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 after retirement?
Depending on when you plan to retire, you may be able to just leave the money in the TSP to grow. If you don’t need it right now, it’s probably best to leave it alone. Minimum withdrawals must be started at the age of 72, same like other retirement accounts. This is referred to as a Required Minimum Distribution (RMD) (RMD). The amount of your RMD is determined by the size of your account and your expected life expectancy.
Should I roll over my TSP?
At first appearance, deciding whether to rollover TSP assets into an IRA appears to be no different than deciding whether to rollover a non-government employee’s 401k or 403b. However, upon closer inspection, there is a significant difference. There are two big differences, in fact.
To begin with, many 401k plans have a slew of fees. While these expensive investment alternatives are an employee’s sole option if they wish to invest in a 401k, after they leave the company, they can move the money to an IRA, which has no restrictions. The TSP, on the other hand, offers some of the most cost-effective investments accessible. We’ll return to this subject in a moment.
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.
Can you rollover a TSP while still employed?
While you are still employed, you can make withdrawals from your TSP account if you are 591/2 years old or older. This is known as a “591/2 withdrawal” or “age-based withdrawal.” Unless you transfer or roll over the taxable portion of your withdrawal to an IRA or another eligible workplace plan, you must pay income tax on it.
Which is better TSP or Vanguard?
The TSP offers among of the lowest costs in the world and is tax-advantaged in the same way that a 401(k) plan is. Even for index funds, most 401(k) plans have higher investing fees than the TSP. Both the TSP and Vanguard offer cost benefits because to their vast scale and the fact that they are administered without commercial motives, as the TSP is a federal service and Vanguard is owned by its own funds. This enables them to charge the lowest possible fees.
The TSP has a few drawbacks, including as a limited fund choices.
The I-Fund, for example, has certain flaws, and while it’s a good way to fill out your TSP account, it’s not the finest form of international index accessible. A Roth IRA, on the other hand, is more flexible than the TSP while also being tax-favored, and can be a good location to put money in addition to your TSP.
Still, the TSP’s restricted options are flexible enough to cover almost all of your bases, and it’s one of the best defined contribution retirement systems available anywhere, especially when combined with the lowest costs in the world in a 401(k)-like tax-advantaged platform.
Can I transfer my TSP to a self directed IRA?
Your TSP balance can be transferred to a new company retirement plan or a self-directed individual retirement account (IRA). As long as the transfer is from a trustee to another trustee, there is usually no tax liability.
How do I roll my TSP into a Roth IRA?
There are two ways to transfer funds from your TSP to your Roth IRA. The first is a transfer, which takes place directly between the TSP and Roth IRA account trustees. The second way is an eligible rollover distribution (ERD), which involves the participant withdrawing money and depositing it into a Roth IRA account within 60 days. Employers withhold 20% of an ERD, but there is no withholding for a transfer.
If you have a traditional and a Roth TSP account, all withdrawals are proportional to each account’s balance. For example, if your Roth TSP account balance is 40% of your overall TSP balance, all distributions will come from 60% of your traditional account and 40% of your Roth account. In addition, Roth TSP dividends are split into two pools, one for contributions and the other for earnings. If your Roth TSP has 70 percent contributions and 30 percent earnings, for example, distributions will be split 70 percent in a contributions pool and 30% in an earnings pool.
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.
Is TSP a 401k or IRA?
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
Is TSP a Roth IRA?
1 The first thing to remember is that a Roth TSP and a Roth IRA are very similar. There are two types of Roth accounts, both of which provide the same benefits as all Roth accounts. You contribute a share of your profits after taxes.
What is the difference between IRA and TSP?
One significant distinction between these two accounts is that if you invest in the TSP as a federal employee, your employer will match your contributions. Basically, depending on how much you invest, your agency will make a contribution to your TSP account. When you invest in an IRA, there is no match.