3. If you’re going to conduct an indirect rollover, think twice. You tell the TSP to transmit your TSP assets immediately to your new employer’s plan or an IRA, and you never have to touch the money. You seek a lump-sum payout from TSP and then take responsibility for executing the transfer through an indirect rollover. Indirect rollovers have a lot of tax implications. Because the plan is required to withhold 20% to ensure that taxes are paid if the rollover is not completed, you will not receive the whole amount. If you are younger than 591/2, you must deposit the funds in an IRA within 60 days to avoid paying taxes on pretax contributions and gains, as well as the possibility of an additional 10% tax penalty. You must add funds from another source equal to the 20% withheld by the plan administrator if you want to defer taxes on the entire amount you cashed out (you get the 20 percent back if you properly complete the rollover). Learn the difference between direct and indirect rollovers.
4. Be careful of claims of “Free” or “No Fee.” Financial institutions compete fiercely for IRA business, and rollovers and IRA-related services are frequently advertised. Advertising can be deceiving in some circumstances. FINRA has noticed overly broad language in advertisements and other sales materials that implies investors having accounts with the businesses are not charged any fees. There will almost definitely be expenses associated with account administration, investment management, or both, even if there are no costs involved with the rollover itself. Don’t rely on the word “free” to convince you to roll over your retirement assets.
5. Recognize the existence of conflicts of interest. Commissions or other fees may be paid to financial advisors who advocate an IRA rollover. Leaving assets in the TSP or rolling them over to a plan offered by your new employer, on the other hand, is likely to result in little or no income for a financial advisor. In other words, even if the advice is legitimate, any financial professional who advises you to transfer money from your TSP to an IRA stands to gain financially from the move.
6. Evaluate investment and other services choices. An IRA allows you to choose from a wider choice of investment possibilities than an employer plan, but it may not have the same low-cost options as the TSP. The attractiveness of the IRA options will be determined in part by how satisfied you are with the TSP’s possibilities. Investment advice, planning tools, telephone support lines, educational materials, and workshops are all available through some employment plans. IRA providers, therefore, give various levels of service, which may include full brokerage, financial advice, and distribution planning. Consider the tradeoffs if you’re considering a self-directed IRA.
7. Be aware of fees and expenses. Both the TSP and the IRA have investment costs as well as plan or account fees. Sales loads, commissions, expenditures of any mutual funds in which assets are invested, and investment advice fees are all examples of investment-related expenses. Administrative costs (such as recordkeeping and compliance fees) and payments for services, such as access to a customer service agent, can all be included in plan fees. Employers may cover some or all of the plan’s administration costs in some instances. Administrative, account set-up, and custody costs are examples of IRA account fees. Know how much you’re paying TSP to manage your retirement assets before you make a rollover decision. TSP funds have some of the lowest expenditures in the industry. Compare them to the costs and fees associated with a new plan or IRA. Request information on IRA fees and charges from your financial expert, and read your account agreement and any investment prospectuses. Take FINRA’s micro-course on the subject to learn more about why fees and expenses matter and how to control their impact on investments.
8. Have a thoughtful conversation with your financial or tax advisor. Don’t be afraid to bring up topics like tax consequences, service discrepancies, and fees and charges when comparing retirement savings options. If your financial advisor advises you to sell securities in your plan or buy securities in a newly created IRA, inquire as to why the proposal is appropriate for you. Don’t buy it if you don’t understand it, just like any other investment.
9. It is important to consider your age. You may be allowed to take penalty-free withdrawals from the TSP if you leave your work between the ages of 55 and 591/2. In contrast, penalty-free withdrawals from an IRA are normally not permitted until the age of 59 1/2. The rules for both traditional employment plans and traditional IRAs require periodic withdrawals of specific minimum sums, known as required minimum distributions, once you reach age 72 (or 70 1/2 if you reached 70 1/2 before 2020). (RMD). Roth 401(k) accounts are likewise subject to the RMD requirements. However, while the owner is alive, the RMD regulations do not apply to Roth IRAs. You are not required to make necessary minimum distributions from your current employer’s plan if you are still working at age 72. This could be beneficial to people who plan to work well into their 70s.
10. Be aware that you have the option of transferring funds into the TSP rather than out. Many of the ads urging IRA rollovers are geared toward getting money out of TSPs and similar programs. However, you have the option of rolling money in. Transfers and rollovers of tax-deferred money from regular IRAs, SIMPLE IRAs, and qualifying employment plans are all allowed into your standard TSP account. Transfers (or direct rollovers) from an employer-sponsored retirement plan to the TSP are made by the plan participant after receiving a distribution from the plan. The TSP will accept transfers from Roth 401(k), Roth 403(b), and Roth 457(b) accounts into the Roth balance of your TSP account, but you won’t be able to rollover Roth assets into your TSP account indirectly, and you won’t be able to move money from a Roth IRA into your TSP account. The transfer will create a Roth balance in your existing TSP account if you don’t already have one.
Americans’ top financial concern is saving for retirement, and many are unsure of their retirement planning alternatives. The question of whether or not to shift your retirement savings or stay put is a big one. When changing jobs or retiring, you don’t always have to act right away. Take some time to think about your possibilities. To figure out what is best for you, ask questions and do your homework.
Should I move TSP to 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.
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.
How do I transfer my TSP to 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.
What is the best thing to do with your TSP when you retire?
Many retirees choose to take the entire sum out of their TSP and move it to an IRA. For most people, this is the ideal option because it allows you more control.
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.
Does TSP count as IRA?
It is occasionally required to repeat a procedure. Individual Retirement Arrangement (IRA) and Thrift Savings Plan (TSP) are not the same thing. Though they are both tax-advantaged retirement savings plans, the rules can differ dramatically, and individuals who are unaware of the variations may pay a premium when it comes to filing taxes.
“When one withdraws from the Roth TSP, their withdrawals are viewed as coming first from their contributions,” one reader said on a recent piece about the Roth tax trap. Withdrawals will be considered as coming from their wages and, thus, liable to federal income tax only when they have taken an amount equivalent to their contributions from their Roth balance.” This is not the case. This is true for withdrawals from Roth IRAs, but not for withdrawals from the TSP (or from other employer sponsored retirement plans for that matter). A person who believed the IRA and TSP rules were equivalent and acted on that notion would be in for a rude awakening come tax season.
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.
Can I move 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.
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 gorgeous simplicity and low prices. 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 consent if you’re a FERS employee or a member of the uniformed services.
- A financial hardship withdrawal requires spouse notification if you’re a CSRS employee.
Read In-Service Withdrawals for more information on financial hardship withdrawal eligibility and application criteria.
Can I max out my TSP and Roth IRA?
According to the IRS’s 2019 contribution restrictions, you can deposit a maximum of $6,000 to a Roth IRA and $19,000 to the TSP, for a total of $25,000. If you are able to contribute the maximum amount, you should do so since it will provide you with riches in retirement while also saving you money on taxes due to the fact that both accounts are Roths.
There are, however, annual income limits for Roth IRA contributions. See the 2019 yearly donation limitations for further information. Since you already contribute to a Roth IRA, it doesn’t appear that you’ve exceeded these restrictions, but for those who earn too much money, a backdoor Roth conversion is an option.
How do I avoid paying taxes on TSP?
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.