Can I Roll Over My Federal Thrift Savings Plan To An IRA?

Investment 101

Published: February 3, 2022

Share on linkedin
Share on facebook
Share on twitter

Planning for the future is difficult when countless options exist, from savings accounts to beneficiaries and everything in between. If you are a federal employee or a military member looking for a more flexible retirement savings option, you may be wondering what to do with your TSP. One popular option is to roll over your TSP to an IRA.

Here you’ll find all the information necessary to make an informed decision.

What is a Thrift Savings Plan?

The Thrift Savings Plan (TSP) is a retirement savings plan for federal employees and military members. It allows workers to save money for retirement in a tax-advantaged account.

A TSP allows employees to save part of their income while receiving matched contributions from the government.

The TSP is similar to 401(k) plans offered by private employers but with some key differences. A TSP has lower fees than most 401(k) plans. It also gives participants five investment options from which to choose.

What is an IRA?

An IRA is an Individual Retirement Account. There are two types of IRAs: Traditional and Roth.

Traditional IRA contributions are taken out of paychecks with pre-taxed money. They offer tax-deferred growth on your investments. While that provides higher current salaries, these contributions and their growth will be taxed as current income upon withdrawal.

On the other hand, Roth IRA contributions are made with after-taxed dollars, offering tax-free growth on your investments. Since the original contributions were made with taxed dollars, this option allows individuals to make tax-free withdrawals once in retirement.

Both IRA types allow for penalty-free withdrawals at 59 1/2 years old.

Benefits of a Thrift Savings Plan

A TSP allows employees to save up to 11% of their annual salary for retirement. This account offers the added benefit of being tax-deferred. Employees can enjoy the most of their finances now without worrying about taxes.

A TSP gives participants a choice of five different investment options:

  • G Fund: Government Securities Investment Fund
  • C Fund: Common Stock Index Investment Fund
  • I Fund: International Stock Index Investment Fund
  • F Fund: Fixed Income Index Investment Fund
  • S Fund: Small Cap Stock Index Investment Fund

Unlike other retirement accounts, TSP holders have the bonus of a lower investment fee. While all retirement accounts pay an investment manager to maintain their account, TSP accounts hold one of the lowest total expense rates.

With the current rate at 0.042%, employees spend a meager $0.42 per $1,000 in their account balance.

Drawbacks of a Thrift Savings Plan

Before setting up a Thrift Savings Plan, there are a few drawbacks to consider. If you leave your job before retirement, you must pay taxes on the money you saved in your TSP account.

Also, if the money from your TSP account is withdrawn before you are 59 1/2, you will be subject to a 10% penalty. This penalty will be added to the following year’s taxes, given that it’s considered earned income.

Benefits of Rolling Over Your Thrift Savings Plan To An IRA

Rolling over your Thrift Savings Plan to an IRA has several benefits. Rolling it over gives you more control over your investment options. With an IRA, you can choose to invest in various assets, including stocks, bonds, and mutual funds.

Switching your TSP account over to an IRA will also save you from having to pay taxes on your contributions until you withdraw them in retirement.

Drawbacks of Rolling Over Your Thrift Savings Plan To An IRA

Like every retirement savings option, rolling your TSP over to an IRA has disadvantages.

Rolling it into a traditional IRA will cause you to lose the ability to defer taxes on the money you have contributed to your account.

If you roll your savings into a Roth IRA, you will be forced to pay taxes on the amount in your savings plan in one lump sum. This is to cover the taxes that would have been taken from those contributions if the Roth IRA was your initial savings plan.

Like every other retirement savings plan, you will be subject to a penalty if you withdraw money from your IRA before you reach retirement age.

Other Considerations of Rolling Over a Federal Thrift Savings Plan

Each with its advantages and disadvantages, there are a few things to consider carefully before making your decision, including:

Make Sure You Evaluate Your Transfer Options

When you leave your job, your previous employer generally has three options for what to do with your federal Thrift Savings Plan (TSP) account: leave the money in the TSP, roll it over to a traditional IRA, or roll it over to a Roth IRA.

Before deciding which option to choose, each plan has rules and regulations regarding taxes, fees, and investment options. It’s essential to take time to learn the differences each three provides.

1. Taxes

If you withdraw money from your TSP account before age 59 1/2, you will likely be subject to income taxes and a 10% early withdrawal penalty. However, if you roll the money over into an IRA, you can avoid paying the early withdrawal penalty as long as you don’t make any withdrawals from the account for at least five years.

2. Fees

Different institutions may require you to pay an entrance fee for rolling over your TSP account into an IRA managed by them. Make sure to compare the fees charged by various institutions before deciding where to open your IRA account.

3. Investment options

When you roll over your TSP account into an IRA, you will have more investment options than you do with the TSP.

For example, you can invest in mutual funds and exchange-traded funds (ETFs) that are not available in the TSP. It’s important to consider if the additional investment options are worth the fees you may have to pay to open and maintain an IRA.

