Contractor 401(k) + TSP consolidation

Updated: July 28, 2026

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According to the most recent available Federal Retirement Thrift Investment Board annual report, the TSP held approximately $782 billion in aggregate balance across roughly 6.7 million participants (figures vary by reporting year). Roughly 21% of those participants are uniformed-service members or veterans who also hold a separate civilian retirement account through a federal contractor employer.

For that population, the question at retirement is rarely whether to roll the TSP.

For that population, the question at retirement is how to consolidate two parallel accounts into a single self-directed structure. One account is the TSP from military or earlier federal service. The other is a Lockheed Martin or Booz Allen or SAIC 401(k) from civilian contractor work. The goal is to hold IRS-approved metals without disturbing basis tracking on either side.

Element I of the consolidation is the basis inventory. Before the first rollover form is filed, you need to know what is in each account: how much is traditional pre-tax, how much is Roth, how much is combat-zone tax-exempt, and how much is agency-matched.

For the parallel single-account path, see our TSP to gold IRA rollover guide for federal employees, which covers the standalone TSP mechanics that apply on top of the dual-account coordination described here.

Why a federal contractor often holds both a TSP and a contractor 401(k)

The TSP is the federal government’s defined-contribution retirement plan, authorized under 5 U.S.C. §8439 and administered by the Federal Retirement Thrift Investment Board. Military service members who contributed during Active Duty, Guard, or Reserve participation retain that balance after separation. The account does not roll out automatically, and the participant can leave it at the TSP indefinitely, subject to the post-separation distribution rules.

A separate civilian 401(k) typically opens when the same person takes post-service contractor employment with a Department of Defense prime, an intelligence community contractor, or a federally-funded research and development center. Lockheed Martin, Northrop Grumman, Raytheon, Leidos, SAIC, Booz Allen Hamilton, MITRE, and similar employers run their own 401(k) plans under 26 U.S.C. §401(k) with their own custodians (Fidelity, Vanguard, Empower Retirement, and others), independent of the TSP.

The result, for a contractor in the typical 55-65 age range, is two parallel accounts: a TSP balance reflecting military or earlier civilian-federal service, and a current 401(k) reflecting contractor employment. Both qualify for rollover to a self-directed IRA under IRC §402(c), but the basis layers in each are different. Consolidation only works if those layers are mapped before any paperwork moves.

The four basis layers hidden in a TSP balance

A TSP balance is a single line item on the participant’s quarterly statement, but the IRS treats it as up to four separately-tracked sub-accounts. The contractor’s annual TSP-1 election history and Form 8606 filings (if any) document which layer holds what.

Layer 1: traditional pre-tax elective deferrals. Contributions the participant elected to make from pre-tax salary, deducted from W-2 Box 1 in the year contributed, growing tax-deferred. On distribution, the full amount is ordinary income reported on a 1099-R with Code G (direct rollover) or Code 7 (normal distribution after 59½).

Layer 2: agency automatic 1% plus matching contributions. Under the Federal Employees Retirement System Act of 1986, the agency contributes 1% of base pay automatically and matches participant contributions up to 4% of base pay. The Blended Retirement System, for service members who opted in after 2018, follows the same structure. This layer is treated as pre-tax for tax purposes and vests per the participant’s service-time schedule.

Layer 3: Roth TSP contributions. Available since May 2012, Roth TSP elective deferrals are post-tax contributions with tax-free qualifying growth. The 5-year clock under IRC §408A starts at the first Roth TSP contribution and does not transfer to a receiving Roth IRA.

The Roth IRA clock starts at the first contribution to that specific Roth IRA, which can be earlier or later than the Roth TSP clock. For service-members rolling Roth TSP balances, see our TSP combat-zone tax-exempt contributions rollover guide for the parallel basis-tracking discussion.

Layer 4: combat-zone tax-exempt contributions. Under IRC §112, military pay earned in a combat zone, hazardous-duty area, or qualifying contingency operation is excluded from gross income.

