The Thrift Savings Plan (TSP) is designed to help federal employees and military service members save for retirement on a tax-advantaged basis. If you decide to leave federal employment, one thing you’ll have to decide is what to do with your TSP balance. Completing a Thrift Savings Plan rollover to an IRA can ensure that your retirement funds aren’t left behind. Here’s what you need to know.
A financial advisor can help create a financial plan for your retirement needs and goals.
The Thrift Savings Plan is a retirement plan offered to federal employees and members of the military. In terms of contribution limits and taxation, it’s the federal equivalent of a 401(k) plan.
For 2024, eligible employees can save up to $23,000 in a TSP account (up from $22,500 in 2023). If you’re 50 or older, you can make an additional catch-up contribution of $7,500. These contributions are made through elective salary deferrals. TSPs also allow for employer matching contributions.
Qualified distributions from a TSP are allowed beginning at age 59 ½. Withdrawing money from your plan early could result in a 10% early withdrawal penalty. Once you turn 73 (75 in 2033), you’re obligated to take required minimum distributions (RMDs) from a Thrift Savings Plan.
You can set up a TSP as a traditional account or with a Roth designation. Traditional TSP contributions are made using pre-tax dollars. Qualified distributions are subject to ordinary income tax. With a Roth designation, you’re saving with after-tax dollars. That means you won’t pay tax on distributions in retirement. You’ll have to take RMDs regardless of whether you choose a traditional or Roth TSP.
Generally speaking, a rollover means taking money from one retirement plan and moving it to another retirement account. You might roll over money from your TSP if you decide to leave federal employment or if you retire.
The IRS establishes guidelines for rollovers, including which types of accounts money can move between. If you have a TSP, where you can roll the money to depends on whether you chose a traditional or Roth designation.
With traditional TSPs, you can roll the money into:
If you designated your Thrift Savings Plan as a Roth account, the options are different. In that case, you could transfer your balance to your new employer’s Roth account or roll it over to a Roth IRA.
Traditional and Roth IRAs generally follow the same tax rules as traditional or Roth TSP accounts. A traditional IRA is funded with pre-tax dollars and qualified distributions are taxable. RMDs are also required beginning at age 73 (75 in 2033).
Roth IRAs are funded with after-tax dollars, so you’ll pay no tax on qualified distributions. You don’t get a tax deduction for contributions the way you might with a traditional IRA. But there are no RMDs for Roth IRAs.
If you’d like to roll money from your Thrift Savings Plan, you’ll first need to decide where the funds should go. From a tax perspective, you can minimize taxes by doing a like-to-like rollover.
So if you have a traditional TSP, that would mean rolling it into a traditional IRA. And if you have a Roth TSP, you’d roll it into a Roth IRA. Rolling traditional TSP funds into a Roth IRA, on the other hand, means paying tax on the rollover amount. That can reduce your retirement savings right off the bat.
The next step is deciding how to complete the rollover. You can roll money from a Thrift Savings Plan directly or indirectly.
In a direct rollover, your plan administrator or custodian moves your TSP savings to a new account for you. All you have to do is provide the details for where the money should go, i.e., your new employer’s plan or an IRA you’ve opened at a brokerage.
Indirect rollovers allow you to receive a check from your TSP. You’d then have to deposit those funds into your new employer’s plan or an IRA. There’s also a caveat to this: You have to deposit the money within 60 days of the original distribution. Otherwise, the entire amount is treated as a taxable distribution.
Choosing an indirect rollover also means that your plan withholds 20% of your savings for federal income tax. That’s taken right off the top before you get any remaining funds. So again, that’s another argument for choosing a direct rollover instead, since doing so would allow you to avoid the withholding.
You might be wondering if you’re required to roll over a TSP balance if you leave federal employment. The short answer is no, you don’t have to complete a rollover. You could leave your TSP savings right where it is for the time being as long as your balance is $200 or more.
So why might you decide against rolling over TSP money to an IRA?
Leaving your TSP where it is could make sense if you’re satisfied with your plan’s investment options and the fees you’re paying. While you can’t make any new contributions to the plan, you can still benefit from tax-deferred growth. And the Thrift Savings Plan also offers relatively low administrative expenses, so you don’t have to worry about your retirement savings being eaten up by fees.
Here’s one thing you might not know about TSPs: You can roll money into them. If you have a traditional IRA, you roll money from it into your TSP. You can also transfer funds from an eligible employer-sponsored retirement plan. Roth TSPs can’t accept rollovers, but they can accept transfers from other employer-sponsored Roth designated accounts. This can be a backdoor way to increase TSP savings when you’re no longer able to make direct contributions.
Also, keep in mind that you may be able to take penalty-free withdrawals from your TSP if you’re between the ages of 55 and 59 ½. The catch is that in order to avoid a tax penalty, you have to have left your job after turning 55.
Executing a Thrift Savings Plan rollover to an IRA isn’t complicated, but it does require a little planning. Specifically, you’ll want to think carefully about where the money should go. If you’re opening a new IRA, for instance, consider what kind of investment options the brokerage offers and what kind of fees you’ll pay. Also, be prepared for any tax implications that may result if you choose an indirect rollover or you’re moving money from a traditional TSP to a Roth IRA.
Photo credit: ©iStock.com/katleho Seisa, ©iStock.com/PeopleImages, ©iStock.com/Prostock-Studio
Rebecca Lake, CEPF®Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She's worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children. Rebecca also holds the Certified Educator in Personal Finance (CEPF®) designation.
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