To rollover or not rollover your TSP

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If you are a federal employee or military service member who has contributed to the Thrift Savings Plan (TSP), you are probably wondering whether or not you should rollover your TSP savings into an individual retirement account (IRA) or leave them in the TSP. While there is no right or wrong answer, there are pros and cons to each option to consider.

First, let’s explore the benefits of rolling over your TSP into an IRA. One major advantage is greater flexibility in investment options. With an IRA, you have access to a wider variety of investment choices compared to the TSP’s five index funds. This can help you diversify your portfolio and potentially earn higher returns. An IRA also allows you to consolidate multiple retirement accounts into one, making it easier to manage your retirement savings.

Another advantage of rolling over your TSP into an IRA is that you can avoid required minimum distributions (RMDs). Once you turn 72, the IRS requires you to start taking RMDs from your traditional IRA, but not from your TSP if you’re still working. If you roll your TSP into an IRA and then convert it to a Roth IRA, there will be no RMDs. This is a great strategy for people who don’t need the income from their retirement accounts and want to minimize their tax liabilities.

On the other hand, there are also some drawbacks to rolling over your TSP into an IRA. One of the main disadvantages is that the TSP has lower fees compared to most IRA providers. With TSP, you pay a flat rate of 0.042% of your account balance regardless of the size of your account, while many IRA providers charge fees that are calculated as a percentage of your account balance. This means that if you have a large TSP balance, the fees at an IRA provider could be substantially higher.

Another disadvantage of rolling over your TSP into an IRA is that you lose access to the G Fund, which is unique to the TSP and is essentially a government bond fund. The G Fund is a stable, low-risk fund that earns slightly higher returns than a savings account but less than the other TSP funds. If you value stability over potential gains, it might be worth leaving some of your money in the G Fund.

If you decide to keep your savings in the TSP, you can continue to enjoy low fees and an excellent government-backed investment option with the G Fund. You can also take advantage of the TSP’s loan program, which allows you to borrow money from your account at a very low interest rate. However, if you are looking for greater flexibility in investment options and want to avoid required minimum distributions, rolling over your TSP into an IRA might be the better choice.

Ultimately, the decision of whether to rollover or not rollover your TSP depends on your individual financial situation and retirement goals. Consider consulting with a financial advisor to weigh the pros and cons and determine the best course of action for you.