9:45 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by chemocean »

Swee'pee is correct below is a previously written post on the subject:

Estate planning is critical when a large amount of your assets are in TSP. If you are married and your spouse is the beneficiary of your TSP, a spousal beneficiary account will automatically be set up in his/her name upon TSP receiving your death certificate. If the beneficiary is a non-spousal beneficiary(s), TSP will be send a form to fill out to them once they receive your death certificate. The non-spousal beneficiaries have a limited time (either 60 or 90 days) to return the form. One opinion of the form of a beneficiary of the TSP OWNER is to transfer the TSP funds into an already established inherited IRA. I don’t know out the SECURE Act affects this this transfer. If TSP does not receive the form in the required time, your non-spousal beneficiary(s) will receive a taxable distribution. All this can be planned for ahead of time.
The one catch with TSP is that the beneficiaries of a SPOUSAL beneficiary account DO NOT have the option of transferring their inheritance into an inherited IRA. A taxable distribution will be made upon TSP receiving the death certificate of the surviving spousal.
Besides this estate planning issue, the other disadvantage of TSP is that you cannot convert to a Roth account once contributions went into TSP on pre-tax basis. Also, for retirement planning, qualified charitable distributions (QCD) cannot be made from your TSP. More of my pre-tax retirement assets are in TSP than in my IRAs. As I convert my traditional IRA to a Roth IRA, I will be transferring funds from TSP to my traditional IRA so that all my charitable contributions are made as a QCD this is part of my RMD when I turn 72. The G fund is unique as far as the risk/benefit ratio is concerned. Since transfers are made on a pro-rata basis, I will need to readjust my TSP allocation percentages after each distributions so that the $ value in G fund
retiredjg
Posts: 42270
Joined: Thu Jan 10, 2008 12:56 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by retiredjg »

Agree with these last two posts.

CCRewards, you might be allowed to leave the money in the TSP as a beneficiary rather than roll it to an inherited IRA....but you should not do it. If you get hit by a bus, it will be distributed to your beneficiary(s) immediately and the entire thing will be a taxable distribution for them in one year.
Topic Author
CCRewards
Posts: 16
Joined: Tue Feb 23, 2016 10:49 am

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by CCRewards »

I've asked the wrong question, but it looks like it sparked an interesting discussion!

There's a long thread somewhere where one user owns a TSP account while his spouse doesn't. Upon his death, the TSP goes directly to his spouse. Part of his "upon death" instructions for his wife is to then transfer the entire TSP balance to outside the TSP ASAP. The reason is, as the discussion above shows, second-degree beneficiaries (or even non-spousal beneficiaries) are treated poorly by the TSP, and funds are essentially liquidated out in cash, creating a major taxable event. I truly wish the TSP made this information more available as I imagine it affects many people, but it's such an "in the weeds" question. How many spouses know to immediately exit the TSP after their TSP-owning spouse passes, if their goal is to leave money to their kids, tax-free (a common goal)?

Here's the question I meant to actually ask:

As the original owner of a TSP, when I pass, can my traditional TSP balance be transferred to a non-spousal inherited Roth IRA (children beneficiaries)? My goal is to "Rothify" as the money exits the TSP to avoid state taxes, and I'm wondering if it's possible to accomplish this for non-spousal beneficiaries. I've been successfully doing this for years as I convert directly from traditional TSP to Roth IRA, without ever having to own, create, or open a traditional IRA.
Alan S.
Posts: 9979
Joined: Mon May 16, 2011 6:07 pm
Location: Prescott, AZ

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by Alan S. »

CCRewards wrote: Fri Oct 02, 2020 10:26 am
Here's the question I meant to actually ask:

As the original owner of a TSP, when I pass, can my traditional TSP balance be transferred to a non-spousal inherited Roth IRA (children beneficiaries)? My goal is to "Rothify" as the money exits the TSP to avoid state taxes, and I'm wondering if it's possible to accomplish this for non-spousal beneficiaries. I've been successfully doing this for years as I convert directly from traditional TSP to Roth IRA, without ever having to own, create, or open a traditional IRA.
Yes, since this is a non IRA plan, a non spouse beneficiary can do a direct rollover to an inherited Roth IRA as well as the more typical inherited TIRA. Of course, your beneficiaries will be taxed on the amount rolled to an inherited Roth IRA from pre tax traditional TSP dollars. Accordingly, they may wish to limit the amount rolled into an inherited Roth IRA, and have the rest rolled to an inherited TIRA.

