Roll Your Thrift Savings Plan (TSP) To An Individual Retirement Account (IRA) Upon Retirement?



Recently a retired federal employee friend asked me about rolling his TSP account into an IRA.  My initial thought was, “No, why, there’s no advantage.”

But luckily for both my friend and I, research shows that indeed there are at least five advantages to rolling over your TSP after you retire.  Here’s a summary of the advantages to rolling a TSP account into and IRA that I found:

An IRA gives you Substantially more investment choices.  Where as the TSP has 5 investments plus a group of lifestyle funds,

  • G Fund (Government Securities Investment) 
  • F Fund (Fixed Income Index Investment)
  • C Fund (Common Stock Index Investment)
  • S Fund (Small Capitalization Stock Index Investment)
  • I Fund (International Stock Index Investment
  • L Funds (Lifecycle)

an IRA, especially a self-directed IRA can accommodate nearly any investment including real estate, commodities, annuities, individual stocks, and even certificates of deposits.  If you feel more confident in your own abilities, and in your retirement years you will certainly have more time to manage your money, this can be a very important feature.  You worked all those years for that money …why not be able to control it the way you feel is best?

Less hassle at 70-½ minimum distribution age.  Current regulations require starting to withdraw from retirement plans at age 70 ½.  If all funds are in IRAs, the withdrawal only has to come from one of the IRAs.  If some funds are in 401(k) type accounts (TSP), a withdrawal has to come from the TSP and the IRAs.  Some of us, with smallish investments may not consider this much of a problem, but once you have to start taking money out of your finds … at the mandatory withdrawal age, (typically 70 years and 6 months), this can be a big problem.  Likely by that time in life you have little or no mortgage and other easily itemized deductions and the ‘tax bite” of two or more withdrawal schemes may push your Federal Income and State Income taxes higher than you want them to be.

Tax law requires individual retirement account holders to begin taking out at least minimum amounts, known as RMDs, from their accounts once they reach age 70½. Technically, that means the IRA money must start coming out in specific increments no later than April 1 following the year you reach that age.  Even if the total amount you need to take out works out to be the same, taking the required withdrawal out of multiple sources is going to make for more hassle and expense in time and effort, if not money as well.

More flexibility to set up periodic income distributions…start, stop, increase, decrease.  TSP allows distributions of monthly income, but that distribution is not very flexible.  An IRA can distribute monthly income, and that distribution can be stopped, restarted, increased or decreased any time. This could be very important during lifestyle changes.  Suppose for example you decided to move to a smaller home .. or move to an overseas retirement haven like the Philippines (I did, you can read about my adventures retiring in the Philippines here.) 

You may find you need a monthly withdrawal just for a short period to cover outstanding expense.  If you need to raise, lower or stop that withdrawal in a timely manner, the TSP is not the best choice.

Unlimited partial withdrawals.  TSP allows one partial withdrawal over the life of the account.  An IRA has no such restriction.  Again, a very important difference.  You might decide to make a one-time withdrawal to cover something important like buying your retirement home.  Then what happens five years down the road if you find you need $10,000 to cover some needed handicapped accessibility upgrades.  With the TSP, you would have already “shot your wad” and you’d have no choice except to close your TSP  completely or else borrow the needed funds at a potentially high interest rate.

Quicker response time on withdrawals.  A withdrawal from the IRA generally can be done in a few days or less — not so with TSP.  Heck I even found legal “Checkbook IRA’s”.  No you can’t just write a check for your own pocket at will, but you can set up a Limited Liability Corporation under the umbrella of your IRA and write checks at will for IRA-legal investments … which are literally many and varied.

So to me it really looks as if my friend had the right idea.  If you are retiring from the Federal Service, you can roll that TSP money over into an IRA tax free with little hassle.  Seems like a worthwhile thing to do in my book.

(of course the usual disclaimers apply.  I am not a qualified financial advisor, tax consultant nor plastic surgeon, so make sure you make financial moves with your brain engaged and using competent professional advice.  The contents of this website are for thought provoking and discussion purposes only, they are not legal advice.)

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