When you retire, there’s nothing wrong with leaving all of your money in the Thrift Savings Plan (TSP) and letting it grow for the rest of your life. However, if you want to consider other options, it’s important to understand what the TSP doesn’t let you do when it comes to managing your investments. In-Plan Roth Conversions Are Prohibited
As you may know, a Roth conversion enables you to move money from a pre-tax account to an after-tax Roth account for tax-free distributions in retirement. Unfortunately, the TSP doesn’t allow in-plan conversions. Since you can’t move money from your Traditional TSP to the Roth TSP, you’ll have to move the funds to an IRA then do a conversion to a Roth IRA.
“Without the ability to choose the funds you want to sell for TSP distributions, it’s more difficult to rebalance your investments from year to year.”
You Can’t Specify Funds For TSP Distributions
Unfortunately, the TSP doesn’t let you pick funds to sell when you make a withdrawal. Distributions are prorated according to your balance. Let’s say 50% of your TSP is invested in the G fund and 50% in C fund, your withdrawal will be automatically made in the same 50-50 proportions. Without the ability to choose the funds you want to sell for TSP distributions, it’s more difficult to rebalance your investments from year to year.
You Can’t Control Tax Withholdings From TSP Distributions
The TSP is required to withhold at least 20% of any taxable part of your installment payments that you don’t transfer directly. This can be an issue if you’re in a tax bracket that’s less than 20%. Of course, you’ll get a refund when you file your tax return. But, at the time of the TSP withdrawal, you’ll have to cover the extra amount needed for taxes. Note: the only exception to the 20% withholding is an installment payment that is expected to last more than 10 years.
You Can’t Make A Qualified Charitable Distribution (QCD)
A Qualified Charitable Distribution (QCD) enables retirees to save on income taxes while helping out a good cause and satisfying Required Minimum Distributions (RMDs). For example, with a traditional IRA, when you reach age 70-½, you can distribute funds directly from your account to a qualified charity without being subject to income taxes and the QCD applies to your annual RMD. Unfortunately, this isn’t allowed under TSP rules.
During your career, the TSP is a great way to save for retirement while getting your agency matches. However, if you want more flexibility in managing your TSP once you separate from service, connect with an FRC® trained advisor to discuss all of your options.
