Should Rollover Your TSP to an IRA?
You’re soaked in champagne, or the $4.16 version of it that the casual lieutenant picked up at the Class 6. You’ve got a few thousand hours (hopefully) under your belt and landings are pretty much equal to takeoffs. As you wrap up the fini-flight celebrations, there’s probably nothing more pressing on your mind than: “Should I leave my money in the TSP, or roll it over to an IRA,” right?
Unfortunately, the question isn’t as easy to answer as something like, “Should I take the bonus?” or “Should I go straight to guns off the perch?” But this article will give you some ammo to help mow down this choice, and the nice thing is, you’ve got time.
!!! WARNING !!!
Before coming down firmly on both sides of this argument, it’s critical to remember that unless you are 59.5 years-old (or meet another narrow exception), you can’t start spending your TSP money without paying your current marginal bracket, e.g., 24% or higher, plus a 10% penalty tax for early withdrawal.
If you do want to move your money out of the TSP, you must execute a rollover to an IRA, preferably directly to the institution that you’re moving it to. (e.g., Vanguard, Fidelity, Schwab, etc.) If you accept the money into your checking account, even as part of the rollover process, the TSP must withhold 20% for taxes. You then have 60 days to put the entire amount (including the 20% that you won’t see again until next April 15th) into the new custodian’s account, or you’ll effectively have taken the entire amount as a distribution—read: pay 24% or higher plus 10%. Don’t be that guy or gal.
The TSP now makes this process only medium-clunky online. If you have both Roth and Traditional money, as well as some after-tax dollars from combat deployments, you’ll want to make sure you work with the TSP and your new custodian to properly segregate that money into Roth and Traditional IRAs, rather than comingling it.
If something goes plaid and it ends up comingled, don’t let the issue go. You could get taxed twice on your dollars if you let that hot mess simmer for a few years. For simplicity, in the rest of this article, I’ll talk about rolling the TSP over to an IRA, but you’ll likely be rolling it over into two IRAs—one for the Traditional dollars and another for the Roth dollars.
One final tip—it’s necessary to open the new IRA accounts with the receiving custodian before initiating the transfer from the TSP. This is an easy online procedure at most custodians.
The Case for Rolling Over your TSP to an IRA
The TSP has been good to you for 12-20+ years, why mess with a good thing? If you wanted, you could leave your money with the TSP until you die. Even though the TSP is a reliable workhorse, there are some reasons to consider just rolling your money over to an IRA.
Simplicity. A few decades of financial activity can leave you with dozens of accounts, statements, 1099s, logins, fees to track, investment options, etc. Chances are that you already have an IRA open for you and your spouse. Closing the TSP could be some Marie Kondo for your financial life. Why leave a rat’s nest for your heirs to sort out?
High Pk merge with an IRA anyway. Chances are, you are eventually going to move it to an IRA anyway. The TSP doesn’t give you near the flexibility that most custodians do for taking withdrawals to buy your hearing aid batteries. Why not just do it early and enjoy some streamlined financial life?
Investment Options. As you know, the TSP only has 5 core index funds if you don’t want to pay the fees to use the new Mutual Fund Window. Most major custodians have hundreds of funds and access to thousands more. Rolling your TSP to an IRA opens many more ways to diversify your investments. Want to buy crowd-funded real estate with your retirement dollars, you’ll likely need a self-directed IRA for that—no such options in the TSP.
Withdrawal Options. You can’t choose to cash $5,800 out of the C-Fund to buy some sweet Bitcoin, Dogecoin, NFTs, GME or pogs. Distributions are a peanut butter spread of your TSP investments. So much for buy low, sell high. With the TSP, it’s buy low or high… won’t know for a long time… sell as allowed by TSP rules… That’s probably not the best TTP for your retirement dollars.
Withdrawal Frequency. You can take and change your distributions as often as you like as long as that’s no faster than monthly, and no less than $1,000 at a time. The TSP currently takes 30 days to administratively adjust to your distribution requests. This could be a significant LIMFAC if you have a life event or opportunity that requires a large distribution shortly after changing your normal distribution preferences.
Turns like a BUFF. The TSP has changed for the better in recent years. There are more Lifecycle fund options, you can change withdrawals every 30 days versus every 365 days, etc. But it’s slow to keep up with commercial custodian practices that give you flexibility, so you might find better options on the outside.
Professional Advice. In general, if you work with an advisor, that advisor can’t directly manage your TSP for you, if that’s what you’re hoping for. The advisor can recommend actions such as rebalancing, but you’ll have to take them. Depending on what you want from your advisor relationship, that may defeat the purpose of having a professional help you.
Okay, so there’s a lot of reasons to rollover your TSP to an IRA. But before you start slinging rollover paperwork, let’s hear what the defense has to say.
The Case for Staying in the TSP
Sure, the TSP’s got some warts, but it’s been a pretty good autopilot for your wealth-building flight plan. Why mess with a good thing any earlier than you must? I agree, and here are some reasons to stay with the TSP for now.
The G-Fund. The G-Fund, an index fund of U.S. government bonds, is unique among investment vehicles. It is essentially guaranteed to never lose value even if its returns are unimpressive by stock fund standards. You will find no analog outside the TSP. While you may not currently need a heavy bond allocation, one day, you’ll probably want some lower-risk securities. Keeping at least some of your money in the TSP gives you access to this unique animal.
