Rolling Over a TSP Into an IRA
Considering a direct or indirect rollover is key when contemplating rolling over TSP funds. A direct rollover allows your TSP administrator to send your funds directly into your new plan or IRA without you needing to touch it directly; while indirect ones require you to process each step yourself.
Taxes
If a TSP account owner wishes to convert assets from his or her TSP into an IRA, there are certain tax considerations they must keep in mind. For instance, their TSP must withhold 20 percent for federal income tax withholding purposes irrespective of whether their rollover occurs directly or indirectly. Furthermore, any funds remaining in their traditional balance that aren’t converted will be taxable upon withdrawal.
Tax-wise, the TSP offers many advantages over other retirement plans when it comes to taxes; its low fees and investment options being among them. However, it should be remembered that many financial professionals who recommend rolling over into another plan may earn commissions or other fees related to that transaction – it is therefore important to factor any potential conflicts of interest into any advice from advisers when evaluating them.
Fees
The Thrift Savings Plan offers very low fees; however, IRAs typically charge higher fees. Furthermore, investment management fees and plan costs may add up over time; so it is crucial that all the costs associated with rolling over TSP funds into an IRA are understood before making your decision.
Some IRA providers impose fees for professional money management. These costs can add up and reduce returns over time. Furthermore, you may incur fund expenses related to investing in mutual funds.
If your TSP investment options and fees meet your expectations, it may make sense to leave the funds where they are. A financial advisor can assist with making this decision – SmartAsset’s free tool matches you up with pre-vetted advisors in your area so you can arrange a call to find out more about them and whether they could work together effectively with you.
Investment options
Contrary to most employer-sponsored retirement plans, the Thrift Savings Plan (TSP) permits its participants to move funds into rather than out. These transfers or direct rollovers encompass funds held in an IRA as well as those from an eligible employer plan or traditional IRA.
There are some key considerations if you decide to pursue this route, however. First and foremost is that any transfers under age 59 1/2 must incur a 10% penalty, in addition to taxes withheld according to your seven tax bracket.
Another key point is that you won’t get to choose where your monthly withdrawals come from – be they traditional or Roth TSP – payments will come out of all accounts automatically until told otherwise, which can be especially frustrating for service members who have amassed tax-exempt dollars in combat zone deployments and want those funds shielded from taxes.
Withdrawals
TSP withdrawal policies have recently changed to offer account holders greater flexibility during retirement. They now allow a direct rollover from traditional to pre-tax IRA and make unlimited withdrawals per year; however, these strategies must pay taxes upon withdrawing money from TSP; therefore it is crucial that account holders carefully consider both their current tax rate and what might change over time when withdrawing money from TSP.
All withdrawals and distributions made from TSP accounts must be reported to the IRS on Form 1099-R: “Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts etc.” It is best to consult with your tax advisor prior to withdrawing money from your TSP. A new option called Substantial Equal Payments (SEP) gives more control over payments in retirement made using both traditional and Roth balances.
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