Did you know that Americans have more money in IRAs than in employer-sponsored retirement plans like the Thrift Savings Plan (TSP) when it comes to saving for retirement? Individuals who transfer money from the TSP or equivalent 401(k) or 403(b) plans when they leave a job are the largest source of IRA contributions, according to the Employee Benefit Research Institute.
This is known as a rollover, and you’ve probably seen or heard advertisements or messaging enticing you to do so with your TSP account. However, if you’re considering rolling money from your Thrift Savings Plan (TSP) into an IRA, think about your alternatives, which include staying in the TSP or transferring money from another retirement account into your TSP.
1. Consider your choices for transferring.
There are four options available to you. You can put some or all of your money into a TSP. If approved (check with a new employer’s benefits or human resources office), you can move assets to their plan. You can transfer your 401(k) funds to an IRA. You can also take your balance and cash it out. Each has advantages and disadvantages, but cashing out your account is rarely a sensible choice for younger people. If you are under the age of 591/2, the IRS will generally consider your payout to be an early distribution, which means you may face a 10% early withdrawal penalty in addition to federal and state and local taxes.
2. Reduce taxes by rolling Roth accounts into Roth accounts and traditional accounts into traditional accounts.
You can pick between a standard IRA and a Roth IRA if you opt to roll your TSP funds over to an IRA. When you transfer assets from a regular TSP account to a traditional IRA, or your contributions and earnings from a Roth TSP account to a Roth IRA, no taxes are required. However, if you go from a regular IRA to a Roth IRA, you’ll have to pay taxes on the amount you rollover. It’s a good idea to discuss the tax consequences of each choice with your plan administrator, as well as financial and tax professionals.
Should I move my TSP to an IRA?
TSP Rollover Benefits: Full investment control, greater investment options, mobility, and professional money management
TSP Rollover Drawbacks: Typically higher costs and expenses, move existing 401(k) or IRA into TSP, no administrative fee, creditors protection, no RMD until you resign from federal employment
The TSP, or Thrift Savings Plan, is the federal government’s version of the private-sector 401(k) plan. The option of whether to keep the money in the TSP or move it to an IRA or Individual Retirement Account is one of the most important for the TSP owner.
1. Complete investment control: With an IRA, you have complete control over your money. With the TSP, you can only invest in one of the five funds or a mix of them. For others, this can be a concern if they are new to investing, since they may end up making their retirement situation worse by having more options.
2. More low-cost investing options: The TSP only provides a few low-cost investment options. In a TSP or other mutual fund, you can’t trade individual equities. The TSP currently lacks REITs, which are mutual funds that invest in commercial real estate. These are frequent in most professionally managed portfolios. Alternative assets, such as commodities and gold, are also unavailable.
3. Portability: IRAs allow you to move your money around more easily. You can transfer your assets from one custodian to another while keeping your current investments. Because TSP assets are only available through the plan and are not available through any other custodian, when you conduct a rollover, all of the funds must be liquidated and reinvested in the new IRA.
4. Professional money management: One benefit of converting TSP assets to an IRA is that IRA investments can be managed directly by a professional investment advisor. Some people who don’t want to bother with investing and value the counsel of an investment manager may benefit from this. However, keep in mind that this can come at a high price, up to 1% of the assets under management, or AUM. A million-dollar rollover to a managed IRA, for example, might cost you $10,000 each year in fees! This does not take into account the expense ratios of the funds in which your money is placed. For some, this is an excessive sum of money. Others recognize the importance of competent money management and are ready to pay for it.
1. Expense ratios are typically higher: At roughly 0.04 percent, the TSP has the lowest expense ratios among index funds. Expense ratios in most index funds are higher than that. However, with charge compression and industry competitiveness, this is fast changing. However, as compared to other low-cost providers, the TSP is relatively low, which will have an impact on your investments’ long-term growth.
2. Previous 401(k) IRAs can be transferred to TSP: You can transfer your old 401(k) IRAs to the TSP. This will allow you to manage your investments more effectively by consolidating them into a single account. This is strongly advised because older 401(k) plans don’t get as much attention as newer ones, so consolidating can help you get the most out of your money.
3. No administrative fees if you leave your money in the TSP after leaving government: There are no fees if you leave your money in the TSP after leaving government. Some accounts have fees that alter. However, some TSP users have expressed dissatisfaction with the slowness of withdrawals and the procedures necessary. These, however, are not frequent. This could be due to the fact that it is a large fund that serves a broad population and is more bureaucratic. This is to be anticipated, given that it is the government.
4. IRAs offer less creditor protection: Creditor protection is vital to consider, and the TSP offers more protection than an IRA. These programs, like any 401(k) plans, offer additional safeguards that should be properly evaluated.