Either way, they will be subject to the 10 year rules of the Secure Act, but they can let the inherited Roth accumulate since a lump sum distribution at the end of the 10 year period will be non taxable.
chemocean
Posts: 267
Joined: Mon Dec 19, 2016 9:45 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by chemocean »

CCRewards wrote: Fri Oct 02, 2020 10:26 am Here's the question I meant to actually ask:

As the original owner of a TSP, when I pass, can my traditional TSP balance be transferred to a non-spousal inherited Roth IRA (children beneficiaries)? My goal is to "Rothify" as the money exits the TSP to avoid state taxes, and I'm wondering if it's possible to accomplish this for non-spousal beneficiaries. I've been successfully doing this for years as I convert directly from traditional TSP to Roth IRA, without ever having to own, create, or open a traditional IRA.
The answer is YES you can, but you have to do it correctly and quickly.
Once your Personal Representative sends Form 17 to TSP with death certificate, TSP will determine the beneficiaries (spouse or non-spousal).
If the beneficiary is a non-spousal, TSP will send a packet that includes Form TSP-81 (TSP-81 is not available on the web but you can call TSP and request the form for estate planning purposes). The non-spousal beneficiary then has 60 days to get the completed package back to TSP. In order for the process to occur correctly, the following needs to happen in 60 days,
1) The TSP package needs to be delivered to non-spousal beneficiary (hopefully the address at TSP is correct and mail forwarding is working),
2) The non-spousal beneficiary needs to open an inherited IRA at a financial institution,
3) The non-spousal beneficiary needs to fill out form TSP-81 with details of the inherited IRA,
4) The non-spousal beneficiary needs to send the form to the financial institution,
5) The financial institution needs to certify the acceptance of the rollover,
6) The financial institution needs send the form back to non-spousal beneficiary,
7) The non-spousal beneficiary needs have his/her signature notarized on form TSP-81,
8) The non-spousal beneficiary needs send the form TSP-81 back to TSP.

ALL WITHIN 60 days, or the non-spousal beneficiary will be a taxable lump sum distribution.
The only actions that I can think of that will speed up the process,
The original TSP owner can make sure the address(es) of the non-spousal beneficiary is correct and up to date,
The non-spousal beneficiary can establish the inherited IRA before the Personal Representative sends Form 17 to TSP with death certificate.

I think most financial institutions will require the rollover to go into a Traditional inherited IRA first, and THEN the Roth conversion can occur at the financial institution. Even converting a Traditional IRA in one mutual fund to a Roth IRA at Vanguard in a different mutual fund is a two-step process.
MichDad
Posts: 562
Joined: Sat Apr 20, 2013 3:50 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by MichDad »

chemocean wrote: Sat Oct 03, 2020 10:36 am
CCRewards wrote: Fri Oct 02, 2020 10:26 am Here's the question I meant to actually ask:

