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

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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.
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 founder and editor of The Military Wallet. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL 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. 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!

  2. Robert Rogers says

    I retired on 12/31/2009. In February 2011 I withdrew my TSP money, got a check for $345,074 and immediately deposited it to my IRA. TSP with held 20% for taxes which is about $38,342. Today I read that the taxes withheld also had to transferred. I can cover that amount now. I have been searching for ways to rectify this. At first I thought I could just amend the recent 2019. Then I thought I could go through the Form 8606’s correcting each one which would change the basis and taxable income over the years. Any advice you could provide will be greatly appreciated.
    Robert Rogers

    • Ryan Guina says

      Hello Robert, I recommend contacting a tax professional with this question. This is more advanced than most situations and should be handled by a professional. Best wishes!

  3. Dave says

    I will be retiring at the end of this year with 33 years of service. I have a substantial amount of TSP savings and I’m told that I can move that money now into an IRA before I actually retire. Is that true and would you advise it?

    • Ryan Guina says

      Hello Dave, I am not aware of any way to transfer funds out of your TSP and into a new retirement account before you retire. I would advise waiting until after you retire from the military, and have determined if you even need to move the funds into an IRA. There are advantages and disadvantages of doing both, and trying to do this while you are also preparing for your retirement may just be added stress.

      I would wait until you have decided your next course of action, whether that is full retirement, a post-military career, etc., you have settled into your new home if moving, and you have adjusted to the new situation. Then you can decide what to do.

      Final advice – try to avoid listening to a financial advisor who advises you to move all your retirement accounts under his portfolio. The TSP has a wide enough variety of accounts to fully diversify your investment portfolio (more info – https://themilitarywallet.com/thrift-savings-plan-diversification/), and it features the lowest fees you will find anywhere. Convincing military veterans and civil service workers to move their TSP accounts into more expensive investments is a multi-billion industry you want to avoid. And that often doesn’t count the high investment management fees many financial advisors charge. Moving your investments out of the TSP without a well thought out plan is a quick way to dig a hole that can be difficult to get out of.

      There is no penalty for leaving your investments in the TSP, so the best course of action is to wait until you have the time to determine your exact needs. Then decide if moving your funds out of the TSP helps you achieve those goals, or if it takes you in the opposite direction.

    • Drew says

      Dave,

      You can not move your money before your actually retire. I know several people that have recently retired and took a TSP Retirement class. Email me if you would like the presentation slides from the class, they were really helpful.

      [email protected]

      • Spud says

        You can make an in-service withdrawal after 59-1/2 while still working. Take the money and pay tax OR rollover directly to commercial IRA broker. You may be able to choose Roth or traditional but that commercial Roth account must be set up or they’ll send you a check (and have to redeposit within 60 days detail that in you tax return for that year.
        See TSP site “An in-service withdrawal is a withdrawal that you make from your Thrift Savings Plan (TSP) account while you are still actively employed in federal civilian service (CSRS or FERS) or the uniformed services.1 There are two types of in-service withdrawals: financial hardship withdrawals and age- based “591/2″ withdrawals.”

  4. Cyrus says

    One important factor overlooked is Minimum Required Distributions (MRDs). These are required to begin the year after you turn 70.5. These are required for the roth tsp, traditional tsp, and traditional ira. However, they are not required for a roth ira. So if your goal is to maximize the tax differed growth of your money, rolling over tsp to a Roth ira might be an important factor. Note: the 401k is also subject to RMDs.

  5. Ron says

    Hello

    If you leave govt with a civilian tsp how much if it can be rolled into a Ira ? What’s the tax implications.

  6. javier says

    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

    • Ryan Guina says

      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.

  7. 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.

  8. William says

    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.

  9. Fred says

    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.

  10. Larry W. says

    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 !

  11. 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

    • Ryan Guina says

      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!

  12. Dale says

    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?

    • Ryan Guina says

      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.

    • Ryan Guina says

      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.

    • Ryan Guina says

      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.

  13. Pat S. says

    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.

    • Ryan Guina says

      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!

  14. Hank says

    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)?

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