Once I wanted to start taking money out of my TSP after retiring, I rolled it over into an IRA so that I could take advantage of the IRA’s more flexible withdrawal options. Image: iQoncept/Shutterstock.com
By: John GrobeWill you end up leaving federal service in the next year? Some of you might want to leave in order to accept an early out (VERA). Some of you may be forced to leave due to agency downsizings and reductions in force. When (if) you leave, you have a choice as to what to do with the money in your Thrift Savings Plan.
Many separated TSP participants choose to roll their money out of the Thrift Savings Plan. And by far, the most common rollover out of the Thrift Savings Plan is into an IRA. TSP is an employer sponsored retirement plan; and an IRA is an individual retirement plan. Some of the rules that govern them are the same (e.g., the definition of a “qualified withdrawal” for a Roth), while others are different (e.g., the age at which one will face an early withdrawal penalty).
Rollovers have been allowed in IRAs since the 1970s and in the TSP since its inception in 1987. When rollovers began, and until the mid-1990s, if the money that was withdrawn from the TSP (or other tax advantaged account, such as an IRA) was rolled into another tax advantaged account within 60 days, there was no tax due and there was no withholding. But a major change occurred in the 1990s; taxes were withheld from any rollover that was not a direct rollover (i.e., the money went directly from the IRA or TSP to the other qualified account).
If you had TSP money sent to your checking account, this would be considered an indirect rollover and taxes would be withheld from the payment. Even if it was your intent to roll it over into an IRA the next day, 20% would be withheld for federal income taxes. You would be able to recoup the withheld money if you roll the entire amount over into a qualified account within 60 days. Here is an example:
Direct Rollover
Amount rolled or transferred: $200,000
Withholding: $0
To IRA: $200,000
Indirect Rollover
Amount rolled or transferred: $200,000
Withholding: $40,000
To IRA: $160,000
You should make sure that you do a direct rollover (transfer) whenever you are moving money between tax-advantaged accounts. Almost all financial advisers are aware of this and will work with you to make sure that you execute a direct rollover.
Now, just because you can do a rollover from your TSP to an IRA doesn’t mean that you should do one.
There are pros and cons to rolling money out of your TSP.
The following table shows the advantages of each.
TSP
- By and large, TSP expenses are lower than IRA expenses and the TSP charges no annual fees.
- Penalty free withdrawals are allowed as early as age 55 (age 50 or 25 years of qualifying service for certain special category employees) in many circumstances. With IRAs, you generally must wait until age 59 1/2 .
IRA
- Even though the TSP has instituted a “mutual fund window”, it’s easier (and often cheaper) to invest outside of the TSP’s fund choices within an IRA.
- Despite the fact that the TSP has liberalized withdrawal options, you can take money out of an IRA whenever you feel like it.
In my situation, when I left federal service, I left my money in the TSP until I wanted to start taking it out. Once I wanted to start taking money out, I rolled it over into an IRA so that I could take advantage of the IRA’s more flexible withdrawal options (I was older than 59 ½ at that time).
If you choose to execute a rollover, you would utilize the appropriate TSP withdrawal wizard and choose either a full or a partial withdrawal. Then have a representative of the firm to which you are rolling the TSP monies complete the transfer section of the form.
What if you end up returning to federal service after your departure? You’re allowed to roll your IRA money back into the TSP if you wish.
John Grobe, President of Federal Career Experts, is an expert in the area of federal employee retirement and benefits. This expertise comes from his 26 year federal career in which he managed the retirement program in a 3,500-employee office of a large federal agency.
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See also
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