Service members who contributed traditional TSP from this excluded pay built basis: the contribution itself was never taxed, so the principal will not be taxed at distribution either, only the earnings on the principal. The TSP tracks this layer separately on the participant’s TSP-3 statement.

Most participants forget it exists; missing it on the rollover paperwork forces basis recovery on the receiving IRA side, which is mechanically harder than preserving it at source.

How the contractor 401(k) basis layers usually compare

A civilian contractor 401(k) typically holds a narrower basis set than the TSP. Most plans offer a traditional pre-tax bucket and an optional Roth 401(k) bucket; combat-zone basis cannot accrue because the income is civilian.

The Layer 2 employer-match analog is present in most contractor 401(k) plans, which match between 3% and 6% of base pay. A minority of plans also allow after-tax non-Roth contributions under the rules at IRC §401(m), with later in-plan Roth conversion, the pattern common at Lockheed Martin and Boeing.

For consolidation, the practical question is whether the contractor 401(k) carries any after-tax non-Roth basis. If it does, the participant has a Form 8606 obligation already and the IRA receiving the rollover needs to track that basis layer alongside any preserved TSP basis. A contractor who funded a “mega backdoor” Roth conversion path during civilian employment will likely have done some of this tracking already; one who contributed only standard pre-tax dollars will not.

The consolidation sequence in six procedural steps

The full TSP-plus-contractor-401(k) consolidation has six discrete steps. Done in this sequence, the basis layers in each source account map cleanly onto the receiving IRA, and the 1099-R series in January of the following year reflects an aggregate non-taxable rollover.

Done out of order, you can end up with a 20% mandatory withholding on the indirect-rollover portion and a 60-day clock running on a check sitting in a desk drawer. You also face a basis-allocation question that takes a CPA two billable hours to untangle.

Figure 1. The six-step contractor 401(k) and TSP consolidation sequence. Steps 1 and 2 establish the basis inventory and the receiving IRA. Steps 3 through 5 execute the two direct rollovers. Step 6 reconciles the year-end 1099-R series.

1. Build the basis inventory across both accounts. Pull the most recent TSP quarterly statement and confirm the TSP-3 line items: traditional balance, Roth balance, tax-exempt balance (if any), agency contributions. Pull the contractor 401(k) plan statement and confirm the traditional, Roth, and after-tax-non-Roth lines if all three exist. Document the four-to-six-line basis inventory before any forms are filed.
2. Open the self-directed IRA at the receiving custodian. The custodian must be an IRS-approved trustee under 26 U.S.C. §408(a), with the operational capacity to hold IRS-approved metals at an approved depository. Open the Roth IRA separately from the traditional IRA at the same custodian; the two accounts will receive the Roth and pre-tax sides of each source rollover, respectively. Do not commingle.
3. Initiate the TSP rollover via Form TSP-99. Select the partial-withdrawal option introduced by the TSP Modernization Act of 2017 (effective September 2019), which allows multiple partial post-separation withdrawals rather than the prior all-or-nothing rule. See our TSP Modernization Act partial withdrawals guide for the eligibility detail. Specify the destination custodian as the trustee on the form; the TSP will issue a check made payable to the new custodian “FBO” the participant, which is the direct-trustee-to-trustee pattern. Distribution Code G on the resulting 1099-R confirms the non-taxable direct rollover.
4. Initiate the contractor 401(k) rollover at the plan administrator. The exact form varies by plan (Fidelity uses NetBenefits distribution request, Empower uses an online portal flow), but the structural requirement is the same: direct trustee-to-trustee transfer to the receiving IRA, with the destination matching the custodian named in step 2. Roth 401(k) balance rolls to the Roth IRA; pre-tax 401(k) balance rolls to the traditional IRA; after-tax-non-Roth (if any) rolls to either (the participant elects, subject to plan rules and the IRS guidance in Notice 2014-54 on the pro-rata allocation of after-tax basis on a partial rollover).
5. Purchase IRS-approved metals through the dealer. Once both source-account checks have settled into the receiving IRA (typically 5 to 15 business days), the dealer issues purchase confirmations for metals meeting the fineness standards in IRC §408(m): gold .995+ (American Gold Eagles are an exception named in statute), silver .999+, platinum and palladium .9995+. The metals are shipped from the dealer to the IRS-approved depository named on the custodian’s storage agreement; the participant does not take physical possession. The Tax Court rejected home storage in McNulty v. Commissioner, 157 T.C. No. 10 (2021), and reclassified the entire IRA balance as a taxable distribution.
6. Reconcile the 1099-R series in January of the following year. The TSP issues a 1099-R (Distribution Code G, gross amount = TSP balance rolled, taxable amount = $0). The contractor 401(k) administrator issues a separate 1099-R (Distribution Code G, gross amount = 401(k) balance rolled, taxable amount = $0). Form 5498 from the receiving IRA custodian confirms the rollover contribution. If any after-tax-non-Roth basis was present in either source account, Form 8606 is filed with the participant’s return to update the basis tracking on the receiving IRA. The aggregate effect on the tax return is zero taxable income from the rollover itself.

