For government workers, a Thrift Savings Plan (or TSP) is their employer-offered retirement plan.
After the end of a government job or career, and as individual needs and priorities change, a different type of retirement plan may be a better fit. This is why you might consider a TSP rollover to an IRA.
A Roth IRA offers more investment choices than a TSP and does not require minimum distributions. They are also funded with money that has already been taxed. This means your savings are tax-free when you withdraw them during retirement.
Traditional IRAs allow you to save for retirement on a tax-deferred basis. This means you only pay taxes on the money you put into the account once you withdraw it, usually at retirement.
How to Rollover TSP to IRA
A TSP rollover to an IRA can be done in one of two ways: direct rollover and or an indirect rollover. The process is now more accessible than ever since it can be completed online.
Both options have their own set of tax implications that need to be understood before making the move. With careful planning, a TSP rollover to an IRA can be completed in an efficient and cost-effective manner.
A direct rollover, also known as a transfer, is a simple and efficient way to move your retirement funds from one plan to another. It allows you to quickly and securely transfer money between two retirement plans without incurring any taxes or penalties.
To transfer a TSP to an IRA, you tell the TSP administrator to send your funds directly into your new IRA provider and account. All you need is an established IRA account and the necessary account details for the transaction.
When you transfer a TSP to a Roth IRA, the transferred amount is added to your taxable income for that year. This is something to consider when you decide to make a transfer. If you are making a transfer from TSP to a traditional IRA, no taxes are due upfront because both are funded with pre-tax dollars.
With an indirect TSP rollover to an IRA, you receive your retirement funds and have 60 days to deposit the money into an IRA. If the withdrawal is not deposited within the 60-day period, and you are under 59 ½, then you may be subject to a penalty.
The same rules apply if this is a TSP rollover to a Roth IRA, but your TSP will withhold 20% for federal income tax purposes. When you make a deposit, include the additional 20% to avoid a penalty.
What Are the Benefits of a TSP Rollover to an IRA?
Transferring TSP funds to an IRA can be beneficial for you. Once you turn 59 ½, you are allowed to complete a single TSP rollover to an IRA. This allows you to create more vehicles and avenues to build your retirement savings.
You should be careful when considering this change. It’s always best to speak to a fiduciary before moving forward. That said, there are a few powerful benefits to keep in mind.
Diverse Investment Options
If you have a traditional TSP or a Roth TSP, then you have limited options for investment. IRAs have much more options to choose from with individual stocks, bonds, ETFs, and mutual funds.
This makes a TSP rollover to an IRA an attractive option for federal employees. TSPs have target date funds, which can incur higher expenses and may not yield the most financial benefit for you compared to other options.
Access to Professional Money Managers
Since your TSP is an employer-backed account, you won’t have access to professionals who can look out for your specific needs. Having a financial advisor who understands your goals and objectives can help you to employ a strategy that will take those priorities into consideration. You don’t have that option with a TSP.
What Are the Disadvantages of a TSP Rollover to an IRA?
When you make a TSP rollover to an IRA, you need to consider the potential drawbacks. Apart from the tax implication of transferring funds with an IRA rollover from a TSP, there are some protections and restrictions that apply.
No ERISA Protections
ERISA is a federal law that protects employee benefit plans, like a TSP account. It imposes fiduciary obligations so the plan acts in your best interest. Plan administrators will need to give you your plan details and you have legal protections against litigation.
Higher fees can be a major concern when it comes to a TSP rollover to an IRA. TSPs have lower administrative costs, making them an attractive choice for those who want to maximize their returns. As an employer-backed account, you receive a discounted rate when it comes to investment fees. IRAs, on the other hand, can have higher maintenance fees.
Loss of Loan Options
The loss of loan options is a major challenge for those looking to save for retirement. IRA plans don’t offer this feature, so you can’t take a loan from your account. This feature can sometimes come in handy for financial emergencies.
Splitting Withdrawals Between Your TSPs
If you have both a traditional TSP and a TSP Roth account, then you have to split the withdrawals between the two when you make a TSP rollover to an IRA. In these special circumstances, it might be better for you to do a partial rollover to a Roth IRA to get the most out of your retirement accounts.
Get Ready for Retirement
If you think a TSP rollover to an IRA is for you, then get in touch with a financial planner with tax experience. You should be working with a true fiduciary and not those who claim to be “federal employee consultants.” These individuals are not connected to the federal government and do not have a legal obligation to act in your best interests.
At Asset Preservation Wealth & Tax, we provide a comprehensive suite of financial services designed to take the hassle out of managing your money. Our team of experienced tax professionals and financial planners is dedicated to helping clients achieve their financial goals.
With our personalized approach to retirement planning, we strive to develop a customized plan that will meet each of your individual needs. Retirement isn’t a time for uncertainty. You need a solid plan crafted by experts who are fiduciaries.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
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