As the original owner of a TSP, when I pass, can my traditional TSP balance be transferred to a non-spousal inherited Roth IRA (children beneficiaries)? My goal is to "Rothify" as the money exits the TSP to avoid state taxes, and I'm wondering if it's possible to accomplish this for non-spousal beneficiaries. I've been successfully doing this for years as I convert directly from traditional TSP to Roth IRA, without ever having to own, create, or open a traditional IRA.
The answer is YES you can, but you have to do it correctly and quickly.
Once your Personal Representative sends Form 17 to TSP with death certificate, TSP will determine the beneficiaries (spouse or non-spousal).
If the beneficiary is a non-spousal, TSP will send a packet that includes Form TSP-81 (TSP-81 is not available on the web but you can call TSP and request the form for estate planning purposes). The non-spousal beneficiary then has 60 days to get the completed package back to TSP. In order for the process to occur correctly, the following needs to happen in 60 days,
1) The TSP package needs to be delivered to non-spousal beneficiary (hopefully the address at TSP is correct and mail forwarding is working),
2) The non-spousal beneficiary needs to open an inherited IRA at a financial institution,
3) The non-spousal beneficiary needs to fill out form TSP-81 with details of the inherited IRA,
4) The non-spousal beneficiary needs to send the form to the financial institution,
5) The financial institution needs to certify the acceptance of the rollover,
6) The financial institution needs send the form back to non-spousal beneficiary,
7) The non-spousal beneficiary needs have his/her signature notarized on form TSP-81,
8) The non-spousal beneficiary needs send the form TSP-81 back to TSP.

ALL WITHIN 60 days, or the non-spousal beneficiary will be a taxable lump sum distribution.
The only actions that I can think of that will speed up the process,
The original TSP owner can make sure the address(es) of the non-spousal beneficiary is correct and up to date,
The non-spousal beneficiary can establish the inherited IRA before the Personal Representative sends Form 17 to TSP with death certificate.

I think most financial institutions will require the rollover to go into a Traditional inherited IRA first, and THEN the Roth conversion can occur at the financial institution. Even converting a Traditional IRA in one mutual fund to a Roth IRA at Vanguard in a different mutual fund is a two-step process.
A copy of the TSP-81 is available on the Bogleheads Wiki. You cannot use this version for personal purposes. Note that it contains a "Do Not Reproduce" watermark and it will not be accepted by the TSP. You must get your own version of the TSP-81 from the TSP. Here's a link to the Bogleheads copy:

https://drive.google.com/file/d/1mHARTU ... GvVlO/view

MichDad
retiredjg
Posts: 42270
Joined: Thu Jan 10, 2008 12:56 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by retiredjg »

chemocean wrote: Sat Oct 03, 2020 10:36 am I think most financial institutions will require the rollover to go into a Traditional inherited IRA first, and THEN the Roth conversion can occur at the financial institution.
I have some question about this part. From my reading on the internet, only a spouse can convert an inherited IRA to Roth IRA. Non-spouses cannot so I'm not sure this part of your comment is correct for this poster.

What I did learn is that it is possible for a non-spouse to convert an inherited 401k to Roth IRA. The TSP is not a 401k but the rules for most things seem to be very similar so maybe that is possible.

If all I'be been reading is accurate, my guess is the money would have to go from TSP directly to Roth IRA. And taxes would be due which is why so few people do this.

I've been a happy TSP user since it started, but things like this 60 day limit make me consider that I should just leave them so my heirs don't have to jump through all these hoops.
Spirit Rider
Posts: 13644
Joined: Fri Mar 02, 2007 2:39 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by Spirit Rider »

@retirejg is correct.

A non-spouse beneficiary can not do a Roth conversion of an Inherited traditional IRA.

Under the PPA a non-spouse beneficiary can rollover an Inherited pre-tax qualified plan (in this case the TSP) to an Inherited Roth IRA.
retiredjg
Posts: 42270
Joined: Thu Jan 10, 2008 12:56 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by retiredjg »

I don't know what the PPA is, but that sounds like the answer to poster's question in a nutshell.

My question....would it be an ordinary Roth IRA (no distribution requirements) or an inherited Roth IRA (distribution required in 10 years for most people)?
Spirit Rider
Posts: 13644
Joined: Fri Mar 02, 2007 2:39 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by Spirit Rider »

Pension Protection Act of 2006.