The TSP Modernization Act constraints to know before step 3

The TSP Modernization Act of 2017, effective September 15, 2019, replaced the single-partial-withdrawal rule with a more flexible post-separation distribution menu. The relevant practical details for a contractor planning a partial rollover to a self-directed IRA:

• Multiple partial withdrawals are now allowed after separation, in any amount, at any time, subject to a 30-day minimum interval between requests.
• Age-based in-service withdrawals (one only) remain available at age 59½ for participants still in federal service. A contractor who has separated from federal service but is currently employed by a civilian contractor is no longer “in service” for TSP purposes; the post-separation rules apply.
• The participant can choose whether each partial withdrawal comes proportionally from traditional and Roth balances, or specifies the source. For a rollover that needs to preserve the Roth 5-year clock and any combat-zone tax-exempt basis, specify the source explicitly on Form TSP-99 rather than accepting the default proportional draw.
• The participant can elect to receive monthly payments and execute partial withdrawals in parallel under the post-Modernization Act rules; they are no longer mutually exclusive as they were before September 2019.

One trap: a contractor who initiated a TSP-77 partial withdrawal under the pre-Modernization-Act rules before September 2019 may believe the “one partial withdrawal” cap still applies. It does not; the new rules are retroactive in the sense that prior TSP-77 history does not consume the new multi-partial allotment.

VA disability and retired pay coordination at consolidation

For a contractor who is also a military retiree drawing both VA disability compensation and DFAS retired pay, the consolidation step does not directly interact with those two income streams. VA disability compensation under 38 U.S.C. §1131 is excluded from gross income and does not flow through a 1099-R. DFAS retired pay is reported on a 1099-R but is independent of the TSP balance. The two streams continue uninterrupted during and after the rollover.

The indirect coordination matters in the same tax year. A contractor who triggers a large indirect rollover ends up with a residual taxable distribution if the withheld 20% is not made up from other funds within the 60-day window. That happens when a direct transfer fails and the mandatory 20% withholding under IRC §3405 applies.

Combined with full DFAS retired pay and civilian contractor W-2 income, that residual can push you into the next marginal bracket and trigger the 3.8% Net Investment Income Tax on portfolio income. It can also affect Medicare IRMAA two years later. The fix: use direct trustee-to-trustee transfers exclusively and never an indirect rollover. That takes the residual-distribution risk to zero.

Tax treatment of the three account types side by side

The three structures (TSP source, contractor 401(k) source, receiving self-directed gold IRA) are taxed on different bases. Side-by-side treatment matters for the contractor planning the post-rollover distribution timing, particularly if RMDs begin within the next decade.

The RMD line is the one most contractors underestimate. After consolidation, the gold IRA holds the aggregated balance and the RMD is calculated on the December 31 prior-year balance of the consolidated account. That calculation can be larger than either source-account RMD would have been individually, simply because the aggregated balance is larger. Plan the consolidation with that downstream RMD in mind.

