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For government workers, a Thrift Savings Plan (or TSP) is their employer-offered retirement plan.
After the end of a government job or career, your individual needs and priorities may change. A different type of retirement plan may be a better fit. This is why you might consider a TSP rollover to an IRA.
A Roth IRA offers more investment choices than a TSP and does not require minimum distributions. You fund this with after-tax dollars. This means your savings are tax-free when you withdraw them during retirement.
Traditional IRAs allow you to save for retirement on a tax-deferred basis. You only pay taxes on the money you put into the account once you withdraw it, usually at retirement.
How to Rollover TSP to IRA
A TSP rollover to an IRA can be done in one of two ways: direct rollover and or an indirect rollover. Previously, you needed paper forms like the TSP-60 and TSP-60-R. This is no longer the case. The process is now more accessible than ever since people can complete it online by logging into the TSP online portal.
Both options have their own set of tax implications that need to be understood before making the move. With careful planning, you can complete a TSP rollover to an IRA in an efficient and cost-effective manner.
Direct Rollover
A direct rollover, or transfer, is an easy way to move retirement funds from one plan to another. It allows you to quickly and securely transfer money between two retirement plans without incurring any taxes or penalties.
To transfer a TSP to an IRA, you ask the TSP administrator to send your funds straight to your new IRA provider and account. All you need is an established IRA account and the necessary account details for the transaction.
When you transfer a TSP to a Roth IRA, the transferred amount is added to your taxable income for that year. This is something to consider when you decide to make a transfer. When transferring from a TSP to a traditional IRA, you won’t owe taxes upfront since both use pre-tax dollars.
Indirect Rollover
In an indirect TSP rollover to an IRA, you receive the funds and must deposit them into the IRA within 60 days. If you don’t deposit the withdrawal within 60 days and are under 59 ½, you might face a penalty.
The same rules are applicable to a TSP rollover to a Roth IRA—20% is withheld for federal income taxes. When you make a deposit, include the additional 20% to avoid a penalty.
Choosing an IRA for a TSP Plan Rollover
You have a big choice when you make a TSP transfer to an IRA. You can move your money to a traditional IRA, a Roth IRA, or both. Each path can trigger tax consequences. So you should think carefully about which IRA you prefer for your TSP plan rollover.
If you move a pre-tax TSP to a traditional IRA, you won’t pay extra taxes. Both accounts use pre-tax contributions. If you roll a Roth TSP into a Roth IRA, you also avoid new taxes. Both accounts use after-tax contributions.
If you have both types of TSP funds, you can split them into the matching IRAs. That helps you dodge immediate taxes for your TSP plan rollover.
However, if you roll your pre-tax TSP into a Roth IRA, you will owe taxes. Your pre-tax funds count as income, and you pay taxes at your ordinary rate. That can create a big tax bill.
Can You Make a TSP Rollover to an IRA After Retirement?
You aren’t limited when you want to make a TSP rollover to an IRA. You can make a TSP rollover to an IRA after retirement. There are several reasons to consider this:
- Wanting more investment choices outside a TSP
- Combining your retirement accounts for easier management and tracking
- Getting access to professional financial advice
- Simplifying your RMDs
- Avoiding TSP withdrawal restrictions
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What Are the Benefits of a TSP Rollover to an IRA?
Transferring TSP funds to an IRA can be beneficial for you. Once you turn 59 ½, you can complete a single TSP rollover to an IRA. This allows you to create more vehicles and avenues to build your retirement savings.
You should be careful when considering this change. It’s always best to speak to a fiduciary before moving forward. That said, there are a few powerful benefits to keep in mind.
Diverse Investment Options
If you have a traditional TSP or a Roth TSP, then you have limited options for investment. IRAs have much more options to choose from with individual stocks, bonds, ETFs, and mutual funds.
This makes a TSP rollover to an IRA an attractive option for federal employees. TSPs have target date funds, which can incur higher expenses and may not yield the most financial benefit for you compared to other options.
Access to Professional Money Managers
Since your TSP is an employer-backed account, you won’t have access to professionals who can look out for your specific needs. A financial advisor who understands your goals can help create a strategy that aligns with your priorities. You don’t have that option with a TSP.
What Are the Disadvantages of a TSP Rollover to an IRA?
When you make a TSP rollover to an IRA, you need to consider the potential drawbacks. Apart from tax implications of rolling over funds from a TSP to an IRA, certain protections and restrictions apply.
No ERISA Protections
ERISA is a federal law that protects employee benefit plans, like a TSP account. It imposes fiduciary obligations so the plan acts in your best interest. Plan administrators will need to give you your plan details and you have legal protections against litigation.
An IRA’s protections often vary by state. Some states offer strong safeguards, while others do not. TSP rules also require spousal consent for certain withdrawals—IRAs usually don’t.
If you worry about lawsuits or financial disputes, these differences can matter. Look into how your state treats IRAs before you roll over. If you’re married, talk to an advisor about how these rules could affect your spouse.
Higher Fees
Higher fees can be a major concern when it comes to a TSP rollover to an IRA. TSPs have lower administrative costs, making them an attractive choice for those who want to maximize their returns. TSPs have some of the lowest fees because the government negotiates cheaper rates for participants. As an employer-backed account, you receive a discounted rate when it comes to investment fees.
IRAs, on the other hand, can have higher maintenance fees. You might face advisory fees, management fees, or trading costs. Some mutual funds also come with loads, which are extra charges you pay when you buy or sell. Over time, those fees can eat into returns.
Loss of Loan Options
The loss of loan options is a major challenge for those looking to save for retirement. IRA plans don’t offer this feature, so you can’t take a loan from your account. This feature can sometimes come in handy for financial emergencies.
Splitting Withdrawals Between Your TSPs
If you have a traditional TSP and a TSP Roth account, you must split the withdrawals between them when rolling over to an IRA. In certain situations, doing a partial rollover to a Roth IRA might help you maximize your retirement accounts.
Get Ready for Retirement
If you think a TSP rollover to an IRA is for you, then get in touch with a financial planner with tax experience. You should be working with a true fiduciary and not those who claim to be “federal employee consultants.” These individuals have no affiliation with the federal government. There is no legal requirement for them to act in your best interests.
Asset Preservation Wealth & Tax offers a full range of financial services to simplify managing your money. Our team of experienced tax professionals and financial planners help clients achieve their financial goals.
We use a personalized approach to retirement planning to create a plan tailored to your specific needs. Retirement isn’t a time for uncertainty. You need a solid plan crafted by experts who are fiduciaries.
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Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
