Can You Move Funds From a Thrift Savings Plan (TSP) to an IRA?

Can you move funds from a TSP to an IRA

While putting funds in a Thrift Savings Plan (TSP) can be effective, an indirect rollover to an IRA can provide more investment choices. When considering these choices carefully, make your decisions accordingly.

Opting for an indirect rollover may be risky, so before making your decision be sure to consult a financial professional. Here are some benefits of this method of restructuring: 1) Taxes and penalties can be avoided

Tax-deferred growth

TSPs offer one of the biggest advantages in terms of tax deferral: contributions and investment growth are both tax-deferred, meaning that when withdrawing it in retirement you only pay taxes on it then.

Because traditional TSP investments are made with pre-tax dollars withdrawn prior to federal income taxes being withheld from your paycheck, Roth TSP funds provide another investment option which utilizes post-tax dollars.

But moving TSP funds to an IRA will be considered an income taxable event; you’ll owe taxes on it. But at least you won’t incur the 10% early withdrawal penalty that applies if withdrawing before age 59 1/2.

Your other option is to have your IRA handled by an investment advisor–this service typically charges fees of 1% annually but may be worth it to avoid having multiple retirement accounts and gain professional advice.

More investment options

While the TSP provides low-cost investment options, they may not meet all your needs once you leave government service. An IRA provides additional investments such as real estate investments or alternative assets.

Your tax situation might permit you to avoid taxes in retirement altogether by shifting part of your traditional TSP into a Roth IRA and bypassing required minimum distributions altogether; however, this requires assistance from a financial professional and should only be undertaken if considered carefully and understood fully by its recipient.

Direct rollovers allow you to instruct TSP to transfer funds directly into another employer plan or an IRA you have set up, while indirect rollovers involve receiving a check from TSP with 20% withheld for federal income taxes and then being responsible for depositing it within 60 days in your new retirement account so as to avoid taxes and penalties.

More portability

Rolling over funds into an IRA offers you greater investment flexibility to meet your goals.

If you choose an indirect rollover, the TSP will issue you a check that must be deposited into your new account within 60 days or it will be taxed as income and may incur a 10% penalty if you are under age 59 1/2.

Moving TSP assets to an IRA provides greater options, but it’s essential to carefully consider fees and expenses before making this move. While the TSP offers some of the lowest fees available, you could incur more expenses with an IRA or employer-sponsored plan. SmartAsset’s free tool connects you with qualified financial advisors who can assist in helping determine what’s best for you and your situation – start searching now.

Convenience

Move funds out of a TSP via direct or indirect rollovers. Direct rollovers allow TSP administrators to take care of everything for you – this method tends to be preferred.

With an indirect rollover, it is up to you to contact your TSP administrator and initiate distribution of funds. As per federal income taxes regulations, 20% will be withheld from any amount you request to be distributed. In addition, an early withdrawal penalty of 10% applies if you’re under age 59 1/2.

Managed retirement savings can be complex. But making informed decisions about your TSP assets can help you reach your financial goals more easily. If you’re uncertain how to use your balance, consult an investment professional – SmartVestor provides free access to experienced investment pros who can create wealth-building plans tailored specifically for you.


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