What are Pros and Cons of Rolling Over Your TSP Into an IRA?

Chris Reddick |

Key Takeaways:

Pros of TSP Rollover: Full control of investments, more investment options, portability, professional money management

Cons of TSP Rollover: Typically higher fees and expenses, transfer old 401(k) or IRA into TSP, no administrative fee, creditors protection, no RMD until you retire from the federal job

The TSP or Thrift Savings Plan is the federal government’s 401(k) plan that we see in the private sector. One of the most significant decisions for the TSP owner is whether to leave the money in the plan or transfer it to an IRA or Individual Retirement Account.

This blog post presents some pros and cons of TSP rollovers.

Pros of Rollover

1. Full control of investments: You have greater control over investments with an IRA. With the TSP, you are restricted to the five funds and a combination of these funds. For some, this can be problematic if you are a novice at investing, and you could end up making your retirement worse off with a greater choice.

2. More investment options: The TSP has a limited number of low-cost investment options. You cannot trade individual stocks in a TSP or other mutual funds. The TSP currently does not have REITs, which are mutual funds investing in commercial properties. These are commonly found in most managed portfolios. There also are not any alternative investments such as commodities and gold.

3. Portability: IRAs provide for greater portability. You can do a rollover from one custodian to another and typically keep your existing investments. With a TSP, the funds are only offered in the plan, and no other custodian has them, so when you do a rollover, all funds need to be sold and reinvested in the new IRA.

4. Professional money management: One advantage of transferring TSP funds to an IRA is that a professional investment advisor can directly manage IRA investments. Money management can benefit some who don’t want to mess with investments and value the advice of an investment manager. However, keep in mind this can come with considerable costs, upwards of 1% of the Assets Under Management or AUM. For example, a million-dollar rollover to an IRA managed could cost you $10,000 per year in fees! These fees do not include the expense ratios of the underlying funds where your money is being invested. For some, this is too much money. However, there is value in professional money management for others, and they are willing to pay for the service.

Cons of Rollover

1. Typically higher expense ratios: The TSP has the lowest expense ratios in index funds at around 0.04%. Most index funds have expense ratios above that. However, this is changing rapidly with fee compression and competition in the industry. But compared to other low-cost providers, the TSP is very low, which will impact the long-term growth of your investments.

2. Ability to transfer old 401k IRAs into TSP: You can transfer your old 401(k)’s or IRAs into the TSP. A rollover will enable you to consolidate investments into one account for better management. Rollovers are highly recommended as old 401(k) plans tend not to get as much TLC, so consolidation can maximize your return.

3. No administrative fees for leaving funds in after leaving government: There is no fee if you leave your money in the TSP. Some accounts change fees. However, some comments from TSP users are complaints about the slow withdrawals and paperwork involved. But these are not commonplace. The TSP is a substantial fund serving a diverse population and tends to be more bureaucratic. Since it is government, this is expected.

4. IRAs have less protection from creditors: The protection from creditors is important to consider, with the TSP providing more protection than an IRA. As with all 401(k) plans, these give more protections, which should be seriously considered.

5. Continue to work for a federal job. You do not have to take RMD at age 72. Suppose you continue to work for a federal job. You will not have to take RMD if your money is in the TSP. RMD is required minimum distributions from a pre-tax TSP account. The idea is that the government wants to set a date when you start to take a portion of the money out to collect the taxes owed. Roth versions of the TSP do not have RMDs at age 72 since all of the money is after-tax.

As mentioned, whether to roll over your TSP into an IRA is a difficult choice. You should consult with a financial planner to make the right decision for your circumstances. If you would like to discuss TSP rollovers, please click the link below to schedule a free initial 30-minute consultation.


*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 any Federal Government tax penalties. Individuals are encouraged to seek advice from their tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own 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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