Estimated tax payment on a 401K plan being rolled over to a Roth IRA

[Captain-Tom0]

I will start receiving monthly distributions from my TSP account to my Roth IRA (outside the TSP).  Amounts will be distributed monthly.  The Thrift Savings Plan Company will not withhold taxes. Since the monthly amounts will be substantial, will I need to make estimated quarterly tax payments? If yes, how do I accomplish this?

[Critter]

Are you taking regular required distributions ?   If so you cannot roll them into any IRA.

[Captain-Tom0]

I am rolling over distributions from a TSP account (401K plan) to a Roth IRA. I am not taking distributions. I checked the IRS regulations and they state that I have up to 60 days from the date of each distribution to roll it over to either a traditional or Roth IRA. The traditional IRA roll-over is non-taxable, while the Roth IRA is a taxable event.

[VolvoGirl]

But why are you getting monthly distributions from the 401k?  I don't think you can do what you are planning.  I think you can only do 1 rollover per year.

[Captain-Tom0]

I recently retired from the U.S. Government (civil service), and am taking monthly distributions from my Thrift Savings Plan.   Since I am 62 years of age, there are three options for my Thrift Savings Plan funds 1) take periodic distributions, 2) leave the funds in the Thrift Savings Account until age 70.5 & then take RMD's, or 3) buy an annuity.  I am now taking periodic (monthly) distributions for several reasons: 1) to have immediate access to funds from those accounts, and 2) to have more choices to invest those funds in.  For estate planning, it also makes sense.  The information I have seen on roll-overs is that I have 60 days to roll-over the funds from a 401K plan (the Thrift Plan is a 401K plan). I have not seen anything that restricts roll-overs to one per year.  If anyone has information that is contrary to me being able to do this. Please let me know.

[Critter · Accepted solution]

Are any TSP distributions considered “eligible
rollover distributions”?
Yes. The following TSP distributions are eligible rollover
distributions:
•   A single payment of part or all of an account
after the participant separates from service
•   All automatic cashouts (i.e., payouts of accounts
that contain less than $200)
•   Equal monthly payments expected to be paid
out in less than 10 years (unless payments are
computed using the IRS life expectancy table)

https://www.tsp.gov/PDF/formspubs/oc94-20.pdf

So now that we know you can do it there is no tax liability if you roll it to an IRA but if you send it to a ROTH it will be taxable ... and you want to know how to estimate the taxes & make estimates if needed ...

https://ttlc.intuit.com/replies/3301588

Do I need to make estimated tax payments to the IRS?

https://ttlc.intuit.com/replies/3301891

  How do I make estimated tax payments?

https://ttlc.intuit.com/replies/3301258

Can TurboTax calculate next year's federal estimated taxes?

https://ttlc.intuit.com/replies/4242911

Can TurboTax calculate the estimated payments for next year's state taxes?

https://ttlc.intuit.com/replies/3301735

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[dmertz]

Yes, doing substantial monthly taxable Roth rollovers (by direct rollover, otherwise mandatory minimum 20% withholding is required) from your TSP would likely require making estimated tax payments to avoid an underpayment penalty.  You'll need to estimate how much tax will need to be paid each tax quarter so that you don't have a balance due with your tax return of more than $1,000.  A good approximation can be done by using a tax estimator with and without your monthly taxable Roth rollovers, then dividing the difference by the number of equal rollovers during the year.  Your estimated tax payment for a quarter will be that number times the number of monthly rollovers that occurred during the quarter.  (Tax quarters vary between 2 and 4 months depending on the quarter:  1st quarter is January through March, 2nd quarter is April through May, 3rd quarter is June through August, 4th quarter is September through December.)  Estimated taxes can be mailed with Forms 1040-ES or submitted online:

https://www.irs.gov/pub/irs-pdf/f1040es.pdf

https://www.irs.gov/payments

You can use TaxCaster to do the estimations.  (Don't worry if TaxCaster is still using the previous year's tax tables.  The result will be close enough unless legislation is passed to significantly change the tax rates):

https://turbotax.intuit.com/tax-tools/calculators/taxcaster/

You'll want to do the same for state taxes, if any in your state.

