How to Convert Your TSP to Roth IRA: A Simple Step-by-Step Guide

If you’re a federal employee or a member of the uniformed services, chances are you’re familiar with the Thrift Savings Plan (TSP). It’s a powerful retirement savings tool, but it comes with some limitations, especially when it comes to investment options and tax flexibility. One way to gain more control over your retirement funds is by converting your TSP to a Roth IRA. This move can provide tax-free growth, more investment choices, and greater flexibility for withdrawals. But the process can be confusing if you’re not sure where to start. This step-by-step guide will walk you through how to convert your TSP to a Roth IRA, in a clear and straightforward way.

1. Understand What a TSP and Roth IRA Are

Before making the switch, it’s important to understand both account types.

• TSP: This is a retirement savings plan for federal employees and military members. It works similarly to a 401(k), offering either traditional (pre-tax) or Roth (after-tax) contributions. However, it has limited investment choices.
• Roth IRA: A Roth IRA is an individual retirement account funded with after-tax dollars. Your money grows tax-free, and qualified withdrawals in retirement are also tax-free. It also offers a wider range of investment options.

Converting a traditional TSP to a Roth IRA is a taxable event. That means you’ll have to pay income taxes on the amount you convert.

2. Make Sure You’re Eligible to Roll Over Your TSP

You can’t roll over your TSP to a Roth IRA while you’re still working for the federal government. You must separate from federal service, either by retiring or resigning, before initiating the rollover.

After separating, you’ll have full access to your TSP and can choose to transfer it into a Roth IRA.

3. Decide Between a Direct or Indirect Rollover

You can move your TSP funds to a Roth IRA in two ways:

• Direct Rollover: The TSP sends the money directly to your Roth IRA provider. This is the easiest and safest way to do it. It also helps you avoid unnecessary tax complications.
• Indirect Rollover: The TSP sends the money to you, and you must deposit it into your Roth IRA within 60 days. If you miss the deadline, it could be counted as a withdrawal, leading to penalties and taxes.

To avoid trouble, a direct rollover is strongly recommended.

4. Prepare for Taxes

When you transfer money from a traditional TSP to a Roth IRA, you’ll owe income tax on the amount you convert. The IRS treats this as if you earned that amount as income in the year of the conversion.

Tips to manage the tax bill:

• Talk to a tax advisor to understand how much you’ll owe.
• Consider converting your TSP in smaller amounts over several years to reduce your tax burden.
• Set aside money to pay the taxes, since the TSP does not automatically withhold for taxes during a direct rollover to a Roth IRA.

If you already contributed to a Roth TSP, only the earnings portion may be taxable when rolled over to a Roth IRA.

5. Open a Roth IRA (If You Don’t Already Have One)

If you don’t have a Roth IRA yet, you’ll need to open one before transferring your TSP. Choose a trusted financial institution or online broker.

Look for:

• Low fees
• Good customer service
• Easy-to-use platform
• A wide variety of investment options

Once your Roth IRA is set up and ready, you can begin the rollover process.

6. Complete the Required TSP Forms

To transfer your TSP funds, you need to fill out one of the following forms:

• Form TSP-70: For a full withdrawal after separation
• Form TSP-77: For a partial withdrawal after separation

These forms allow you to specify a direct rollover and list the Roth IRA account where the funds will be sent. Make sure all account details are accurate to avoid delays.

It’s also helpful to contact your Roth IRA provider ahead of time to make sure they’re ready to receive the funds.

7. Pay the Taxes You Owe

Once the conversion is complete, make sure to pay the income taxes on the amount you moved from your traditional TSP. You can:

• Pay the full tax when filing your next return
• Make estimated quarterly payments to avoid penalties
• Adjust your withholding if you have other income sources

Don’t wait until tax season to plan for this, set the money aside early so you’re not caught off guard.

8. Reinvest and Monitor Your Roth IRA

After your funds arrive in your Roth IRA, decide how you want to invest them. Unlike the TSP’s limited options, Roth IRAs allow for a broad range of investments:

• Stocks
• Bonds
• Mutual funds
• ETFs
• Real estate investment trusts (REITs)

Make sure your investment choices match your retirement goals, risk tolerance, and timeline. You can also rebalance your portfolio over time to keep it aligned with your objectives.

Knowing how to convert your TSP to Roth IRA can give you more control, tax-free growth, and greater investment flexibility. While the process involves taxes and paperwork, it’s not as complicated as it might seem, especially when you follow each step carefully.

Start by separating from federal service, then choose a direct rollover, prepare for taxes, and set up your Roth IRA. Once the funds are transferred, you’ll be on your way to building a more flexible, tax-advantaged retirement future. Always consider speaking with a tax advisor or financial planner to ensure the conversion aligns with your overall retirement strategy.