Description

• A TSP is an individual retirement savings account that is tax-deferred. This means your contributions are tax deductible, and no taxes are levied on money in the account. Employer contributions are not taxed or counted as wages and do not appear on your W-2. When you withdraw money from your TSP after age 59 1/2, it becomes taxable as ordinary income. A traditional IRA is a retirement account that offers the same tax deferral benefits as a TSP, except there is no employer to make contributions on your behalf. Roth IRAs are personal retirement accounts like traditional IRAs. However, you don’t get tax deductions for Roth contributions. Instead, all funds withdrawn after retirement are exempt from income taxes.
  
  

Contributions

• At the time of publication, the maximum yearly contribution you can make to a TSP is $16,500. Your employer may add as much as $32,500, making the aggregate maximum $49,000. If you are at least 50 years old, you can add up to $5,500 more to your TSP contribution. These contributions do not count against the amount of money you may want to contribute to an IRA. The maximum yearly contribution to an IRA is $5,000. When you reach age 50, this goes up to $6,000.
  
  

IRA Phase-Out

• The IRS sets income limits for receiving a tax deduction to a traditional IRA and for making contributions to Roth IRAs. If you have a traditional IRA, the fact that you have a TSP may affect your ability to deduct contributions to a traditional IRA because the limits depend in part on whether or not you are covered by a retirement plan at work. This is not the case for Roth IRA limits, so your TSP won’t affect them. At the time of publication, if you are married and file a joint return and have a TSP, your IRA deduction is reduced starting when your adjusted gross income reaches $90,000 and is phased out completely when your earnings reach $110,000. If you are single, the range is $56,000 to $66,000. If you are not covered by a retirement plan at work but your spouse is, the phase-out range is $169,000 to $179,000. If you are married and file a separate return, phase out starts at zero and is complete when your income reaches $10,000.
  
  

Rollovers

• You may transfer or roll over funds from your TSP to a traditional IRA without losing the tax-deferred status of the money. The same rules apply if you transfer funds from the IRA to your TS. Rollovers do not affect your contribution limits in any way. Usually this is done by a direct transfer from one account to the other. If you withdraw the money to make the transfer, your account trustee must withhold 20 percent against possible tax liability. This money may be subject to income taxes and penalties.