As long as your TSP account contains at least $200 of vested assets, no action are required when leaving federal service; however it might be wise to speak with an investing professional before taking this decision.
TSPs provide low-cost investment options, such as government securities investments and five funds with different approaches and returns. IRAs offer more investment options but come with their own fees related to investments as well as plan or account fees.
Contribution Limits
Investing assets into an IRA requires waiting five years before they can be withdrawn tax free, which should be kept in mind if your funds will supplement retirement income once retired.
CSRS and FERS participants should make sure they understand that transferring their assets into an IRA will eliminate them from receiving federal matching contributions, as well as prevent them from contributing catch-up amounts in future (please refer to TSP fact sheet Annual Limit on Elective Deferrals PDF for more details).
Your best bet to avoid this is choosing a direct rollover, in which TSP transfers the distribution directly into your new retirement account or IRA. This option is preferable over indirect rollovers that require you to receive cash distributions and manage them yourself later; these take more paperwork and could result in tax obligations since TSP withholds 20 percent as part of its taxable distribution requirements – this applies even if moving equal amounts between Roth and traditional balances.
Investment Options
Thrift Savings Plan offers an impressive range of low-cost investment options, such as index funds. However, individual Retirement Accounts (IRAs) provide greater options in terms of stocks and alternative investments – however their expense ratios tend to be higher than those offered through TSP.
Rollover of TSP distributions to an IRA is often the optimal strategy. TSP administrators will handle this transfer for you; but be wary about which type of IRA to select; moving pre-tax TSP funds into Roth IRAs could incur substantial taxes liabilities while each type has associated fees that include account maintenance, recordkeeping and compliance costs plus expenses of mutual funds that make up its content.
By contrast, an indirect rollover may incur taxes and a 10% penalty if you’re under age 59 1/2. When using this approach, TSP will send you a check which you must deposit into your new retirement account within 60 days.
Fees
As with any retirement plan, the TSP incurs fees that could alter your returns. These include investment expenses (such as sales loads and commissions for mutual fund investments you purchase) as well as plan or account fees.
Your TSP administrators will handle the transfer on your behalf and report it as taxable income on your federal return at tax time.
An indirect rollover involves receiving a check from the TSP and depositing it directly into either your new employer’s plan or an IRA opened with a brokerage firm. While this option could potentially leave you with an increased tax bill in one year, any distribution from your new account must be reported and paid within 60 days to avoid incurring penalties and late fees.
Taxes
When moving TSP funds to an IRA, the IRS taxes the money that’s being transferred because it’s moving from a pre-tax account (TSP) into an after-tax one (IRA).
When making this decision, you should keep several things in mind when making this choice: 1) your current and projected future tax rates 2) investment options available in an IRA as opposed to those provided by a TSP (3) the potential tax savings associated with each option
If you’re contemplating a rollover, be sure to speak with an investing professional first. SmartVestor offers up to five professional connections free of charge in your area – no commitments required and no hidden costs attached – get connected now and start planning!