5. Keep working for the federal government. At 72, you are not required to take RMD. Assume you continue to work for the federal government. If your money is in the TSP, you won’t have to take RMD. RMDs (required minimum distributions) are mandated minimum payouts from a pre-tax TSP account. The idea is that the government will pick a date when you will begin taking a portion of your money out to pay your taxes. Because all of the money in a Roth TSP is after-tax, there are no RMDs at 72.
As previously said, deciding whether or not to roll your TSP into an IRA is a difficult decision. To ensure that you make the best selection for your situation, you should talk with a financial planner. If you’d like to learn more about TSP rollovers, please use the link below to set up a free 30-minute consultation.
*The information in this article was compiled from sources that are regarded to be reliable. The material supplied is not designed or intended to be tax or legal advice, and it should not be used to avoid any tax penalties imposed by the federal government. Individuals are recommended to obtain tax or legal guidance from their own advisors. Individuals who are participating in the estate planning process should collaborate with a team of professionals, including their own legal or tax counsel. The information offered, as well as any opinions expressed, do not reflect a specific investment or the purchase or selling of any securities. In a deteriorating market, asset allocation and diversification do not guarantee a profit or safeguard against loss.
Can I rollover my TSP to an IRA while still employed?
First and foremost, you can contribute to your TSP whether you’re still employed with the federal government or after you’ve left.
- Money from a Traditional employer-sponsored plan, such as a Traditional 401(k), that you had before or during your government job;
- Money from a Traditional IRA, which allows you to deduct your IRA contributions from your federal income tax (also known as a Roth IRA) “IRA with a traditional tax deduction”); and
- The profits component of a Traditional IRA (also known as a Roth IRA) where you have not been able to deduct your IRA contributions from your federal income tax (also known as a Roth IRA) “Non-deductible traditional IRA”).
- Money from a Roth employer-sponsored plan, such as a Roth 401(k), that you had prior to or after working for the federal government.
Transfer money directly into the TSP
When a qualifying plan delivers all or part of your money to the TSP, this is known as a transfer or “direct rollover.” For tax-deferred monies, use Form TSP-60, Request for a Transfer Into the TSP. Use Form TSP-60-R, Request for a Roth Transfer Into the TSP, to transfer Roth funds.
Roll Over Traditional Money into the TSP
When you receive qualified money directly from your traditional IRA or plan and subsequently deposit it into your TSP account, this is known as a “rollover.” You cannot rollover Roth monies into the TSP, and you must execute the rollover within 60 days of receiving the funds. To roll over qualified traditional money, fill out Form TSP-60, Request for a Transfer Into the TSP.
More to know:
Money transferred or rolled over does not count toward your contribution restrictions under the Internal Revenue Code (IRC), and your eligible transfer and rollover will be invested according to your preferences.
When can I roll my TSP into an IRA?
A transfer is when the TSP sends money straight from your TSP account to your IRA account. A rollover, on the other hand, is when they personally send you a check, which you must deposit into your IRA within 60 days.
Is TSP better than IRA?
Once you’ve taken full advantage of the TSP match, deciding where to put your money gets more difficult. If your taxes are high now and you expect them to be considerably lower in retirement, the TSP is a superior option. It is preferable to apply your deduction to the higher tax rate. The Roth IRA is a superior option as you get closer to retirement. A longer investment horizon means your money has more time to grow, and you’ll enjoy more tax-free gains from your Roth IRA. There isn’t a plainly superior alternative. It is up to you whether you want to take advantage of your tax savings now or wait until retirement.
How do I convert my TSP to a Roth IRA?
You will be able to change the tax status of your contributions from Traditional to ROTH through the TSP, which will influence future contributions. The TSP, on the other hand, does not allow for retroactive adjustments, so you won’t be able to transfer funds from the regular tax status (tax-deferred) to the ROTH status (tax-free).
By going into your TSP account online and selecting the ROTH option, you can shift your TSP contributions from tax-deferred to ROTH.
If you’re under the age of 59 1/2, what options do you have? When it comes to moving funds from a standard TSP to an ROTH, there aren’t many options. However, if you are no longer in the military or are over the age of 59 1/2, you may want to consider a different planning technique.
How do I avoid paying taxes on my TSP withdrawal?
We provide a number of ways for you to get money out of your account. It’s critical to consider your income needs as well as the lifestyle you want in retirement before making your decision. The method you use to withdraw money from your TSP account is determined by your specific objectives.
- Consider withdrawing only a portion of your TSP savings if you only need a portion of your money right now but want the remainder to grow. You can take as little as $1,000, but there is no limit to how many you can take in your lifetime. (Due to processing times, you can only make one withdrawal per 30 days.)
- If you want to postpone paying taxes on the money in your TSP account for as long as possible, wait until the IRS forces you to do so before taking any withdrawals. Beginning the year you reach 72, you must begin taking required minimum distributions (RMDs). (Participants who turned 701/2 on or before December 31, 2019 had to start getting RMDs the year they turned 701/2.) Any taxable income you receive from your TSP account will be taxed at your regular income tax rate at that time.
