Can TSP Be Rolled Over to an IRA?
Answering this question depends on your current income level and tax rate in retirement. Your TSP account balance could also be used to purchase an annuity that offers monthly payments for life.
Planning to convert your TSP isn’t complicated, but requires careful consideration. Make sure you understand its tax implications, fees and expenses associated with conversion as well as any ongoing obligations or requirements associated with doing it.
Benefits
TSP is one of the best employer-sponsored retirement plans, and provides participants with numerous advantages. Use it to save for retirement and you may be able to withdraw funds without incurring tax penalties if you withdraw them at age 55 or later; otherwise a 10% early withdrawal penalty applies if the funds are withdrawn before age 59 1/2.
Your TSP funds may also be used to purchase an annuity that will pay lifetime monthly installments, making this type of annuity suitable for people looking for guaranteed income but don’t wish to oversee their investments themselves.
TSP stands out with its lower fees, which can make a huge difference over time. TSP’s investment management fees are lower than average IRA fees; additionally, TSP provides greater diversification by offering multiple stock index funds while traditional IRAs only typically provide access to one single stock index fund such as S&P 500 index fund.
Taxes
When withdrawing money (or taking a distribution from their TSP account), tax liabilities on both traditional contributions and earnings must be reported and any penalties applicable (ie: exceeding lifetime expected benefit or being under 59 1/2) may also need to be covered by them.
IRAs typically charge higher fees than TSPs, such as management and investment fees, trading charges, sales loads and any other hidden costs that could sap returns. It’s important to understand these fees before deciding where to place your money.
As with any financial advice, be wary of financial professionals advising an IRA rollover as they could earn commissions or other fees from this transaction, potentially conflicting with your best interests. It is recommended to work with an independent fiduciary who will offer impartial advice and recommendations. A reliable fiduciary will find an IRA with minimal fees so as to help avoid penalties and maximize retirement savings.
Fees
Understanding the tax ramifications of rolling over your TSP into an IRA is of vital importance, as you may be able to minimize taxes by rolling your contributions and earnings from a traditional TSP into a Roth IRA – although income restrictions do apply and it is wise to consult a tax professional and financial planner prior to taking any steps.
TSP fees tend to be lower than IRA fees because the government negotiates lower rates for participants; however, this doesn’t imply that IRAs don’t incur expenses of their own.
Addition investments into an IRA can help diversify your portfolio. While TSP only offers one large-cap stock index fund (C Fund), an IRA allows you to choose multiple funds with various management styles that could reduce risk from any one manager becoming “hot” or “cold”. Furthermore, it’s essential to note whether or not your new employer accepts rollovers before investing.
Limitations
Although many messages advocate IRA rollovers, it’s important to remember that TSP is an employer-sponsored retirement plan while IRAs are individual accounts; each type has unique tax considerations.
TSP funds cannot be moved or rolled over directly into another traditional or Roth IRA account, though there may be ways around this restriction through recharacterization or rollover from eligible employer plans.
IRS contribution limits dictate that TSP contributions must meet certain conditions; any participant can only make up to the IRS maximum limit in an account that serves both civilians and uniformed services TSP accounts.
Frontline TSP customer service representatives may advise participants that it is impossible to directly transfer tax-exempt balances earned through combat zone pay into a Roth IRA due to withdrawal causing future growth to become taxable; however, due to recent tax court rulings and IRS regulations this requirement has now changed.
Categorised in: Blog