The TSP boasts some of the lowest investment-related fees on the market compared to fees associated with IRAs and new accounts.
There are multiple strategies available to you when it comes to transferring TSP assets. One option is direct rollover; another may be cashing out your balance – each approach has their own set of advantages and disadvantages.
Fees
Direct rollovers to an IRA allow your funds to be transferred free from withholdings and penalties, the method most frequently utilized by financial professionals.
An indirect rollover involves liquidating assets and receiving a check from TSP with 20% deducted as tax due. You then must deposit these funds back into another retirement account within 60 days to avoid paying taxes and penalties.
An indirect rollover typically refers to when someone is leaving military service or government jobs and wants to switch into pre-tax contribution accounts such as 401(k) at private sector employers or an IRA with lower management fees than TSP funds; however, your investment choices may be restricted; before making any decisions regarding managing these retirement accounts it is wise to conduct extensive research and consult a financial professional before taking action.
Taxes
As with any investment decision, taxation must always be taken into account when moving assets between TSP accounts and IRAs. One option for minimizing taxes would be switching from traditional to Roth or vice versa – but there may also be other considerations available to you.
Another key consideration are fees and expenses. Traditional Thrift Savings Plans have relatively low fees while new IRA investments may incur greater expenses; speaking to a financial professional can help determine which option makes the most sense based on your goals and lifestyle needs.
Understanding direct and indirect rollovers is also essential. A direct rollover involves moving assets directly from one trustee to the next without incurring liquidation of assets in either plan; while indirect rollovers involve receiving a check from your TSP that needs to be deposited into your IRA or plan within 60 days after receiving. With indirect rollovers, 20 percent withholding tax applies.
Withdrawals
The TSP offers numerous investment options, ranging from short-term U.S. Treasury securities to index funds that invest in domestic and international stocks, lifecycle funds that automatically change as you get closer to retirement date, and lifecycle funds which automatically shift investments from more aggressive to more conservative over time.
Rolling your TSP assets over to an IRA may be the right move for you if you’re happy with the investment options available to you within your plan, or wish to reduce fees and taxes. But it is wise to carefully consider all available options, consulting a financial expert if unsure.
If you choose to move your TSP money, it’s crucial that you take the time and care in filling out the withdrawal form correctly. Failure to do so could result in increased taxes (or even an early withdrawal penalty of 10%). SmartVestor provides access to an investment pro who can assist in creating an individual wealth-building plan tailored specifically towards your goals and values – get started for free now!
Portability
If you opt for the TSP, your money can benefit from tax-deferred growth and low administrative fees. If your IRA fees may be higher than those associated with the TSP, consider speaking with a financial professional about comparing expenses in order to make an informed decision.
If your TSP account is converted into an IRA, federal income taxes and penalties will be withheld from any distributions you receive. To avoid paying these fees and penalties, all distributions should be reinvested within 60 days.
An indirect rollover involves having the TSP administrator liquidate assets and sending you a check, which you then deposit into either your new employer’s plan or an IRA that you’ve opened. 20% will be withheld for federal income taxes; to ensure maximum tax savings and avoid taxes and penalties altogether, the initial amount must be reinvested within 60 days or it will be treated as a taxable withdrawal and may incur early withdrawal penalties.
