Can You Move Funds From a TSP to an IRA?
Friday, September 22nd 2023
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 post 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:
- Broader investment options: IRAs typically provide more investment options than TSPs do, providing access to stocks, bonds, mutual funds, ETFs (2) and other investment vehicles.
- Easier consolidation: Consolidation may help make managing multiple retirement accounts simpler by consolidating them all into one IRA account.
- Greater flexibility in withdrawals: While TSPs typically impose strict withdrawal rules, IRAs typically offer greater flexibility for making early withdrawals; you might find them to be less stringent than TSPs in this respect.
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:
- Loss of low-cost investments: TSPs are widely known for offering extremely competitive fees; by moving funds into an IRA you could incur higher fees that reduce overall returns over time.
- No matching contributions: If you remain employed with the federal government, moving your TSP funds from TSP to an IRA means forfeiting future matching contributions that might otherwise apply.
- Limited access to TSP’s G fund: The government securities fund offered through your TSP (G Fund), known as an option that combines risk with reward, is unique among investment vehicles available today and cannot be transferred out into an IRA; by withdrawing money out of a TSP would mean forfeiting this investment option altogether.
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:
- Open an IRA: If you do not already own an IRA, creating one requires selecting a financial institution, choosing between Traditional or Roth accounts, and filling out an application process.
- Request a direct rollover: If you want to avoid tax implications, make a direct rollover request from your TSP. This requires filling out and sending in form TSP-70 directly to its processing center.
- Wait for confirmation: Once processed by TSP, funds will be dispersed directly to your IRA within several weeks.
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 consult a financial advisor. A professional can give you impartial guidance based on your specific finances as well as your tax bracket retirement plans, and risk tolerance – not overlooking that they will guide you through the process of rolling over to reduce penalty and tax consequences.
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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