Should You Rollover Your TSP Account Into an IRA?

If you have left government or military service in recent years, then there is a good chance you still have a Thrift Savings Plan (TSP) account in your name. Personally, I’m a big fan of consolidating financial accounts to make financial planning and management easier to deal with. But the TSP is in it’s own category of financial accounts due to several factors that separate it from other investment options, namely some of the lowest expense ratios you will ever find. So keeping your assets in the TSP may not be a bad option. But sometimes it’s best to simplify things and roll your investments into fewer accounts.

Should you rollover your Thrift Savings Plan into an IRA?

The first thing you will need to do is determine if your assets are eligible for distribution. The TSP has certain criteria, so contact customer service through the ThriftLine if in doubt.

Deciding to rollover TSP assets into an IRA

Once you determine your funds are eligible for distribution, you need to decide what to do with those funds. We previously discussed options for the TSP when you leave the service in this article: what should you do with your TSP when you leave the military?

This article covers the main options, such as leaving your funds within your TSP account, rolling it into an IRA, roll your assets into a 401k plan at your new employer, withdraw your funds (watch out for early withdrawal penalties), and roll your funds into a qualified annuity.

The TSP has many similar features to a 401k plan, so this article may also be helpful: should you rollover a 401k into an IRA? Let’s look at the pros and cons of rolling over your Thrift Savings Plan funds into an IRA.





Pros and cons of doing an IRA rollover

The TSP has some of the lowest expense ratios in the investment industry and you will be hard pressed to find mutual funds with expense ratios that low. You almost certainly won’t be able to find them in a 401k plan, as most 401k plans have funds with relatively high expense ratios.

An IRA, on the other hand, gives you better control over your investment options, including the ability to invest in a wide variety of stocks, bonds, funds, and other investments that you can’t use with the Thrift Savings Plan or a 401k plan. You can also open an IRA at many locations, including banks, online discount brokers, mutual fund houses, etc.

Advantages of rolling your TSP into an IRA:

  • Full control of investments
  • More investment options
  • Ability to control fees
  • Portability

Advantages of leaving your funds in the TSP: There are two main advantages to leaving your funds in the TSP: the low expense ratios, and the possibility of tax free withdrawals if you made contributions with tax free funds. This last advantage could apply if you contributed to your TSP plan while you were in a tax free combat zone.

To see if you have any tax exempt money in your TSP, look at the bottom of you balance sheet: you will see “Tax Exempt Balance – $xxxx.xx.” You may wish to keep your TSP if you have a large amount of tax free contributions because those contributions would have been made without being taxed and that percentage of your withdrawals would also be tax free – which is virtually impossible to achieve in the civilian world!

Additional benefits to leaving your assets in the TSP. You won’t be charged any additional fees to leave your funds in the Thrift Savings Plan (plan expenses still apply), and it won’t affect any of your other investments, or ability to open other retirement accounts.

Rolling over a TSP Account into an IRA

If you decide to roll your Thrift Savings Plan assets into an IRA, then you have a few options to consider. The first thing you will need to do is open an IRA if you don’t already have one. Here is a list of what to look for when opening an IRA and some of the best brokerages to open an IRA to help you.




Which option is the best?

There is no right or wrong option. If you prefer a hands off approach with low fees, or if you have a large amount of tax free contributions, then you may wish to keep your funds in the Thrift Savings Plan. If, however, you have a hands on investing approach, or simply wish for more investment options, then rolling your TSP assets into an IRA may be a better option for you. Be sure to investigate your options thoroughly and make the best decision based on your investment needs and risk tolerance. Best of luck!

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Date published: March 22, 2011. Last updated: January 14, 2014.

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Ryan Guina is the founder and editor of this site. He is a writer, small business owner, and entrepreneur. He served over 6 years in the USAF and also writes about money management, small business, and career topics at Cash Money Life. You can also see his profile on Google

Comments

  1. Can you split the funds from you TSP by rolling them into two seperate accounts, a Traditional IRA (regular TSP contributions) and a Roth IRA (Tax Exempt contributions)?

  2. What about leaving the funds in the TSP and continuing to transfer from external tax deferred plans? With the expense ratio as low as it is in the TSP, and the easy to understand competitive investment portfolios available, this seems like an even better option.

    This is a little known provision, that allows you to transfer funds INTO the TSP after you leave military service. This only applies to traditional 401(k) type accounts, but s long as you leave the money in the TSP, it applies.

    There is some paperwork to go along with it, and you will need to contact both your employer’s personnel office and the TSP for rules and other stipulations, but this allows you to keep your funds in the TSP while still investing in tax deferred accounts, and adding to the TSP through a “back door” strategy that many people do not take advantage of.

    For more information on this provision visit: https://www.tsp.gov/planparticipation/transfers/eligibility.shtml

    Too many people aren’t familiar with this provision, and pull their money out of the TSP without considering the almost non-existent expense ratio and fund choices offered by the TSP.

    • Pat, that is a great option as well. But it’s only available when you change employers or any other time you are eligible to roll over a retirement fund. OS it’s a good idea, but not something people can take advantage of frequently!

  3. What amount do you consider “large amount of tax free contributions.”

    • Dave, it depends on your individual circumstances as to what constitutes a large percentage. But in my opinion, it’s never a good idea to move the tax free contributions into an account where they would lose their tax free eligibility. In this case, you wouldn’t want to roll those contributions into a 401k, because there is no way to separate those funds – they would all get lumped together and the tax free contributions would lose their tax benefits.

