You’ll have to decide if you value simplicity or flexibility when choosing where to keep your retirement money. Image: TierneyMJ/Shutterstock.com
By: Dallen HawsThe TSP (Thrift Savings Plan) is really good at a lot of things, but not everything.
While you’re working the TSP is hard to beat.
It is simple and has high quality, low-fee investment options.
But when you retire the story changes.
There are a number of things that the TSP doesn’t let you do in retirement but here are the top 5.
No Roth Conversions For You
For those that don’t know, a Roth Conversion is the process of getting money from a pre-tax account over to a Roth (after-tax) account so that your money can then grow tax free.
This is an incredibly popular strategy to save taxes over time.
So how do you do Roth Conversions within the TSP? Well, you simply can’t.
The TSP doesn’t allow you to move money from the Traditional TSP to the Roth TSP.
To do a Roth Conversion you’d have to move your money to an IRA.
Tedious Spousal Consent
The second thing the TSP does not let you do is to withdraw or transfer money without your spouse’s consent.
If you want to take money out or transfer it to a different retirement account your spouse will need to sign off on that action.
For those that are on the same page as their spouse this isn’t the end of the world but is simply just another tedious hoop to jump through.
The good news is that in the past they required a notarized signature from their spouse for every withdrawal but they have since gone to getting their permission via email. Progress 🙂
Can’t Pick Which Investments to Sell
Let’s say you are retired and have half your TSP money in the G Fund (super safe fund) and the other half in the C Fund (more aggressive fund).
You are ready to withdraw $10,000 for that incredible Europe trip that you have been planning for years.
But you notice that the stock market (and the C Fund) are having a bad couple of months and you don’t want to sell (aka withdraw money out of) your C Fund as that would be selling when things are down.
You’d prefer to just sell some of your more stable G fund to allow the C fund time to recover.
Unfortunately, the TSP doesn’t let you pick which investments to sell when you make a withdrawal.
It will automatically make the withdrawal from your investments proportionally.
So if you have half of your TSP money in G and half in C then your withdrawal will come out half from G and half from C.
Note: There is a work around to this problem but it is an extra step. After you make your withdrawal you would then have to move money from the G fund (in my example above) to the C fund so that it was “as if” the withdrawal came just from the G. And as long as you make the investment change right after you make the withdrawal (and the price of C fund hasn’t changed too much) then it will give your C fund more time to recover.
Can’t (Normally) Change How Much Tax They Take
For most Traditional TSP withdrawals the TSP will withhold at least 20% for taxes.
You can ask them to withhold more but you can’t go lower than 20%.
So if you ask for $10,000 then they’ll send $8,000 to you and the remaining $2,000 to the IRS.
Well what happens if you are only in the 12% tax bracket or any bracket that is less than 20%?
Doesn’t matter. The TSP will still withhold at least 20% and you’ll just have to withdraw more to end up with your desired amount after taxes.
Now if you are only in the 12% bracket then you’ll get the 8% overpayment back when you file your taxes.
In comparison, an IRA will let you choose exactly how much you want to withhold.
Note: The one type of withdrawal that the TSP will allow a withholding of less than 20% is an installment payment that is expected to last more than 10 years.
No QCD’s (AKA: The best way to save taxes and support charity at the same time!)
If you like giving to charity and saving taxes then a QCD (qualified charitable distribution) is your best friend.
QCD Summary: When you reach the age (between 70.5-75 years old depending on your birth year) that you will be required to take money out of traditional retirement accounts for RMDs (required minimum distributions) you are allowed to send your RMD withdrawals to a charity and that would make your entire withdrawal tax free!!
But, as I am sure you guessed, you can’t do this from your TSP. It has to happen from an IRA.
If you consistently give to charity then a QCD is a no brainer as it often saves you way more money in taxes than any other way of giving.
Final Thoughts
But don’t take this article the wrong way. The TSP is not all bad in retirement.
The TSP certainly does lack some flexibility in retirement but its greatest strength is SIMPLICITY.
Fewer options often means fewer ways to make a mistake.
You’ll have to decide if you value simplicity or flexibility when choosing where to keep your retirement money.
Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.
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