Can You Move Funds From a TSP to an IRA?
Yes, but be wary of doing an indirect rollover transfer as this creates major tax liabilities and it’s your duty to inform the IRS accordingly.
Assess your current income tax rate and what it’s expected to be upon retirement; this can help determine which TSP type would work better.
Direct rollovers
There are two primary strategies for moving funds from a TSP to an IRA: direct rollovers and indirect rollovers. Under direct rollover, your distribution goes straight from your TSP administrator into your new IRA; under indirect rollover, your account balance is sent first, requiring you to transfer it later into an IRA account yourself. However, in both instances the IRS mandates that 20 percent of your distribution be withheld for taxes before you deposit it into an IRA within 60 days from when it was made; failing which penalties could apply.
Considerations of a TSP rollover can provide numerous advantages. One advantage is streamlining your retirement savings situation by consolidating all assets into one account. This makes it simpler to evaluate whether your retirement goals are on track while assessing fees and expenses impact. Furthermore, TSP funds have some of the lowest expenses among any fund family, making them an attractive option when compared with fees charged by other plans or IRAs.
Another advantage of TSP participation for former federal workers is the flexibility it affords when transitioning out, in terms of both continuing their contributions post-work and fulfilling required minimum distributions (RMDs). By contrast, IRAs cannot accept new contributions.
The TSP accepts rollovers of both traditional and Roth TSP balances as well as transfers from eligible employer retirement plans (e.g. 401(k) and 403(b). When rolling over an TSP balance into a Roth IRA, its new balance will include proportionate amounts from both your traditional and Roth balances; similarly if you change investment elections or reallocate or transfer funds following a rollover; take out loans or distributions from your TSP account.
Make note that any withdrawal from a TSP prior to reaching age 59 1/2 will be taxed as income in the year of withdrawal; to qualify for penalty-free withdrawals you must have been employed with either government or an eligible employer for at least five years.
Financial professionals that recommend moving TSP assets into an IRA may receive compensation for their services, leading to potential conflicts of interest. For instance, should you transfer them into an employer-sponsored plan, the financial professional might earn commissions or fees; on the other hand, leaving them where they are could result in no or minimal compensation being earned by them.
Please be aware that moving TSP assets into an IRA may not be in your best interests, especially if you’re nearing retirement or have a low tax bracket. Furthermore, IRAs come with their own set of fees and charges such as sales loads and commissions as well as account-related expenses such as custodial and administrative costs; make sure that before making your decision you seek further clarification from a financial professional regarding these fees and charges before forming any opinion.
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