- You have a few alternatives if you desire regular income from your TSP account every month, every quarter (three months), or once a year:
- When filling out your withdrawal request form, you can choose a dollar amount. You will receive payments in the amount and frequency that you specify until your account balance is paid in full or you change or stop your payments, which you can do at any time. It is important to note that each monthly payment must be at least $25.
- When you submit your request form, you can have us calculate a monthly payment amount for you depending on your life expectancy. Your first payment will be determined by your age and the balance in your account at the time of the first payment. We’ll compute the amount of your monthly payments every year after that, based on your age and your account balance at the end of the previous year.
- Please keep in mind that neither the stated dollar amount nor the TSP-calculated payment choice are guaranteed to last the rest of your life.
- Consider obtaining a life annuity, which is a monthly benefit paid to you every month for the rest of your life, if you want a guaranteed source of monthly income. This procedure can be tricky at times, but we’ve got you covered. For more information on buying an annuity, go to Annuity basics.
Can you transfer TSP to Vanguard?
Consider asking this fiduciary if you should transfer your TSP to an IRA that they will manage. Is there a clearer illustration of a conflict of interest? No, I don’t believe so. Despite this, they openly give this counsel while reveling in their status as a fiduciary. It should come as no surprise that they frequently promote the rollover.
Non-fiduciary advisors, on the other hand, frequently promote costly and complex annuities and other insurance products. In a moment, we’ll look at their pitch.
When it comes to the TSP, some experts come up with incredible reasons why an IRA is preferable. That brings us to two scare tactics that I’ve come across.
The TSP’s simplicity is one of its most appealing features. It only offers five mutual funds, as well as Lifecycle Funds. The Lifecycle funds are low-cost target date retirement funds. Four of the funds are extremely low-cost index funds, one is a low-cost government securities fund, and the other is a low-cost government securities fund.
It’s everything a savvy investor might want. It’s not a problem if you wish to follow the Bogleheads’ 3-Fund Portfolio:
If you wish to follow Warren Buffett’s investment strategy for his wife, the TSP has you covered:
The TSP provides the S Fund if you want to focus your portfolio on small companies. The S Fund is a wide U.S. stock fund that avoids the S&P 500’s largest companies.
Finally, the Lifestyle Funds have you covered if you choose to place your money in a single well-diversified fund. Based on when you plan to retire, these funds allocated your money among the other five funds.
I’m reminded of something Steve Jobs said about simplicity. “Simple might be more difficult than complex: to make anything simple, you must work hard to clean up your mind.” But it’ll be worth it in the end because you’ll be able to move mountains once you get there.”
Despite this, advisor after expert attempting to persuade seniors to leave the TSP laments the restricted options. They see it as a drawback. As if having more options, many of which are burdened down by high costs, will result in higher results. They are not going to do it. Listen to Warren Buffett if you don’t trust me.
The TSP’s assets are dangerous, according to the second fear strategy. In general, the counselor is implying that the stock market is dangerous. While it can rise for many years, we all know how quickly it can fall. Many retirees are naturally concerned about this roller coaster ride.
This danger can be addressed in a variety of ways. Never put money in stocks that you won’t be able to spend in the next five years. Adjust your asset allocation accordingly to achieve this. Reduce your stock exposure even more in accordance with your risk tolerance (although never below 50 percent in my opinion). Despite this, many counselors try to persuade seniors to buy expensive annuities with the promise of a guaranteed return. On an after-fees basis, it’s almost always a guaranteed poor return.
I’m not implying that all annuities are inherently terrible. Many commissioned advisers, I believe, push pricey annuities on naive retirees in order to generate fees for the advisor. The retiree loses his or her low-cost TSP account and acquires an expensive annuity, while the advisor earns a large commission.
If you’re thinking of annualizing some or all of your TSP, there are two things you should consider. Take a look at the TSP’s annuity options first. It may or may not be appropriate for you, but you should look into it. Second, make contact with Vanguard. They have some of the most affordable annuities on the market.
Let us now turn our attention to the question at hand. Moving out of the TSP should bear the brunt of the burden of proof at first. It’s an excellent investment because of its beautiful simplicity and low costs. It is not a good idea to take your retirement assets out of the TSP casually.
Retirees may seek investment advice in some instances. During their working years, they felt confident in their ability to manage their money. They are apprehensive, though, about managing withdrawals and making investing blunders as they approach retirement. That’s very understandable.
There are two viable choices. The first is to choose a financial advisor who charges a flat fee rather than a percentage of assets under management (AUM). While the majority charge a percentage of AUM, a growing number of firms are opting for a flat fee. It’s far less expensive, and if you and your advisor agree, you can retain your money in the TSP. They have no financial interest to persuade you to abandon the TSP.
