All military and federal government employees will eventually face the difficult decision of what to do with their Thrift Savings Plan investments. Some choose to transfer them directly into a private IRA account while others decide on another approach.
Have you seen or heard messages encouraging you to transfer the money in your TSP into an IRA? Before doing so, take the time to weigh the potential pros and cons.
The TSP allows you to transfer funds between accounts, including an IRA. However, there are a few considerations you should keep in mind before doing so.
As an example, you cannot transfer funds from a Roth IRA into a Thrift Savings Plan account, nor from an inherited IRA into the Thrift Savings Plan account.
Additionally, it is important to remember that any withdrawals made from a TSP in retirement may be subject to income tax based on your current tax bracket – meaning a potentially higher tax bill in your early years in retirement than initially expected.
SmartAsset’s free tool connects you with pre-approved advisors in your area who can assist in planning for retirement and you can interview each advisor without incurring additional costs in order to find one who may best meet your needs.
2. Tax-deferred growth
IRA funds typically offer more options and lower fees than TSP funds, making them more suitable for investors who value professional money management. But be wary – depending on your account size, they could add up quickly; fees could easily reach 1% a year!
Rolling over TSP funds to an IRA typically involves filling out several forms and it is best done with assistance from a financial advisor. SmartAsset’s free tool connects users with pre-screened advisors in their area who can assist in making this decision.
Reversing from an IRA back into the TSP is also possible, although this requires additional steps and could come with tax consequences. The TSP withholds 20% if your distribution arrives via check; this money goes straight to the IRS instead of directly transferred funds that only send what’s been requested into your new account.
3. Investment options
An important drawback of rolling over to an IRA is losing access to your TSP’s investment options; for instance, you could switch from C Fund to G Fund easily in your TSP, but not with an IRA (though that option remains available within traditional employer-sponsored plans).
TSP also provides Lifecycle funds, which adapt their asset allocation from high-risk/high-reward investments to lower-risk/lower-return investments as you near retirement. Most IRAs do not offer these types of funds.
If your TSP investment options and low fees meet your needs, it may make sense to keep them where they are. But if additional investment choices and control are important to you, an IRA might be right up your alley. SmartAsset’s free tool connects you with up to three vetted financial advisors serving your area so that you can interview them without cost before making your choice – begin the process now – it only takes minutes!
It often makes good financial sense to roll your TSP balance over into an IRA, especially given its greater investment options and lower expense ratios than TSP.
Before making the leap, however, there are several key things you must take into account.
As part of any transfer between retirement accounts, it’s wise to avoid any indirect rollovers. With an indirect rollover, TSP will liquidate your investments and send a check with 20 percent tax withheld as required by federal regulations.
If you withdraw funds before age 59 1/2, they could be considered early withdrawals by the IRS, potentially incurring an early withdrawal penalty. Furthermore, TSP provides more protection from creditors than an IRA does.