Must be Inherited Roth IRA.
chemocean
Posts: 267
Joined: Mon Dec 19, 2016 9:45 pm

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by chemocean »

Page 2 of TSP-81 for rollover from Traditional TSP specifically allows rolling over into a inherited Roth IRA. The note in section VI. header specifically mentions the taxes will need to be paid "when you file your tax return for the year." if the non-spousal beneficiary rolls a traditional TSP to an inherited Roth IRA. I was not aware of the prohibition of Roth conversions of an inherited traditional IRA.
However, if the original TSP owner leaves all his/her funds in TSP, the non-spousal beneficiary may be paying the highest tax rate on the conversion of the entire traditional TSP amount. Form TSP-81 seems to allow rollover only to a Traditional inherited IRA OR a Roth inherited IRA, both not partial rollovers to both.
My plan for tax efficiency is to transfer yearly amounts from my traditional TSP to traditional IRA while I am alive in amounts that will allow me to convert my Traditional IRA to a Roth IRA to the top of my current tax rate each year while it still is beneficial tax-wise.
Topic Author
CCRewards
Posts: 16
Joined: Tue Feb 23, 2016 10:49 am

Re: [Can an inherited TSP be transferred to an inherited Roth IRA?]

Post by CCRewards »

Alan S. wrote: Fri Oct 02, 2020 6:59 pm Yes, since this is a non IRA plan, a non spouse beneficiary can do a direct rollover to an inherited Roth IRA as well as the more typical inherited TIRA. Of course, your beneficiaries will be taxed on the amount rolled to an inherited Roth IRA from pre tax traditional TSP dollars. Accordingly, they may wish to limit the amount rolled into an inherited Roth IRA, and have the rest rolled to an inherited TIRA.

Either way, they will be subject to the 10 year rules of the Secure Act, but they can let the inherited Roth accumulate since a lump sum distribution at the end of the 10 year period will be non taxable.
Perfect. Thanks for your succinct answer.
chemocean wrote: Sat Oct 03, 2020 10:36 am The answer is YES you can, but you have to do it correctly and quickly.
Once your Personal Representative sends Form 17 to TSP with death certificate, TSP will determine the beneficiaries (spouse or non-spousal).
If the beneficiary is a non-spousal, TSP will send a packet that includes Form TSP-81 (TSP-81 is not available on the web but you can call TSP and request the form for estate planning purposes). The non-spousal beneficiary then has 60 days to get the completed package back to TSP. In order for the process to occur correctly, the following needs to happen in 60 days,
1) The TSP package needs to be delivered to non-spousal beneficiary (hopefully the address at TSP is correct and mail forwarding is working),
2) The non-spousal beneficiary needs to open an inherited IRA at a financial institution,
3) The non-spousal beneficiary needs to fill out form TSP-81 with details of the inherited IRA,
4) The non-spousal beneficiary needs to send the form to the financial institution,
5) The financial institution needs to certify the acceptance of the rollover,
6) The financial institution needs send the form back to non-spousal beneficiary,
7) The non-spousal beneficiary needs have his/her signature notarized on form TSP-81,
8) The non-spousal beneficiary needs send the form TSP-81 back to TSP.

ALL WITHIN 60 days, or the non-spousal beneficiary will be a taxable lump sum distribution.
The only actions that I can think of that will speed up the process,
The original TSP owner can make sure the address(es) of the non-spousal beneficiary is correct and up to date,
The non-spousal beneficiary can establish the inherited IRA before the Personal Representative sends Form 17 to TSP with death certificate.
What an absolutely ridiculously long process...and it must be done while grieving the loss as well. I wonder if we can figure out a way to keep an updated "packet" of what the TSP sends beneficiaries upon a participant's death. Even speeding up one part of the process (mail processing and delivery time from TSP to beneficiary) seems like it would be hugely beneficial.