      The best solution for tax purposes is usually one of two things:

      1. Leave your TSP funds in the TSP.

      2. Transfer your TSP into an IRA. The tax free contributions in your TSP can be rolled into a Roth IRA and the other contributions can be rolled into a Traditional IRA. As these are rollovers, they don’t count toward your annual IRA contribution limits.

      Which of these choices is better depends on your investing skill and preferences. The TSP has a limited number of funds, but they are extremely low cost. IRAs generally give you more investment options, plus, your Roth IRA will have the opportunity to grow more, whereas any tax free contributions in your TSP remain the same (only the tax free contributions are distributed without taxes). The best long term move may be to roll your TSP into a Traditional and Roth IRA.

      I hope this helps, and thanks for your service.

  4. I’m being told by the TSP call center that you can’t roll it over into anything, 401k, Roth, Self Directed IRA, nothing. The only way to remove money is a financial hardship or if you are 59 1/2. They are citing this:
    https://www.tsp.gov/PDF/formspubs/tspbk12.pdf

    • JR, This is correct if you are still actively eligible to contribute to the TSP. For example, you are still serving in the military or in the government.

      You can only do a rollover after you have left military or government service. I hope this helps.

  5. If I’m not mistaken, another important reason to keep your money in the TSP is the FDIC type insurance. If you transfer to a civilian brokerage, you lose this benefit, assuming the investments you choose with the broker are non-Fdic insured, like stocks and mutual funds. Am I correct in this logic?

    • Dale, the only investments that are FDIC insured are Certificates of Deposit or cash equivalents. Government bonds are also guaranteed by the US Government. These types of investments are also available through a civilian brokerage, along with many other investment alternatives. The TSP also features some non-FDIC insured investments. As with all investing, it’s important to understand the risks.

  6. Ian Coubrough says:

    Ryan, I retired last August and need to know the best way to handle my TSP funds. I’ve heard that there is a definite distinction between a rollover and a transfer to an IRA. My funds will be taxed the 20 percent but I want to avoid additional penalties. I am 64. Thanks

    • Hello Ian, you actually have several choices for your TSP where you can avoid paying any taxes. Here is a list of options for your TSP when you leave government service. Your primary options are to leave your TSP funds in your TSP – you don’t have to remove them. You can also roll your TSP account assets into an IRA, roll your TSP account into your new employer’s 401(k) plan if you have a new job, or transfer your TSP account assets to a qualified annuity. None of these options will cost you anything, or incur any taxes.

      Your final option is to withdraw some or all of your TSP funds in a lump sum. You won’t pay any penalties since you are older than age 59.5, but you would have to pay taxes on your withdrawal, and depending on how much you withdraw, you may go into a higher tax bracket.

      My recommendation is to only withdraw the amount you need each month so you don’t pay too many taxes at once. The remaining assets will continue to grow in a tax deferred environment, allowing you to increase your retirement savings while waiting to pay the taxes on those funds. It’s probably not a good idea to withdraw everything at once, unless you are rolling it into another retirement plan such as a 401k, IRA, or qualified annuity.

      You can also contact a financial planner for more specific information tailored to your individual needs. Best of luck, and thanks for your service!

  7. I retired from the Post Office and I’m 55 years old. Can I rollover my TSP account into a Traditional IRA with out incurring penalty fees ? No Roth is involved. Thanks !

  8. Ryan, what is your opinion of investing in “C” shares. The investments for now will be relatively low, like (100-200) a month. This would happen after a fully funded TSP account.

  9. Another reason to roll your TSP balance into a traditional IRA is because once you leave federal service you cannot contribute to it any longer. After leaving federal service your TSP balance’s growth is dependent on the gains of your holdings alone and not from future contributions. If you roll the balance into a traditional IRA you can continue contributing to it. Also, depending on the type of vehicle (mutual funds, stocks etc.) you fund your traditional IRA with…you can take advantage of even more balance growth via capital gains and dividends being reinvested into your holdings.

  10. Howard M. says:

    I’m getting to the age when I have to remove the funds from my TSP account. I don’t want to put it into an annuity, because I want to keep control of it. On the other hand, I want to put it into a safe investment, such as a IRA investment, so the principle will not diminish and it will continue to grow. Being that I’m completely retired, can I roll my TSP account into to an IRA account? Is there an IRA account that is a good investment? Thank you.

  11. Ryan, I am 57 years old and retired from the federal government and left my money in the TSP. I have a new employer and I am contributing monthly to a 457 (b) Compensation Plan. I invest the money in several mutual funds that give me more diversity. I plan to work about three more years. Can I roll over my TSP into the 457(b) where I can contribute to it monthly. As you know, since I have separated from the federal government I can lo longer contribute to my TSP.
    Thanks

    • Hello Javier, Yes, you should be able to roll the TSP funds into the 457b. However, your funds may have a lower expense ratio inside the TSP. Take a look at your current investment options, and decide if you can get everything you need from the 457b, and see if the expense ratios are reasonable. If the 457b works for your needs, then transferring your TSP funds to the 457b is a good idea. If you like the TSP funds better than the 457b, then just leave your funds in your TSP. There is no problem leaving them in there. When you reach retirement from your current job, you would be able to roll those funds into the TSP if you wish to consolidate your investments.

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