How soon after rolling a TSP into an IRA can it be used for college tuition?
We can’t afford to contribute to a college fund from our current income and are considering using retirement funds for our children’s tuition. How long would it take to process the rollover before those funds became available? (Oldest is in 6th grade now, so we have some lead time but we’re trying to understand the tax implications as part of the overall financial aid picture.)
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First, it should be noted that, under current rules, you can only withdraw from the TSP (and a rollover/transfer is considered to be a withdrawal) if you are separated, or if you are still an employee, you are over 59 1/2.
The TSP is rather vague in how long it will take to process a rollover, but you should expect anywhere from a week to several weeks before the money is available in an outside IRA.
If you are executing the rollover after separation, the TSP cannot disburse any money until it has been notified by your agency that you have separated. Agencies usually do this after you “clear payroll” and have received your final paycheck. The TSP notes that, “In most cases this will be between 2 and 4 weeks after the actual date of separation.”
If you are still employed and execute an age-based withdrawal (you must be at least age 59 1/2 to do so) the TSP says it could take up to “several weeks”.
Assuming you meet the criteria for a rollover (i.e., you are either separated or 59 1/2 or older) you should allow at least a month to play it safe. From reading your question (oldest child in 6th grade), it appears that you might not meet these criteria, so you might have to look at other options.
Assuming you are currently contributing to the TSP, you could lower your TSP contributions and begin to contribute to an outside IRA for the purpose of later college contributions. Make sure you are still contributing enough to the TSP to get the full employer match if you take this route.
You could also lower your TSP contributions and direct some of the money to a state approved 529 plan or a Coverdell ESA.
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