Common consolidation mistakes federal contractors make

Five recurring procedural errors show up in TSP participant-services case files and in the BBB complaint history for gold IRA dealers that serve the military and federal contractor market. Each has a documented correction path.

Mistake 1: rolling without inventorying the four TSP basis layers. The TSP quarterly statement shows a single balance, but the TSP-3 service-history line items split the balance across the traditional, Roth, tax-exempt, and agency layers. A contractor who initiates a rollover without that inventory cannot reconstruct the basis on the receiving IRA side. Correction: pull the most recent TSP-3 statement before filing TSP-99, confirm each layer’s dollar amount, and keep the document in the rollover file.

Mistake 2: accepting an indirect rollover from either source. When the TSP or the contractor 401(k) plan issues a check made payable to the participant (not to the destination custodian “FBO” the participant), the distribution is indirect.

The 20% mandatory withholding applies, the 60-day clock starts, and the participant has to make up the withheld 20% from outside funds to complete a tax-neutral rollover. Correction: confirm with both source custodians that the check is payable “Custodian X FBO [Participant Name]” before any distribution is initiated.

Mistake 3: missing the Roth 5-year clock on the receiving Roth IRA. The Roth TSP and Roth 401(k) clocks are tracked at the plan, not at the participant. When the Roth balance rolls into a Roth IRA, the receiving Roth IRA’s clock applies, which can be earlier or later than the source-plan clock.

A contractor who opens a new Roth IRA specifically to receive the rollover starts a fresh 5-year clock on that account. Correction: roll the Roth balance into an existing Roth IRA that already has a 5-year-old contribution history, when one exists.

Mistake 4: failing to file Form 8606 when after-tax-non-Roth basis is present. A contractor with after-tax-non-Roth balance in the 401(k) (the “mega backdoor” feeder) has a Form 8606 obligation when that basis rolls to a traditional IRA.

Skipping the form leaves the IRS with no record of the post-tax basis, and a future distribution will be taxed in full as ordinary income. Correction: file Form 8606 with the tax return for the year of the rollover, even if no taxable distribution occurred.

Mistake 5: choosing a dealer that pressures the rollover before the basis inventory is complete. A dealer who proposes to “start the paperwork today” before the participant has pulled the TSP-3 and the 401(k) plan statement is sequencing the work backwards.

The rollover paperwork is mechanically simple once the basis inventory exists; without it, the rollover can succeed and still produce a basis-tracking error on the receiving IRA. Correction: complete steps 1 and 2 of the six-step sequence before the dealer is engaged at all.

Edge cases: USERRA make-up contributions, NUA, and Roth in-plan conversions

Three edge cases appear often enough in contractor consolidation scenarios to deserve named procedural notes.

USERRA make-up contributions. The Uniformed Services Employment and Reemployment Rights Act (38 U.S.C. §4316) gives returning service members extra time to rebuild their 401(k). They may make up missed contributions for up to three times the length of their military service, capped at five years.

A contractor who exercised USERRA make-up contributions builds basis in the contractor 401(k) on a delayed schedule, and the W-2 reporting of those contributions follows USERRA rules rather than current-year IRC §402(g) limits.

The basis layer is the same as a standard pre-tax contribution; the wrinkle is that the plan’s recordkeeping system may flag USERRA dollars separately, which the custodian’s intake forms may or may not accommodate.

Net unrealized appreciation on employer stock. If your contractor 401(k) holds employer stock (Lockheed Martin LMT, Northrop Grumman NOC, or similar), check whether the cost basis is materially lower than current value. If it is, an NUA election under IRC §402(e)(4) can be more tax-efficient than rolling that stock to an IRA.

NUA elections require a lump-sum distribution and specific qualifying triggers (separation from service, attaining 59½, death, disability). The election is irrevocable. For the full mechanics, see our NUA and gold IRA employer stock guide.

Roth in-plan conversions before rollover. A contractor 401(k) that allows in-plan Roth conversions lets you convert the after-tax-non-Roth balance to Roth inside the plan before any rollover. That pattern is available at Lockheed Martin, Boeing, Microsoft for contractor staff, and a handful of others.

