Contributions to the Roth Thrift Savings Plan (TSP) continue to grow among federal employees. The Roth TSP has been available to most federal employees since 2012. But participation in the Roth TSP has surged particularly over the last five years. As a result of the passage of the Tax Cuts and Jobs Act of 2017, federal income tax rates have remained low since 2018. They will continue to remain low with the recent passage of the One Big Beautiful Bill Act (OBBBA).
Roth TSP Contributions
Roth TSP contributions are made with after-tax dollars (deducted from an employee’s after-taxed salary) and qualified withdrawals from the Roth TSP are income tax-free. This includes contributions and accrued earnings. Federal employees will therefore benefit when their Roth TSP accounts are withdrawn in retirement when federal income tax rates will likely be higher compared to what they are currently.
This column discusses the rules associated with the rollover a Roth TSP account to a Roth IRA. Federal employees and retirees are forewarned that the tax rules associated with Roth TSP to Roth IRA rollovers are challenging and confusing. One challenging rule involves the five-year holding period for both the Roth TSP and the Roth IRA. There are two five-year holding periods with separate rules. One five-year rule applies to the Roth TSP distribution/rollovers and a second five-year rule applies to the receiving Roth IRA account.
Some Reasons for Performing a Roth TSP to Roth IRA Rollover
There are two reasons why a federal employee separating from federal service may want to rollover Roth TSP funds to a Roth IRA. One reason is to take advantage of unlimited investment options. The Roth TSP investment options are somewhat limited. Another reason is that Roth IRA contributions can be accessed at any time, tax-free and penalty-free. The Roth TSP cannot be accessed while an employee is in federal service until the employee reaches age 59.5.
On the other hand, there are two reasons federal employees may want to keep their Roth TSP funds in the Roth TSP. One reason applies to Roth TSP participants who are concerned about shielding their Roth TSP funds from nonbankruptcy creditors are advised to leave their funds in the Roth TSP. Another reason applies to making Roth TSP contributions; there are also no federal employee adjusted gross income (AGI) restrictions like there are for federal employees who want to make Roth IRA contributions.
Three Types of Roth Rollover Funds
There are three types of funds involved in a Roth TSP-to Roth IRA rollover. They are:
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1. Rolled over Roth TSP contributions.
2. Rolled over earnings generated within the Roth TSP before the Roth TSP to Roth IRA rollover, and
3. Earnings generated within the Roth IRA on the Roth TSP rolled-over amounts after the Roth TSP rollover.
a. Rolled over Roth TSP contributions. Roth TSP contributions are made on after-tax basis, Roth TSP contributions are deducted from an employee’s after-tax salary. This means that Roth TSP contributions are always considered “basis” and therefore can be withdrawn from a Roth IRA without tax or penalty any time after a rollover.
b. Roth TSP rolled over accrued earnings. The treatment of accrued earnings on Roth TSP contributions generated within the Roth TSP before the rollover to a Roth IRA depends on whether the Roth TSP distribution is a qualified distribution.
A Roth TSP distribution is qualified if:
(1) The Roth TSP participant is age 59.5 or older, disabled or deceased; and
(2) A five-year holding period is satisfied. This period begins on January 1st of the year the employee made his or her first Roth TSP contribution. The five-year period applies only to contributions made to the Roth TSP (or Roth qualified retirement plan rollovers to the Roth TSP or traditional TSP conversions to the Roth TSP).
If the Roth TSP distribution is qualified, then pre-rollover Roth TSP earnings also go into the rollover Roth IRA as basis and are immediately available for a tax and penalty-free distribution after the rollover. The following example illustrates:
Example 1. Allan made his first Roth TSP contribution on December 10, 2021. Allan’s five-year Roth TSP holding period began on January 1, 2021. On March 15,2026 when Allan is aged 60, he rolls over his Roth TSP account worth $400,000 ($275,000 contributions and $125,000 accrued earnings) to his Roth IRA. Since Allan is at least 59.5 and has satisfied the five-year Roth TSP holding period, his Roth TSP distribution is qualified. As such, he can withdraw his entire $400,000 from his Roth IRA penalty-free and tax-free.
If the Roth TSP distribution is not qualified, then pre-rollover Roth TSP accrued earnings can be withdrawn if the eventual Roth IRA distribution is qualified. Those earnings can be withdrawn penalty-free if the Roth IRA owner is at least age 59.5 or qualifies as a penalty exception.
A Roth IRA distribution is qualified if:
(1) The Roth IRA owner is age 59.5 or older, disabled, diseased or using the distribution for first-time homebuyer expenses; and
(2) A Roth IRA five-year holding period has been satisfied. This five-year period begins on January 1st of the year the first Roth IRA contribution, or Roth IRA conversion, is made for any Roth IRA. Note that the Roth TSP holding period cannot be credited in determining whether the Roth IRA holding period is satisfied.
The following example illustrates when the Roth TSP distribution is not qualified.
Example 2. Adrienne made her first Roth TSP contribution in September 2023. She retired from federal service on December 31,2025 at age 60 and immediately rolls over her entire $40,000 Roth TSP account balance ($30,000 contributions and $10,000 accrued earnings) to her first Roth IRA that she opened in 2013.
Adrienne’s Roth TSP distribution is not qualified because she did not satisfy the five-year Roth TSP holding period which would have been January 1,2023 through December 31, 2027. That means only the $30,000 of Adrienne’s Roth TSP contributions will be rolled over on a tax-free basis.
On March 2, 2026, Adrienne at age 61 decides to withdraw her entire $40,000 Roth IRA. This assumes that no post-rollover earnings have been generated. Adrienne will have a qualified Roth IRA distribution because she opened her Roth IRA more than five years earlier, in 2013, and she is over 59.5. Note that it does not matter that Adrienne only started contributing to the Roth TSP three years before she rolled over her Roth TSP account to a Roth IRA. This is because the Roth TSP funds always assume the “clock” of the Roth IRA. This means the entire $40,000 Roth IRA distribution is tax-free, and since Adrienne is over age 59.5, it is also penalty-free.
c. Post rollover earnings. Earnings generated within the Roth IRA on Roth TSP rolled over amounts after the rollover can be withdrawn tax-free only if the Roth IRA distribution is qualified (see above for the definition of a qualified Roth IRA distribution). Post-Roth TSP rollover earnings are available for a penalty-free withdrawal on or after age 59.5 or if a penalty exception applies. The following example illustrates:
Example 3. Lawrence started contributing to the Roth TSP in 2014. Shortly after retiring from federal service on September 30,2025 at age 62, Lawrence rolled over his Roth TSP account balance worth $550,000 ($350,000 contributions and $200,000 accrued earnings) to his very first Roth IRA. Lawrence’s Roth TSP is qualified. This allows him to withdraw the entire $550,000, tax-free and penalty-free, at any time after the Roth TSP to Roth IRA rollover.
However, Lawrence’s Roth IRA holding period began January 1, 2025 (January 1st of the year he opened his first Roth IRA contribution) and does not end until December 31, 2029. Note that Lawrence cannot transfer his 12-year Roth TSP holding period to satisfy his Roth IRA holding period.
This means that if Lawrence withdraws his entire Roth IRA account before January 1,2030, the Roth IRA distribution will be non-qualified. He will be taxed on the post-Roth TSP to Roth IRA earnings. But since Lawrence is older than age 59.5, he will not be penalized (no 10 percent penalty) on the earnings.
Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER®, Chartered Life Underwriter, Chartered Financial Consultant, Registered Health Underwriter and Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, located at 833 Bromley Street Suite A, Silver Spring, MD 20902-3019
