I've recently retired and have about $150k in a Roth and Traditional TSP. I'm 42 and am rolling those accounts directly into my newly established Traditional and Roth IRAs at my bank.
I also have a 'tax-exempt' category of about $40k that TSP told me I could not roll into either IRA since the money was comprised of contributions made while deployed and receiving combat zone tax-exclusion, so they would mail me a check or direct deposit that money; AND it "may" be subject to a 20% early withdrawal penalty as determined by the IRS.
Was TSP trying to get me to keep that $40k with them, or will the IRS really penalize me for trying to be responsible while deployed for combat? IS there a way to put this money into an IRA without penalty or am I going to have to keep it with TSP in order to protect it for the next 17.5 years?
Tax-Exempt Deployment Contribution Penalty After Retirement?
byu/Patient_Meal_6967 inMilitaryFinance
Posted by Patient_Meal_6967
2 Comments
Depends on the IRA:
> Distributions from accounts containing tax-exempt
contributions will be made proportionally from taxable and
nontaxable amounts. If an IRA or plan does not accept tax-
exempt balances, the tax-exempt portion of an intended
rollover will be paid directly to the participant.
([source](https://www.tsp.gov/publications/tspfs05.pdf))
[https://themilitarywallet.com/thrift-savings-plan-rollover-ira/](https://themilitarywallet.com/thrift-savings-plan-rollover-ira/)
# How to Transfer Your Tax-Exempt Contributions Correctly
You can prevent your tax-exempt funds from being transferred into a Traditional IRA by NOT selecting the following Boxes in the forms:
**Form TSP-70, Section X, Box 40.** Do NOT Check this box!
**Form TSP-77, Section X, Box 36.** Do NOT Check this box!
**Note:** Section X is also the section that your IRA custodian fills out certifying you have an open account with them. When I transferred my TSP funds into an IRA, I sent a cover letter to my IRA custodian explaining my wish not to check Box 40 on Form TSP-70. I strongly suggest including written documentation to your custodian to ensure they do not check this box!
**Tax-Exempt Funds are Sent to You as a Check – Be Careful with This!** By not checking the box above, you are telling the Thrift Savings Plan that your custodian cannot accept tax-exempt contributions into your account. Thus, the TSP will disburse those funds in a check made out to *you*. This money is non-taxable, so technically, you can do anything you want with it, including cashing it and spending it. But that would be a long-term mistake since you can roll it directly into a Roth IRA and earn tax-free growth on your investments.
Once you receive the check, you will need to send it to your IRA custodian with instructions that it should be deposited into a Roth IRA. When I sent in my check, I signed the back and wrote the IRA account number on the back. I also included a letter stating that it was a Rollover from the Thrift Savings Plan. This is important information for the financial institution to note so they can code it correctly for the IRS. Failure to give them this information can cause problems down the road.