Is there some reason that you do not do a direct rollover of the entire TSP balance to a traditional IRA, then do Roth conversions from the traditional IRA to a Roth IRA?  Doing so would avoid being locked into monthly distributions from the TSP, allowing you to vary the amount and the timing of the conversions, perhaps producing a better long term tax result.

[dmertz]

Also, to add to what Critter#2 said, if you are subject to RMDs (having reached the year in which you reach age 70½), the first amounts distributed during the year apply to your RMD and are not eligible for rollover.  The TSP *should* prohibit the direct rollover of these amounts until the entire RMD for the year has been satisfied, then any additional amounts can be rolled over.

[SweetieJean]

As with Critter, my reading of the Q is that OP wants to rollover the RMD's.

[dmertz]

The federal TSP has rather restrictive distribution options.  Monthly distributions would be RMDs if calculated based on life expectancy as an annuity and therefore ineligible for rollover, but as far as I know the TSP allows a monthly distribution program simply for the convenience of the account owner which are not distributions made as an annuity (although an annuity option is available).  One does, however, need to be careful of running afoul of the statute that says that distribution made as a series of substantially equal payments for life or for a period of 10 years or more are not eligible for rollover.  That's another reason to move the money to a traditional IRA and do occasional Roth conversions from there.

<a rel="nofollow" target="_blank" href="https://www.tsp.gov/PlanningTools/LivingInRetirement/withdrawalStrategies.html">https://www.tsp.gov/...>

[SweetieJean]

OP's Q at the very top also calls it a 401(k). I wonder if he is using "TSP" broadly to mean a Tax Sheltered Plan, not a Thrift Savings Plan.

[dmertz]

Good point.  I don't think one would refer to the federal government as "the Thrift Savings Plan Company."  That makes it more likely that the monthly distributions will actually be distributions from an annuity within the plan and those distributions would certainly be ineligible for rollover.  The plan should be smart enough to know that a direct rollover of these distributions to a Roth IRA is not permitted.  However, one could (inappropriately) set up direct deposit of regular distributions to a Roth IRA without the plan knowing that the destination account is a Roth IRA, creating excess contributions to the Roth IRA subject to penalty.

[Captain-Tom0]

I am referring to TSP as the U.S. Government's Thrift Savings Plan.  The TSP representatives have advised me that there is no restriction in taking monthly distributions and rolling them over to either a traditional or Roth IRA.  I selected the Roth IRA because, I believe, it will also offer better long term returns. You may wonder why I am not rolling over to a Traditional IRA. It is for tax reasons. I live in North Carolina.  I am both a retired veteran and Federal Civil Servant. Because of NC state laws affecting older veterans and Civil Servants, I will not pay state income taxes on distributions from my TSP account.  However, if I move to a traditional IRA, then later roll-over the funds to a Roth IRA - or take money out for other purposes, I will owe State Income taxes (approximately 5.5% of distributions).  A second reason for doing this now is that, if I die, my wife will have to pay State Income Taxes on any distributions from my TSP account. Finally, I intend to take out my entire TSP balance over a period of less than 10 years -this will keep me out of trouble on the 10 year rule.  Please let me know if you see any issues with this.

[Captain-Tom0]

For dmertz: I greatly appreciate the information you provided. In your above note, you mention that "one could (inappropriately) set up direct deposit of regular distributions to a Roth IRA without the plan knowing that the destination account is a Roth IRA, creating excess contributions to the Roth IRA subject to penalty". The funds being transferred from my TSP to my Roth Account (with an investment company)are not contributions, they are funds being "rolled over" from my TSP account. Since the TSP account is a 401K type plan, do you see any issues with doing this?

[Captain-Tom0]

The information you provided me was extremely helpful. Thank you very much!!!!