Done properly, the conversion is a taxable event only on the earnings, not the basis. Done before rather than during the rollover, it simplifies the basis accounting on the receiving Roth IRA side. The tradeoff: it locks the conversion year for tax purposes, so the participant should coordinate the conversion timing with marginal-bracket planning for that tax year.

Frequently asked questions

Can I consolidate my TSP and contractor 401(k) into a single IRA without a tax bill?

Yes, provided both rollovers are executed as direct trustee-to-trustee transfers under IRC §402(c). The TSP issues a check payable to the receiving custodian “FBO” the participant, and the contractor 401(k) administrator does the same. Both 1099-R forms show Distribution Code G with $0 taxable amount. The consolidation is tax-neutral.

Do I need to keep my Roth TSP balance separate from my Roth 401(k) balance after rollover?

No. Once both Roth balances arrive in the same Roth IRA, they are aggregated and tracked together. The 5-year clock that matters is the Roth IRA’s clock, not the source-plan clocks. The custodian’s intake forms can accept both incoming rollovers without preserving the source-plan distinction.

What happens to my TSP loan balance if I roll out the TSP?

A TSP loan outstanding at the time of rollover becomes a deemed distribution if not repaid before the rollover date. The deemed distribution is reported on a 1099-R with Distribution Code L (loan treated as distribution) and is taxable as ordinary income. If you are under 59½, the 10% additional tax under IRC §72(t) also applies. For the full mechanics, see our TSP loan rollover deemed distribution trap guide.

Can I consolidate while I am still working for the federal contractor?

The TSP side: yes, provided the contractor has separated from federal service or is age 59½ or older (the age-based in-service withdrawal rule). The contractor 401(k) side: usually no, unless the plan permits in-service rollovers, which is uncommon before age 59½. Most contractors wait until separation from the civilian contractor employer to roll the 401(k); the TSP side can be rolled earlier under the post-Modernization Act rules.

Does the one-rollover-per-year rule apply to my consolidation?

The one-rollover-per-12-month rule from Bobrow v. Commissioner (T.C. Memo 2014-21) applies to indirect IRA-to-IRA rollovers, not to direct plan-to-IRA rollovers. Both the TSP-to-IRA and the 401(k)-to-IRA transfers in this consolidation are direct rollovers from employer plans, which are unlimited in count and frequency.

Sources cited

1. 5 U.S.C. §8439: Thrift Savings Plan investment options and contribution allocation rules (Cornell Law School)
2. IRC §401: Qualified pension and profit-sharing plans; rollover rules applicable to contractor 401(k) accounts (Cornell Law School)
3. IRC §402(c): Direct rollover rules; 20% mandatory withholding on eligible rollover distributions paid to participants (Cornell Law School)
4. IRC §408A: Roth IRA rules including the 5-year aging clock applicable to rolled Roth TSP balances (Cornell Law School)
5. IRC §112: Combat zone tax exclusion creating the tax-exempt basis layer in TSP accounts (Cornell Law School)
6. IRC §408: Individual retirement account rules governing the receiving self-directed IRA in a consolidation rollover (Cornell Law School)
7. IRS Notice 2014-54: After-tax rollover allocation rules for split distributions from qualified plans to Roth and traditional IRAs
8. 38 U.S.C. §1131: Veterans nonservice-connected disability compensation and its interaction with military retirement income (Cornell Law School)
9. IRC §3405: Withholding on pensions, annuities, and certain deferred income (Cornell Law School)
10. 38 U.S.C. §4316: USERRA reemployment rights for veteran contractor employees, including pension benefit protections (Cornell Law School)
11. IRC §72(t): Additional 10% tax on early distributions from qualified retirement plans for participants under 59-1/2 (Cornell Law School)
12. TSP Modernization Act of 2017, Public Law 115-84: Post-separation withdrawal flexibility and partial withdrawal rules for TSP participants (GovInfo)

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