Should You Rollover Your TSP Account Into an IRA? Pros and Cons of Transferring Your TSP

Should you roll your Thrift Savings Plan assets into an IRA when you leave the government or military service? Pros and cons of a TSP rollover to an IRA.
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Table of Contents
  1. What Should You Do with Your TSP After Military Service?
  2. Pros and Cons of Doing an TSP Rollover into an IRA
  3. TSP Rollover: Reasons For
    1. Portability and Flexibility
    2. Account aggregation:
    3. Investment choices:
  4. TSP Rollover: Reasons Against
    1. Costs:
    2. Account aggregation:
    3. Tax planning: Tax-Exempt Contributions Can Have a Major Impact
  5. Pros and Cons of TSP Rollover into an IRA
  6. Pros and Cons of Leaving Your Investments in the TSP
  7. In Summary – Deciding Which Option is Best For You

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 a league of its own among other investment options, namely due to some of the lowest expense ratios you will find anywhere. So keeping your assets in the TSP may not be a bad option.

But sometimes it’s best to simplify your financial life and roll your investments into fewer accounts. So let’s take a look at doing a TSP rollover – the pros & cons, when it makes sense to do so, and when you should leave your money in the TSP. As with all major financial decisions, there is no one-size-fits-all approach. Each situation needs to be reviewed on a case by case basis.

While everyone has different perspectives and situations, there is one constant:

Any financial decision you make should be consistent with a financial plan that reflects your values and goals.

This article will discuss the pros and cons of rolling your TSP account into an IRA. However, any decision you make should be consistent with the long-term plan or strategy you have in place.

What Should You Do with Your TSP After Military Service?

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.

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.

Pros and Cons of Doing an TSP Rollover into an IRA

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, even at low-cost mutual fund firms such as Vanguard or Fidelity. 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 many 401k plans. You can also open an IRA at many locations, including banks, brokerages, mutual fund firms, etc.

Let’s take a look at the reasons for doing a TSP rollover, and the reasons for leaving your money in the Thrift Savings Plan. Remember, there is no right or wrong for everyone, only right and wrong for your situation, and that can change over time.

TSP Rollover: Reasons For

There are benefits to doing a TSP rollover. Some of those benefits are listed in more detail below.

Portability and Flexibility

Transferring your funds from the TSP gives you much more flexibility with how and where you invest your money. There are many advantages to this, including account aggregation and investment choices, which we list next.

Account aggregation:

As people depart the military, they may find themselves trying to get their financial house in order. Part of that process includes account consolidation. If you’ve already been contributing to an IRA and you’re departing the military, it might be convenient to transfer your TSP account into that IRA.

Investment choices:

Although you could argue that TSP has plenty of diversification for any investor, there are several situations in which TSP is not the right investment vehicle. 

Here are some examples of investments you can do outside of the TSP.

  • Real Estate Investment Trusts (REITs)
  • Individual stocks and bonds
  • Index funds or mutual funds that focus on specific industries or sectors.
  • A self-directed IRA to manage real estate or a closely-held business.
  • A qualified longevity annuity contract (QLAC). 
  • And many other investments.

TSP Rollover: Reasons Against

There are also some cons with rolling TSP into an IRA. Let’s look into those as well.

Costs:

There’s just no getting around this – virtually all mutual funds and index funds include management fees. This is the cost of doing business and covers the administrative expenses for managing the fund, to include profits.

In recent years, some brokerages have added “zero cost” index funds, however, many of them include a larger portion of the fund as cash, which can limit returns.

The TSP has some of the lowest costs in the industry.

G FundF FundC FundS FundI Fund
0.049%0.060%0.051%0.068%0.055%
Source: TSP Expense Ratios as of 2020

How does this compare?

Vanguard is one of the industry leaders in low-cost investing. Here is the average investment costs for Vanguard as of 2019 (the most recent data avaialble from the Vanguard website, as of the time of this publication)

  • Vanguard average ETF expense ratio: 0.06%.
  • Industry average ETF expense ratio: 0.25%.

As you can see, management fees at Vanguard are very comparable to the TSP management fees. However, both of these are significantly lower than the industry average.

The higher the management fees you pay, the more money you are giving up in your total returns. Your investments need to earn greater returns in order to end up with the same amount of money.

Account aggregation:

Huh? Wasn’t this a positive consideration for moving your money into an IRA? However, you can just as easily consolidate your IRA and other retirement plans under TSP. This is a great idea for families who have multiple IRAs or 401(k) plans, but who see TSP as a cornerstone of their financial future. You can find more information on rolling accounts into TSP on the TSP website.

Tax planning: Tax-Exempt Contributions Can Have a Major Impact

This is a tough one, so try to follow me here (and we have a full-length article that covers this section in greater detail, including step-by-step Rollover instructions).

For those who have significant amounts of contributions from tax-exempt combat-zones, you’re probably aware that the eventual distribution from those tax-deferred contributions is tax-exempt, even though the earnings on those contributions are not. This information is easily produced by TSP, and you can look at your account statements to know exactly where you stand. You can read more about tax-exempt TSP contributions and withdrawals in this article.

