The Thrift Savings Plan (TSP) is a cornerstone of retirement planning for federal employees, offering low-cost, diversified investment options. However, many federal employees consider rolling over their TSP funds into an Individual Retirement Account (IRA) to gain more flexibility and control over their retirement savings. This article explores the pros, cons, processes, and key considerations of TSP to IRA rollovers.
What are TSP to IRA Rollovers?
A TSP rollover involves transferring funds from a TSP account to an IRA, either a traditional or Roth IRA, depending on the TSP account type (traditional or Roth). A direct rollover moves funds directly to the IRA without taxes or penalties, while an indirect rollover involves receiving the funds first, with potential tax withholding (e.g., 20% by the TSP for traditional accounts) if not completed within 60 days.
Pros of TSP to IRA Rollovers
- Increased Investment Options: The TSP offers limited funds, while IRAs provide access to a broader range of investments, including individual stocks, bonds, ETFs, and alternative assets.
- Account Consolidation: Rolling over to an IRA simplifies retirement planning by consolidating multiple accounts, making it easier to manage investments and withdrawals.
- Flexible Withdrawals: Unlike the TSP, which requires withdrawals to be proportional across your fund allocations, IRAs allow customized withdrawals independent of investment allocations.
- Advanced Financial Planning: IRAs allow for customized strategies, such as Roth conversions, which can optimize tax planning.
Cons of TSP to IRA Rollovers
- Higher Fees: The TSP’s expense ratios (e.g., 0.055% in 2024) are among the lowest available, while IRAs may incur higher management or transaction fees, depending on the provider.
- Tax Withholding Risks: In an indirect rollover, the TSP withholds 20% for taxes, requiring employees to replace the withheld amount within 60 days to avoid taxes and penalties.
- Loss of TSP Benefits: The TSP’s G Fund offers unique stability with no risk of loss, unavailable in IRAs. Additionally, federal employees lose access to TSP-specific features like loans.
- Complexity and Errors: Mistakes in the rollover process, such as incorrect forms or missed deadlines, can lead to unintended tax consequences or penalties.
The Rollover Process
- Choose an IRA Provider: Select a reputable financial institution with low fees and suitable investment options.
- Initiate a Direct Rollover: Contact the TSP to request a direct transfer to the IRA, avoiding tax withholding. Use TSP forms like TSP-75 for rollovers.
- Verify Account Types: Ensure a traditional TSP rolls to a traditional IRA and a Roth TSP to a Roth IRA to avoid tax issues.
- Monitor the Transfer: Confirm the funds are deposited correctly and within deadlines to avoid penalties.
Should You Roll Over Your TSP?
The decision to rollover a TSP to an IRA depends on individual goals. If you value low fees and simplicity, staying in the TSP may be preferable. If you seek greater investment flexibility or plan to consolidate accounts, an IRA rollover could be advantageous. Reach out to a Federal Retirement Consultant (FRC®) who can assess your retirement goals, explain tax implications, and identify your investment needs.
