Pros and Cons of Rolling a TSP into an IRA
Rolling your TSP into an IRA has its pros and cons, which can affect your retirement strategy. Here’s a breakdown of the main advantages and disadvantages.
Pros:
More Investment Options and Greater Flexibility in Withdrawals
In an IRA, you can invest in individual stocks, bonds, ETFs, mutual funds, and even alternative investments, you’re not limited to the five core funds and Lifecycle funds. With a TSP, you’re limited to certain types of withdrawals and installment options. IRAs allow more control over withdrawal amounts and timing.
Account Consolidation
If you have more than one retirement account, rolling TSP funds into an IRA can simplify account management, making it easier to manage and track your investments in one place.
Potential for Roth Conversions Which Eliminates RMDs
Rolling into a Traditional IRA allows you to later convert some or all of the funds into a Roth IRA, potentially benefiting from tax-free growth on future withdrawals. If you roll your TSP into a Roth IRA, you won’t have to take Required Minimum Distributions (RMDs) at age 73, which allows your money to grow longer tax-free.
Cons:
Increased Fees
TSP funds have some of the lowest expense ratios in the industry, typically around 0.05%. Many IRAs have higher fees, so you might lose the advantage of low costs unless you choose low-cost funds in your IRA.
Loss of Unique TSP Withdrawal Options
While IRA withdrawal rules are more flexible overall, the TSP has a few unique options, such as the ability to withdraw a portion of your funds while leaving the rest in place, which some retirees find useful.
Tax Implications for Roth Conversions
If you choose to roll over to a Roth IRA, the entire balance will be taxed as income in the year of the rollover, which could bump you into a higher tax bracket.
Loss of Access to the G Fund
The TSP’s G Fund is a unique, ultra-safe investment that offers the potential for steady returns without risk to principal. If you value this fund, consider leaving a portion of your money in the TSP.
Should You Roll Over Your TSP to an IRA?
Ultimately, the decision depends on your retirement goals, risk tolerance, and preferences for flexibility versus cost. Many retirees split their funds, keeping some money in TSP (especially for access to the G Fund) and rolling the rest into an IRA. Speak with an FRC® trained advisor who can give you unique insight and tailor an investment strategy that fits your needs.
