Are you separating from Civil Service, the Case For Keeping the TSP?

Chris Reddick |

When separating from civil service or retiring, I often get asked what to do with the money in my old Thrift Savings Plan or TSP?

There is no one easy answer to this question, and I would have to say that it depends on your particular circumstances.

In this blog post, I provide some reasons for keeping the TSP and not doing a rollover into an IRA. This is a contrary view to many others.

The TSP, in my opinion, is one of the best retirement plans out there. But unfortunately, many investment managers want you to roll it over into an IRA. They perhaps have other motivations that I will discuss beyond working in your best interests.

1. Fees - This is a no-brainer! The fees for the TSP are extremely low. It would be hard to find lower fees from any other mutual funds. So if you are interested in keeping costs down, the TSP is the way to go. In addition, the TSP mutual funds do not have any commissions or trading fees. Many mutual funds have fees associated with trading them or even front-end/backend loads.

2. Investment Selection - The TSP has five different individual funds and lifecycle funds. These funds have done well for most investors and have performed consistently with the broader market. However, if you rolled the TSP over into an IRA, you would have to select from many funds. The TSP is set up to be easy for novice investors. You can either target retirement dates or pick percentages of the different funds to create a portfolio. Then, working with a financial advisor that provides advice only, you can customize the portfolio to your investment goals.

3. Early withdrawals - If you separate from service from the federal government at age 50, you can take money out of the TSP without the 10% early withdrawal penalty. However, if you rolled the TSP into an IRA, you would face a 10% early withdrawal penalty before age 59.5. In addition, there is no RMD for the TSP, so long as you are working with the federal government. With an IRA, you have to take RMD at age 72.

4. Protection of Assets - Keeping the money in the TSP protects your assets. Creditors cannot touch your TSP, but they can get a hold of your IRA. In addition, the TSP is protected against lawsuits and bankruptcy. IRAs are only protected against bankruptcy up to a limit.

5. Security - We are dealing with the federal government; the amount of security in the TSP is very high. Therefore, TSP account holders should have confidence that their money is secure in the TSP. This is partly due to the large number of members of the TSP and the high demand for information security to keep members' assets safe.

So who is advocating to have the TSP rolled over into an IRA? Typically, money managers want to capture their standard 1% fee on the balance in the TSP. Think about this you could pay the underlying fees from the mutual funds and an additional 1% asset management fee. So if you are looking at actively managed mutual funds with perhaps a 1% fee plus the advisors' fees of 1%, this would translate to $10,000 in annual fees on $500,000 of assets. For some investors, this might be money well spent. Others, instead, managing the funds themselves can be a better low-cost option.

Then who is the TSP most suited for? I would say the DIYer investor. Someone that wants a simple solution that is low cost. Someone that is okay with managing the money themselves in retirement. However, if you want someone to take care of your money and have a dedicated person to call to withdraw money, then the TSP might not be suitable for you in retirement. But if you want this added service, you would have to pay for it! Reach out to me on the contact page below if you're going to see how the TSP fits into your retirement plans.


*This content is developed from sources believed to be providing accurate information. The information provided is not written or intended as tax or legal advice and may not be relied on to avoid federal tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. In addition, individuals involved in the estate planning process should work with an estate planning team, including personal legal or tax counsel. Neither the information presented nor any opinion expressed constitutes a representation of a specific investment or the purchase or sale of any securities. Asset allocation and diversification do not ensure a profit or protect against loss in declining markets.


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