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.
Get specific recommendations from Mint.com: Visit Mint.com to find the best rollover IRA for your needs.
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!
Comments
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)?
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!
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.
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.