What To Consider Before Transferring Your TSP To An IRA


When you separate from federal service, you will have an important decision: should you leave your money in the Thrift Savings Plan or transfer it out (presumably to an IRA)? The bad news is there is no right answer for everyone, and it depends on your preferences and situation. But the good news is that you have some time to consider the advantages and disadvantages of transferring your money out, so don’t rush this decision. To help you in your decision-making process, I have laid out what I believe are the significant advantages and disadvantages of transferring your TSP to an IRA.

Advantages Of Transferring To An IRA

Broader Investment Options and Other Services
An IRA offers far more investment options than available in the TSP. For instance, an IRA will give you access to funds similar to those found in the TSP, plus individual stocks, individual bonds, real estate, and emerging markets.

Additionally, IRA providers often offer additional services, ranging from full brokerage services to DIY education and support. If your IRA is managed (by a financial advisor), you will likely pay substantially more than you did in the TSP and will hopefully receive considerably more value.

Note: Whether or not any increased cost should be considered an advantage or disadvantage is based entirely on the value you receive. Suppose you transfer your TSP to an IRA managed by a great financial planner that provides comprehensive financial planning on top of investment management. In that case, you might be receiving a great deal. On the other hand, if you are paying 10X the cost for about the same service you received in the TSP, well, then you might want to run for the hills.

Withdrawal Flexibility
The major disadvantage of the TSP is its withdrawal limitations. Hence the most significant reason for transferring your money to an IRA is for the added withdrawal flexibility. In fact, if you meet basic criteria (mainly age 59 ½ or older), you can pretty much withdraw money from your IRA however you would like. Which again is in stark contrast to the TSP. For instance, TSP withdrawals must be made proportionally between funds. Meaning, if you have 70% C fund and 30% G fund, every dollar you withdraw must come out in the exact proportion of 70% C and 30% G. This limitation can force you to sell shares of a fund that has declined in value and take a loss.

Another important point is that once separated, you are limited to the following three withdrawal options:

I. Lump-Sum: Whether you just need a portion of your TSP savings or want to withdraw the entire balance, you can have your funds transferred directly to you or an eligible retirement plan (IRA, 401(k), etc.). You can take as many withdrawals as you like but are limited to one withdrawal every 30 days.

II. Installment Payments: This option has some features of both the lump sum and the annuity options. For example, like the lump sum, this option allows payments to be transferred into an IRA or other eligible retirement plan. And like the annuity option, the installment provides a stream of automatic payments. When it comes to payment frequency, you have a few choices; You can choose between annual, quarterly, or monthly payments, and you can change your election at any time.

III. Annuity: The annuity option provides a guaranteed monthly income stream for the rest of your life. Here is how it works; the TSP will take the funds you designate and purchase an annuity from MetLife. MetLife will then issue the monthly payments and handle all the administrative tasks for your annuity.

Note: You can use one of these methods or any combination of them.

The last point on flexibility is that moving money from your Roth TSP to a Roth IRA can eliminate Required Minimum Distributions (RMDs). RMDs are required from Roth TSP but are not required from a Roth IRA. Not only does this grant you more flexibility on withdrawals, but it also allows you to leave your money to grow income-tax-free for a longer period.

Note: RMDs are not required from your TSP if you are still an active federal employee.

Disadvantages Of Transferring To An IRA

Broader Investment Options
Yes, this was listed as an advantage of the IRA; however, it can also be a disadvantage if you don’t have the education or inclination to do your own portfolio construction. In fact, many regard the TSP’s simplicity as of its major benefits.

Conflicts of Interest
Like other industries, the financial services industry is littered with conflicts of interest. And often, when a financial advisor recommends you transfer your TSP to an IRA, they stand to benefit financially from the move (even if the recommendation is appropriate). The most common way that a financial advisor will benefit is by charging you a percentage of the assets under their management (AUM). So, if you transfer your money from the TSP to an IRA under their management, their fee will increase. Hence, knowing whether the advisor recommending a transfer will benefit from the transaction can give you some additional context and is something you should consider when weighing the appropriateness of the advice.

Different Rules
One of the most significant benefits of leaving your money in the TSP is that you can access your funds prior to age 59 ½. If you separate from service in the year that you turn 55 or later (age 50 for special category employees), you’ll be able to take penalty-free withdrawals from your TSP. In contrast, penalty-free withdrawals generally are not allowed from an IRA until age 59 ½. Therefore, take care because if you move your TSP funds to an IRA, you’ll lose this benefit.

Note: Both the TSP and IRA have exceptions that will allow you to take penalty-free withdrawals (substantially equal periodic payments, death, disability, etc.).

No G Fund
Another disadvantage to moving your money out of the TSP is losing the G fund. Yes, I know the G fund is not exciting, but boring is usually great when it comes to investing. The G Fund allows you to earn a rate of return similar to long-term Government securities but with the low volatility of short-term Treasury securities.

Final Thoughts

The decision to move your TSP or stay put is an important one. And there is no right or wrong option. If you prefer a simple, hands-off approach or might need to access your funds before 59 ½, then you may want to keep at least some of your money in the Thrift Savings Plan. If, however, you want more investment options, want your retirement account managed, or simply want the withdrawal flexibility of an IRA, then an IRA may be more practical. Regardless of your decision, it’s important that you thoroughly review your options and make the choice that is consistent with your long-term financial plan. If you need help deciding which decision is best for you, consult with a qualified fee-only Certified Financial Planner.

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2023 Legislative Change Notice

The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.

Published by Jose Armenta, MsBA, CFP®, ChFC®, EA

Jose Armenta is a CERTIFIED FINANCIAL PLANNER™ professional who specializes in helping federal employees get the most out of their federal benefits. Jose’s experience serving federal employees has provided him with valuable insight into federal employees' unique financial planning needs.

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