The Thrift Savings Plan (TSP) was established by Congress in the Federal Employees Retirement System Act of 1986. Known for its low fees and simplicity, it’s one of the largest retirement plans in the world. There is currently around $985 billion invested in the TSP across more than 7.2 million accounts. But one question that is frequently asked is “When I separate or retire, should I move my money from the TSP?”
Minimizing Taxes
As you near retirement, you’re likely to face the stark reality that most of your retirement savings are in tax-advantaged accounts, which means you’re delaying and increasing your tax bill not eliminating it. And you’re not only paying taxes on your contributions but your earnings too. One way to minimize this burden is a Roth conversion, you take an up-front tax hit on the amount you convert, but your money then grows tax-free. With an IRA, you can directly convert your funds to a Roth IRA, but this option is not available in the TSP until next year. And if the Trump tax cuts are allowed to expire at the end of 2025, you’ll be paying a higher tax rate on that conversion.
Dollar Cost Ravaging
An IRA gives you more flexibility on how you structure your withdrawals. In the TSP, your withdrawals are distributed from the funds in proportion to how you invest. If you have 60% invested in the G Fund and 40% in the C and S funds, your withdrawal corresponds. In a down market, this effectively forces you to sell low from the more volatile funds since you can’t opt to have 100% of your distribution come from the G Fund to spare you from losses.
Single Strategy
Diversification is key to a good investment strategy. So in a perfect world, you could use your traditional TSP as a more conservative vehicle for growth (since that growth incurs taxes) and expose your Roth TSP to more risk (since that growth does not incur taxes). Unfortunately, the TSP doesn’t allow you to have different contribution allocations or interfund transfers in your traditional TSP vs your Roth TSP.
Limited Options
When you move your money from the TSP to an IRA or Roth IRA, you’ll have many more options outside of the TSP’s 5 main funds. If you understand investing and follow the market, this is a good thing, if not, you may prefer the “set it and forget it” of a TSP lifecycle fund. With an IRA you can also work with a financial professional who can help optimize your portfolio.
Unsure which option is better for you? Speak with a Federal Retirement Consultant® who can review your TSP and make a recommendation that fits your needs and retirement goals.
