Many TSP participants who leave federal service opt to transfer funds after leaving, which will typically be reported by their TSP on IRS Form 1099-R under box 7 of this form.
IRAs provide greater flexibility, lower fees, and a wider array of investment options than TSPs do; however, there may be additional expenses involved with rolling over TSP assets into an IRA.
What is a rollover?
Rollover is the process of moving funds from one retirement account to another through two distinct methods – direct and indirect rollovers.
Direct rollovers allow someone else to handle all the details for you, with simply telling the recipient where you would like their funds transferred (your new employer’s plan or an IRA), and providing some necessary details. Under these arrangements, no taxes are withheld from transferred amounts; however, at tax time you’ll need to report these funds on Form 1040.
An indirect rollover involves receiving a check from the TSP and depositing it directly into your new retirement account, but beware that 20% will be withheld to cover federal income tax obligations; you must deposit this portion back within 60 days or it’ll incur a 10% early withdrawal penalty.
How can I roll over my TSP to an IRA?
Rollover your TSP funds to either a traditional or Roth IRA at any time; however, it might be prudent to wait a short while as any eligible distribution from your TSP account may come with taxes withheld and additional withholding penalties attached.
TSP fees and expenses are some of the lowest in the industry, so when switching plans or IRAs it is wise to compare those fees and expenses against what will be charged by your new investments options.
Tax minimization when moving between accounts is key for maximizing returns. For instance, moving money from your pre-tax TSP into a Roth IRA could incur taxes because you’re moving money from an account that received tax breaks to one that doesn’t. By avoiding that step altogether, you’ll gain much greater flexibility with how to utilize IRA assets; they offer wider investment choices than TSP accounts such as gold or real estate purchases.
What are the benefits of rolling over my TSP to an IRA?
Have you heard all the advertisements encouraging you to convert your TSP funds to an IRA, which could be an excellent strategy? However, without proper attention paid when doing this conversion process you could end up paying more taxes than necessary.
The TSP allows both direct and indirect rollovers of tax-deferred money from traditional IRAs, SIMPLE IRAs and eligible employer plans into its account. With direct rollover, distributions are sent directly from TSP to your new IRA or plan; with indirect rollover, 20% is withheld for federal income taxes owed; this must be deposited back into your IRA within 60 days or an additional 10% penalty may be assessed against it.
People investing in the TSP may choose to keep it as it is for various reasons, including its low fees and diverse investment options. Others may find it more tax-efficient to roll their TSP funds over into an IRA depending on their income levels and tax rates in the future.
What are the disadvantages of rolling over my TSP to an IRA?
Many TSP rollover messages emphasize moving money from your TSP into an IRA; however, it’s important to remember that money can also be moved in from other sources like employer plans, traditional IRAs and SIMPLE IRAs into your TSP account. Furthermore, you could use the TSP as a consolidation vehicle in order to simplify financial life and reduce expenses.
As soon as funds transfer between accounts, it’s essential that you understand that any time the IRS might require that taxes are withheld from these transactions. For instance, when rolling over pretax contributions into a Roth IRA from your TSP account, they’ll treat this distribution as a taxable one and might require payment of taxes plus possibly even penalties if you’re under 59 1/2.
SmartAsset’s free tool connects you with pre-screened financial advisors in your area who can offer tailored advice and answer any queries regarding TSP rollover options.