Another option is to transfer your TSP to a Vanguard IRA. Vanguard can manage your investments for as little as 0.30 percent each year. For financial planning, you’ll have access to a CFP. While the Vanguard funds are slightly more expensive, the difference is only a few basis points.
The withdrawal choices are another reason to consider a rollover. One of the TSP’s main drawbacks is that it restricts how much money you can withdraw in retirement. In most circumstances, these restrictions will not be an issue. However, if you require additional flexibility, a rollover may be required. Give Vanguard a call if this is the case.
Finally, keep in mind that a partial rollover is an option. You are not required to roll over 100 percent of your TSP investments. For whatever reason, you may choose to roll over some assets while leaving the rest with the TSP.
Get assistance from a skilled expert who has no financial stake in your decision, whatever you decide. To get completely conflict-free counsel, pay a CFP for an hour of his or her time.
How much are you taxed on TSP withdrawal?
When you’re in a pinch, having the ability to take an in-service withdrawal from your TSP account can be a lifesaver. However, before you do so, carefully consider your options and be aware of the implications.
- It’s a withdrawal from your TSP account that won’t be reversed. You won’t be able to get your money back. It also reduces the quantity of money that grows and generates compound interest.
Tax considerations
- For federal income tax purposes, we’ll deduct 10% of the taxable portion of your withdrawal. You can choose to increase or decrease your withholding.
- The taxable portion of your withdrawal is taxed at your regular federal income tax rate. You may also be required to pay state income tax.
- If you’re under the age of 591/2, you may be subject to an extra 10% IRS early withdrawal penalty.
Spousal rights
- A financial hardship withdrawal requires your spouse’s notarized approval if you’re a FERS employee or a member of the uniformed services.
- A financial hardship withdrawal needs spouse notice if you’re a CSRS employee.
Read In-Service Withdrawals for more information on financial hardship withdrawal eligibility and application criteria.
Maximum Contribution Rates
Employees on the FERS or CSRS may contribute a percentage of their basic pay up to the IRS annual maximum. Each pay period, the Postal Service deducts contributions.
Automatic Contributions
Every pay period, the Postal Service automatically donates one percent of the employee’s basic wage. This agency automatic contribution begins on the first pay period of the first election period in which the employee is entitled to contribute and continues even if the employee opts out. The employee’s salary is unaffected by this automatic donation.
Employees must submit their contribution elections through one of the following channels to amend or cancel contributions to the TSP:
Participants who were automatically enrolled in the TSP during the first 90 days of automatic enrolment may request a refund of the contributions collected from their basic pay (including associated earnings). Participants must submit TSP-25, Automatic Enrollment Refund Request, directly to the TSP no later than 90 days after the TSP receives the first automatic enrollment contribution to request a refund (the refund deadline date).
- Refunds are treated as taxable ordinary income by the TSP, which means that 10% of the return will be withheld for federal income taxes. Refunds, on the other hand, are not subject to the 10% early withdrawal penalty tax imposed by the Internal Revenue Code.
- When their refund request is processed, FERS participants will forfeit the agency matching contributions (and associated earnings). The participant’s TSP account retains the agency’s automatic (1%) contributions.
- Participants who are rehired and automatically enrolled in the TSP after reappointment may not be eligible for a reimbursement of automatic enrollment payments for the time of reemployment. A new 90-day refund period cannot begin until one full calendar year has occurred after the participant’s last automatic enrollment contribution (January through December).
Matching Contributions
Through the first 3% of basic pay that an employee pays, the Postal Service matches employee donations dollar for dollar. The employee’s next 2% of basic pay is matched at a rate of 50 cents for every dollar contributed. (See the graph below.)
Vesting of Contributions
Employees are immediately vested in their own contributions as well as the earnings attributable to them.
After completing three years of creditable civilian service as defined by their TSP Service Computation Date, employees are vested in the agency automatic contribution and earnings linked with those contributions.
- Employees who die while on the job are considered vested in the agency’s automatic contributions.
- Employees who were on the payroll between January 1, 1984, and December 31, 1986, and who were automatically changed to FERS on January 1, 1987, received a 1% retroactive contribution for that time period, which was vested immediately.
Can you transfer your TSP to a 401k?
When transferring a TSP balance to a 401k or other retirement plan, there are usually no tax ramifications. If you take the money out of your bank account, you only have 60 days to transfer it to your new 401k or you’ll be charged interest and penalties.
Is TSP an IRA or 401k?
The TSP is a tax-deferred savings plan “For government employees, there is a “employer” retirement plan that is similar to a 401k plan in the private sector. An IRA is a tax-deferred investment account “Individualized” retirement strategy What a change! The TSP must adhere to Section 401k of the Internal Revenue Code’s administrative guidelines.