Reduce Your Tax Burden by Rolling Traditional to Traditional and Roth to Roth

If you have a traditional TSP account and roll it over to a Roth IRA, you will have to pay taxes on the amount you roll over. However, if you have a Roth TSP account and roll it over to a traditional IRA, you won’t have to pay taxes on the amount you roll over.

Similarly, if you have a traditional IRA and roll it over to a Roth IRA, you will have to pay taxes on the amount rolled over. However, if you have a Roth TSP and roll it over to a traditional IRA, you will not have to pay taxes on the amount you roll over.

Rolling your savings from like-accounts minimizes any tax confusion and allows you to continue the same method of saving as you have been.

Consider Your Future Withdrawal Plans

When deciding whether to leave your money in the TSP or roll it over to an IRA, you should consider your future withdrawal plans. If you plan to withdraw the funds from your account before age 59 1/2, you may want to leave the money in the TSP to avoid the early withdrawal penalty.

However, if you plan to wait until after age 59 1/2 to withdraw the money, you may want to roll the account into an IRA to have more investment options.

Take a Closer Look at Doing an Indirect Rollover

An indirect rollover takes a distribution from your TSP account and then deposits the money into an IRA within 60 days. With an indirect rollover, you will have to pay taxes on the amount you roll over and the 10% early withdrawal penalty if you are under age 59 1/2.

However, doing an indirect rollover does offer some benefits. It allows you to invest the money in an IRA before finalizing what you’ll do with it. If you are considering an indirect rollover, speak with a tax advisor to see if it is right for you.

Stay Wary of Free Rollover Claims

Some financial institutions claim that they will do a “free rollover” of your TSP account. Always be aware that fees are usually associated with rolling your TSP account into an IRA, even if an institution claims otherwise.

Always read the fine print and understand all fees before deciding when and where to roll over your TSP account.

Understand There Be a Few Conflicts of Interest

When you roll over your TSP account into an IRA, the financial institution where you open your IRA may have a conflict of interest. For example, the institution may try to sell you products that are not in your best interest, such as annuities.

Research and understand all institution options before rolling over your TSP account.

Break Down the Expenses and Fees

Another issue to consider is that you may have to pay fees to the institution where you open your IRA. Make sure to compare the fees charged between different institutions before choosing where to open your account.

Some of the fees you may have to pay include:

  • Setup fees
  • Annual maintenance fees
  • Investment management fees
  • Transaction fees
  • Termination fees

Compare Different Investment Options

IRAs are appealing because they offer more investment options than TSPs. For example, you can invest in mutual funds and exchange-traded funds (ETFs) that are not available in the TSP.

Before investing in all the options presented, always consider whether the additional investment options are worth the potential associated fees to maintain them.

Hire a Financial or Tax Specialist

You may also want to hire a financial or tax specialist for financial safety reasons. A specialist can help you understand the pros and cons of rolling over your account, help you understand which account best suits your situation, and can assist you with the rollover process.

Investing in a Gold IRA is the Best Option

The best option available is to roll over your TSP into a Gold IRA. A Gold IRA is an Individual Retirement Account (IRA) that allows you to invest in gold and other precious metals. A Gold IRA enables you to diversify your portfolio and protect your retirement savings.

When you roll over your TSP into a Gold IRA, you will have the same tax benefits as you do with a traditional IRA. In addition, you will not have to pay any taxes on the amount you roll over.

Finally, rolling your TSP into a Gold IRA will offer you peace of mind knowing that your retirement savings are protected from future inflation.

Top Reasons Why You Should Invest in Gold

Gold was one of the first forms of money and has been used as currency for thousands of years. Ancient Egyptians used gold to buy food and clothes.

Gold became an international currency in the seventh century BC when the Lydians began using it to trade with other countries. Using gold as a currency continued throughout history. The United States used gold coins until 1933, when President Roosevelt took the country off the gold standard.

There are many reasons why you should invest in gold. Here are some of the top reasons:

  • Gold is a safe investment – Gold has been used as a currency for thousands of years.
  • Gold is a hedge against inflation – When the cost of goods and services increases, the price of gold increases as well.
  • Gold is a hedge against economic uncertainty – Gold tends to do well when there is economic uncertainty or turmoil.
  • Gold is a diversification tool – Investing in gold can help diversify your portfolio and reduce your risk.
  • Gold is portable and liquid – Gold can be easily bought and sold and does not take up much space.

Open a Gold IRA with Noble Gold Investments

If you are looking for a safe and secure way to invest in gold, open a Gold and Silver IRA with Noble Gold Investments.

Noble Gold Investments is a leading Precious Metals IRA company that offers a wide range of gold and silver coins and other precious metals.

When you open a Gold IRA with Noble Gold Investments, you will have peace of mind knowing that your retirement savings are protected from inflation.

Open an account today to get started.

Investment 101

Dive deeper into precious metals

Check out related articles that can help you gain a better perspective on your investments.
Investment tips

Published: July 25, 2022

Government

Published: June 22, 2022