I think you can notarize the form before you send it to the financial institution and have them send the notarized form directly to TSP on your behalf. I've done this in the past when the financial institution had to tell TSP exactly what to write on distribution checks. I sent a notarized form to Vanguard and they filled their portion and sent it to TSP. Of course, I requested a copy of exactly what they sent TSP as well.
chemocean wrote: Sat Oct 03, 2020 10:36 am I think most financial institutions will require the rollover to go into a Traditional inherited IRA first, and THEN the Roth conversion can occur at the financial institution. Even converting a Traditional IRA in one mutual fund to a Roth IRA at Vanguard in a different mutual fund is a two-step process.
Posts below yours better address this question, but it looks like it's possible to go from traditional TSP to inherited Roth IRA in one move. The reason to do this is that many many states don't consider a distribution from the TSP to be a taxable event...there's this whole debate about state's rights vs federal rights. If the money is moved to a traditional inherited IRA and then converted to an inherited Roth IRA (is this even allowed?), the amount becomes fair game for state taxes for many states as the conversion was not from the distribution of a federal event, but rather an event outside of the TSP.
MichDad wrote: Sat Oct 03, 2020 10:59 am A copy of the TSP-81 is available on the Bogleheads Wiki. You cannot use this version for personal purposes. Note that it contains a "Do Not Reproduce" watermark and it will not be accepted by the TSP. You must get your own version of the TSP-81 from the TSP. Here's a link to the Bogleheads copy:

https://drive.google.com/file/d/1mHARTU ... GvVlO/view

MichDad
Thanks for the link. I remember a year (or two?) ago that there was a bunch of discussion about this elusive form. Thanks to whoever got a copy and uploaded it for the rest of us to see. Although I understand why it's watermarked, I sure wish it wasn't. Anything to speed up the process as alluded by chemocean would be useful. I can't imagine that this form changes format often.
retiredjg wrote: Sat Oct 03, 2020 11:22 am If all I'be been reading is accurate, my guess is the money would have to go from TSP directly to Roth IRA. And taxes would be due which is why so few people do this.

I've been a happy TSP user since it started, but things like this 60 day limit make me consider that I should just leave them so my heirs don't have to jump through all these hoops.
Agreed that taxes would be due, but that 10 year SECURE Act tax-free growth period might be quite attractive, especially if there's a life insurance payout, home sale, etc. coupled with the death of a participant. Just a side note, but the government seems to have a history of saying that RMDs aren't even required when the market is really down (or perceived to be down)...2008 and this year (when the market has actually gone up). I imagine that the "10 year" SECURE act could change to an "11 year" option if there is a major market drop in the 10th year.

I disagree with your latter statement specifically because of this thread. Since we now know that a traditional TSP to inherited Roth IRA is possible in one move, your heirs might save on state taxes.
Spirit Rider wrote: Sat Oct 03, 2020 12:21 pm @retirejg is correct.

A non-spouse beneficiary can not do a Roth conversion of an Inherited traditional IRA.

Under the PPA a non-spouse beneficiary can rollover an Inherited pre-tax qualified plan (in this case the TSP) to an Inherited Roth IRA.
Thanks for clarifying this.
chemocean wrote: Sat Oct 03, 2020 3:36 pm Page 2 of TSP-81 for rollover from Traditional TSP specifically allows rolling over into a inherited Roth IRA. The note in section VI. header specifically mentions the taxes will need to be paid "when you file your tax return for the year." if the non-spousal beneficiary rolls a traditional TSP to an inherited Roth IRA. I was not aware of the prohibition of Roth conversions of an inherited traditional IRA.
However, if the original TSP owner leaves all his/her funds in TSP, the non-spousal beneficiary may be paying the highest tax rate on the conversion of the entire traditional TSP amount. Form TSP-81 seems to allow rollover only to a Traditional inherited IRA OR a Roth inherited IRA, both not partial rollovers to both.
My plan for tax efficiency is to transfer yearly amounts from my traditional TSP to traditional IRA while I am alive in amounts that will allow me to convert my Traditional IRA to a Roth IRA to the top of my current tax rate each year while it still is beneficial tax-wise.
The official answer to the question is in the form...you're right. In fact, I would point to Section VII, "Transfer Information for Traditional Funds" wherein you list the account to which the funds are to be transferred; the informational blurb in Section VII says, "The account described here must be an inherited traditional IRA or an inherited Roth IRA."

Regarding your last point, do some research about how your state treats distributions from the TSP. You might be better off doing traditional TSP to Roth IRA in one move and leaving your traditional IRA as-is. In many states, this avoids state tax on the conversion.
Post Reply