Low Costs. As you’re probably aware, the expense ratio arms race has finally reached zero with some custodians. Thus, the TSP’s costs, which vary but are generally around .04% to .06%, are no longer the de facto cheapest index fund options. Personally, I stop splitting cost atoms below .1% and chances are, other parts of 4-I-4-T are driving your returns long before you choose between a fund that has a .5% or a .03% expense ratio.
But if you’re not careful, you could easily roll over your TSP into an IRA with funds carrying expense ratios well over 1% without the returns to make up the difference. Costs matter, so you need to pay attention to this.
Backdoor Roth IRAs. You’ll want to brush up here for the whole story on Backdoor Roth IRAs, but when you start making too much money on the outside ($230K AGI, Married Filing Joint in 2024), you’ll have to fund your Roth IRA through the “backdoor.” Depending on what other accounts you’ve opened over the years (e.g., a Traditional IRA, SIMPLE IRA, SEP IRA), you may be effectively prevented from a tax-efficient Backdoor Roth IRA strategy.
But if you have a qualified plan like the TSP (or a 401(k)/403(b) from your new employer) that accepts rollovers, you can flush other Traditional accounts (IRA, SIMPLE, SEP) into the TSP/401(k) and enable Backdoor Roth IRAs. Keeping your TSP open keeps this door open. It could save you thousands, if not hundreds of thousands, in lifetime taxes—if that kind of thing is important to you…
Simplicity. Does your IRA custodian offer more options than the Cheesecake Factory? Do you like that analysis paralysis feeling when you’re trying to decide which funds to buy? Me neither. The TSP has 5 funds that are a good core for most people. If simplicity is a priority, the TSP can be your friend.
Strong Lobby. The TSP has friends in Congress and other lobbying organizations. Since the whole government and its retirees have access to the TSP, there’s a powerful lobby to protect it, suppress costs, and improve it over time. Your custodian might have different interests pulling the strings.
Cushy GS Job? If your future involves the Civil Service, you’ll now receive a match for future TSP contributions. It could simplify your financial world to let your military TSP dollars lash up with your civilian TSP dollars until you hang up your spurs for good.
FAM (Fee Avoidance Maneuver). If you self-manage your investments and use a low-cost brokerage, this is N/A. However, military retirement and separation come with a lot of financial complexity, so it’s common to start reaching out to a financial advisor for help with the various decisions you face. Unfortunately, “financial advisor” is about as standardized of a term as airplane, and there are a lot of salesmen/women that masquerade as a “financial advisor.”
It should suffice to say that financial relationships always have conflicts of interest. Specific to the TSP question, an advisor that charges you a percentage of the assets that s/he manages for you can’t charge you on TSP dollars that s/he can’t directly manage (unless you allow it, and few would do so).
Salespeople can be pretty slick with their reasons why you should let them manage your dollars after moving them from the TSP to an IRA, but at the end of the day you need to have a good sense of “Can this financial advisor really beat my TSP performance after adding in his/her costs such as trading commissions, ongoing management fees, account maintenance fees, higher expense ratio funds, potential market mis-timing, etc.?”
This is a tough question to resolve, but if you’re getting a hard sell to let a financial services person roll over your TSP so that they can manage it, think twice. If you want to work with that person, maybe hold shots on the TSP rollover for a few years until you’re more confident in that relationship.
Cleared to Rejoin
The answer to most good questions is usually, “It depends.” The TSP rollover choice is no different. The most critical part is the execution and avoiding unintentional tax consequences. Leaving your money in the TSP, at least for a few years, is generally a good do-no-harm strategy.
Unless you just retired after 50 years of service and are literally staring at Roth TSP RMDs (I didn’t think so) then you probably have some time to revisit this decision. Eventually, it probably will be best to move your TSP dollars into an IRA, but you have time, so no need to make an unforced and costly error at a time in your life when you’re already juggling a few flaming chainsaws.
Fight’s On!
Winged Wealth Management and Financial Planning LLC (WWMFP) is a registered investment advisor offering advisory services in the States of Florida, Texas, Virginia, and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training.
This communication is for informational purposes only and is not intended as tax, accounting or legal advice, as an offer or solicitation of an offer to buy or sell, or as an endorsement of any company, security, fund, or other securities or non-securities offering. This communication should not be relied upon as the sole factor in an investment making decision.
Past performance is no indication of future results. Investment in securities involves significant risk and has the potential for partial or complete loss of funds invested. It should not be assumed that any recommendations made will be profitable or equal the performance noted in this publication.
The information herein is provided “AS IS” and without warranties of any kind either express or implied. To the fullest extent permissible pursuant to applicable laws, Winged Wealth Management and Financial Planning (referred to as “WWMFP”) disclaims all warranties, express or implied, including, but not limited to, implied warranties of merchantability, non-infringement, and suitability for a particular purpose.
All opinions and estimates constitute WWMFP’s judgement as of the date of this communication and are subject to change without notice. WWMFP does not warrant that the information will be free from error. The information should not be relied upon for purposes of transacting securities or other investments. Your use of the information is at your sole risk. Under no circumstances shall WWMFP be liable for any direct, indirect, special or consequential damages that result from the use of, or the inability to use, the information provided herein, even if WWMFP or a WWMFP authorized representative has been advised of the possibility of such damages. Information contained herein should not be considered a solicitation to buy, an offer to sell, or a recommendation of any security in any jurisdiction where such offer, solicitation, or recommendation would be unlawful or unauthorized.
