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Bankrate principal writer and editor James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
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Thrift savings plans (TSP) provide government employees with the ability to save for retirement. If an employee leaves government service, they can roll over their TSP account into an Individual Retirement Account (IRA) or other qualified plan. By doing so, they can maintain the tax-advantaged status of their retirement savings and have more control over their investment choices.
Rolling over a TSP account into an IRA is a fairly straightforward process however, there are some things to consider before making the transfer. Here’s how to roll over your thrift savings plan into an IRA and what to watch out for.
The thrift savings plan is a tax-advantaged retirement plan for federal civilian employees and members of the uniformed services, such as the Army, Navy, Air Force, Marine Corps, Coast Guard, Public Health Service, and National Oceanic and Atmospheric Administration.
Through TSP, individuals can make contributions to a plan via payroll deduction, either on a pre-tax basis, after-tax basis in a Roth account, or both. If contributing to a pre-tax account, the funds are not taxed until withdrawn. In contrast, with a Roth TSP, contributions are taxed upfront but grow tax-free, and any money can be withdrawn tax-free at retirement.
The plans also offer the ability to receive up to a five percent match on employee contributions.
Participants in the thrift savings plan can roll over their money into an IRA or any other eligible plan, including a 401(k) plan, a profit-sharing plan, a defined-benefit plan, a 403(b) annuity plan and a 457(b) plan, among others. Here’s how to initiate the process to roll over into an IRA:
When you’re thinking about rolling over your TSP to an IRA, you have one big decision: whether you want to move the money to a traditional IRA (pre-tax) or a Roth IRA (after-tax), or both. This decision can create major tax liabilities, so you need to carefully decide which IRA you want.
If you transfer a pre-tax TSP to a traditional IRA, you won’t create any additional tax liabilities, since you’re keeping the same pre-tax treatment on your contributions. Similarly, if you roll a Roth TSP into a Roth IRA, you won’t create further tax issues, since both are after-tax accounts.
And even if you have money in both types of TSP accounts, you can transfer that money into the respective IRA and avoid creating any immediate tax liabilities.
However, if you move your money from a pre-tax TSP to a Roth IRA, the IRS will require you to pay taxes on the conversion. That kind of rollover could force you to pay significant taxes, since your pre-tax contributions will count as income and you’ll have to pay at ordinary income rates.
Once you’ve decided which kind of IRA you want, you can look at the best brokers for IRAs. An IRA at an online broker allows you to invest in potentially high-return assets such as stocks and stock funds, though you could also opt for an IRA CD at a bank if you want a lower-risk option.
If you prefer professional management of your IRA, consider working with a top robo-advisor, which can set up an investment portfolio that matches your risk tolerance and when you need the money. Alternatively, you can use Bankrate’s financial advisor matching tool to find a reliable advisor in your area.
Once you’ve identified an IRA account that suits your needs, open the account should only take less than 15 minutes. Once the account is created, you can begin the process of rolling over your TSP account.
Contact the TSP administrator to initiate a rollover to your new IRA, and follow their instructions to the letter. The new financial institution or plan must certify that it will accept a check from the U.S. Treasury and must provide rollover information on your distribution request. Each broker, bank or robo-advisor has its own process, so contact yours to see exactly what it needs.
However, the TSP will not accept the forms of other financial institutions.
Fill out the TSP’s required paperwork, which may require some back-and-forth conversations between the TSP and your new IRA provider to get the information that both sides need.
Once the paperwork has been completed, the TSP will liquidate any investments in your account and issue a U.S. Treasury check for the proceeds to your new financial institution.
As you’re considering whether it makes sense to roll over your TSP into an IRA, you’ll want to think about the following issues:
Considering these issues will be critical in deciding what to do with your TSP.
Rolling over your thrift savings plan to an IRA can make a lot of sense, giving your retirement account portability when you change jobs. While it’s relatively easy to roll over your TSP, it may not be a slam dunk choice, so you need to carefully consider the potential issues you’ll run into.
Arrow Right Principal writer, investing and wealth management
Bankrate principal writer and editor James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more.