When you transfer this account to an IRA, most likely, your IRA custodian will have NO idea how to segregate your tax-free and taxable contributions. Combat zone contributions are the only type of contributions that are tax-free. TSP is the only retirement plan that accounts for combat zone contributions. Other plans are primarily focused on pre-tax and after-tax contributions, not tax-free.

What this means is that when you shift your TSP to an IRA account, your IRA custodian will likely treat your account in the following manner:

  • Traditional accounts will be considered pre-tax
  • Roth accounts will be considered after-tax

Your eventual distributions will have required withholdings by the IRA custodian. This means that your tax-free distribution MAY have tax withholdings, even though they’re tax-free. You can eventually claw back the withheld money when you file your tax return.

However, the burden of proof is on you to clearly identify that the transferred money originally came from contributions that you made when you were in a combat zone. This means you’ll have to maintain records that clearly indicate:

If you’re not familiar with IRS Notice 2014-54, it’s a doozy. In essence, it means that when you withdraw from a retirement account plan (such as a 401(k) or TSP), and you have both pre-tax and after-tax (or tax-free) contributions, then you MUST make your withdrawals in proportional amounts.

For example, let’s say you have $100,000 in TSP ($80,000 in traditional and $20,000 in Roth). When withdrawing from this account (or rolling over), you must withdraw equally from each account. If you’re rolling over the entire balance, there’s no problem. However, let’s say you’re only drawing out $20,000. You cannot just cherry-pick $20,000 in Roth just to avoid paying taxes.

The IRS mandates that your $20,000 must be in equal proportions from each account. In this case, you would take 80% from the traditional & 20% from the Roth account, or $16,000 and $4,000, respectively. (BTW, TSP accounts for this and will distribute proceeds from your accounts in this manner).

Tired yet? Just wait until you try to manage this on your own, without any assistance from TSP (who is no longer managing your account). You might spend a lot of money to hire an accountant, enrolled agent, or fee-only financial planner to help you wade through this correctly, or even more time & frustration (and possibly money if done incorrectly) doing it on your own. This might be a situation where you decide to leave your money in TSP. 

Note: We haven’t yet gotten to the point where there are a lot of TSP account holders who are managing distributions of combat zone contributions. However, when we do, it will be quickly apparent that this will be a big deal for those people who rolled their TSP over into IRA accounts. Perhaps the bigger IRA custodians will incorporate procedures to amend this gap. However, since TSP rollovers count for such a small portion of the overall IRA rollover market ($443 billion for TSP vs. $4.8 trillion for 401(k)s), I wouldn’t hold my breath.

More information on Tax-Exempt TSP Contributions: I encourage you to read the following guide, which explains this in greater detail, including how to roll over a TSP with tax-exempt contributions into a Traditional IRA (traditional contributions and earnings) and a Roth IRA (tax-exempt contributions): Thrift Savings Plan Rollover Guide – How to Transfer Your TSP into an IRA – with Instructions for Tax-Exempt Contributions. This guide can save you a lot of trouble when doing a rollover.

Pros and Cons of TSP Rollover into an IRA

Here are the pros and cons of rolling over your Thrift Savings Plan account into an IRA or 401k:

Pros

Advantages of rolling your TSP into an IRA:

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

Cons

Disadvantages of TSP rollovers:

  • You may experience higher expense ratios, depending on the investment
  • You could lose out on the possibility of tax-free withdrawals if you have any tax-exempt contributions.

If You Decide to Rollover 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 places to help you get started.

Pros and Cons of Leaving Your Investments in the TSP

Pros

  • Low expense ratios
  • Tax-free withdrawals if you made contributions with tax-free funds.
  • Ability to transfer IRAs, 401k plans, and certain other retirement plans into the TSP.
  • No additional administrative fees to leave your funds in the TSP even after leaving government service.

Cons

  • Fewer investment opportunities
  • You may have more accounts than you want if you can’t consolidate your other investments into the TSP

In Summary – Deciding Which Option is Best For You

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.

Regardless of your decision, it’s important that you not make this decision too quickly. The last thing that you want to do is jump from the frying pan into the fire. Instead, the decision to roll your TSP into an IRA should be part of a methodical, long-term financial plan that is consistent with your values and financial goals.

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About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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  1. Scott says

    Ryan, thanks for the article. Since it was not mentioned in this article, do you have an article that discusses transferring Traditional TSP money only (leaving Roth TSP money in TSP) to a Traditional IRA after retirement for the purpose of converting to a Roth IRA?

    • Ryan Guina says

      Hello Scott,

      No, I haven’t covered this topic. I’m not sure if you can do it that way or not. I would contact the TSP customer support center or a financial advisor for more specifics. Best wishes!

  2. J Duick says

    Hello. I recently found your articles and find them informative. Question: This article written in Oct. 2019 states TSP’s .expense ratio is .029% yet TSP shows its 2019 expense ration at .042%. I’m not seeing TSP’s expense ratio at .029% since 2015. There have been significant increases in the expense ratio, including a 31% increase from 2015 to 2016. Please explain where your 2019 TSP expense ratio comes from. Thank you.

    • Ryan Guina says

      J Duick, Thank you for pointing this out. This article was originally written several years ago and has been updated since the original publication date. I have updated the TSP management fees to the most recent numbers available on the TSP website. Thank you!

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