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Can You Move Funds From a TSP to an IRA?

Wednesday, July 17th 2024

Transitioning from government service to civilian life raises many financial considerations and decisions, including what should happen with your Thrift Savings Plan (TSP) (1) funds. One option available to you may be moving these assets over into an Individual Retirement Account (IRA). Although it’s certainly feasible, understanding all its ramifications before making your final decision is critical – in this article we cover moving funds between TSP and IRA, including its advantages, drawbacks, and process involved.

Understanding a TSP or an IRA

Thrift Savings Plans (TSPs), similar to private-sector 401(ks), provide tax-deferred growth with matching contributions and low-cost investment options, including tax deferral. Individual Retirement Accounts (IRAs), on the other hand, allow individuals to save tax-advantageously towards retirement with financial institutions using various tax advantages like Traditional and Roth IRAs – each type offering specific advantages depending on an individual’s goals, circumstances, and personal needs. Whether someone makes the switch is up to them alone and their needs or goals when considering all available options in either case!

Reasons for Converting TSP Funds into an IRA:

Reasons why someone would wish to convert their TSP funds to an IRA could include:

Drawbacks of Moving Funds from a TSP to an IRA

While shifting funds from an Individual Retirement Account (IRA) into a Tax Savings Plan has its advantages, there may also be drawbacks:

Eligibility for a TSP-to-IRA Transfer

IRS rules allow transfers from TSP to IRA when certain conditions have been fulfilled. To be eligible, individuals must either have been separated from federal service or reached age 59.5 while still employed and only transfer assets that constitute your “vested balance,” meaning amounts that you own outright.

The Process of Moving Funds from a TSP to an IRA

Here’s an overview on how to transfer funds between TSP and IRA:

Taxes and Penalties

Rolling over your TSP into an IRA should not incur any tax liabilities if done properly; however, mistakes could incur unwanted tax consequences; for example, if a check was payable directly to you but was deposited more than 60 days afterward into your IRA, this would constitute a taxable distribution. Also, if you’re under age 59.5 an indirect rollover could trigger an early withdrawal penalty.

Consider Professional Advice

Prior to making the transition from TSP to IRA, it’s advisable to talk to a financial professional. A pro can provide independent advice in accordance with your personal financial situation and tax brackets, retirement goals and risk tolerance – not overlooking that they will guide you through the transfer process in order to limit tax implications and penalties.

Conclusion

While moving funds between TSP and IRA accounts is indeed possible and offers many advantages, making the move shouldn’t be taken lightly. An IRA might seem appealing due to its wider investment options and flexibility; but for others the low costs and unique investment choices offered by their TSP might prove more advantageous. Therefore, it is crucial that thorough research be performed prior to making such a big step – consult if needed with financial advisers – in order to arrive at an informed decision.

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