Can TSP Be Rolled Over to an IRA?
Moving your TSP to an IRA involves numerous considerations, such as taxes, fees and retirement planning. To avoid potential issues when making this transition, working with an advisor who can guide your plan would be ideal.
Compare TSP fees and expenses with those of your new plan or IRA before making your choice.
Taxes
Rolling TSP funds over to an IRA is an effective way of increasing retirement savings, but can incur substantial tax liability. Here are a few considerations before doing so.
There are two primary methods for rolling over TSP: direct and indirect. Each approach can have differing ramifications for pre-tax and after-tax contributions. A direct rollover occurs when your TSP administrator transfers assets directly into a new account for you without liquidating underlying assets – instead they issue a check payable directly to you instead of selling off their holdings directly.
An indirect rollover occurs when your TSP administrator sends you a lump-sum distribution that must then be deposited into another account; 20% of this amount is withheld to cover taxes due. These rollovers can create significant tax liabilities if moving money from a pre-tax TSP into a Roth IRA; it is best to consult a tax professional before moving TSP funds to an IRA account.
Fees
Dependent upon the type of investment account you select when rolling over your TSP, fees may apply. For instance, an expense ratio might apply or investment management fees might need to be covered in order to keep things on budget if you have substantial money saved up. These expenses can add up quickly when managing large sums.
Tax withholding should also be carefully considered when investing in the TSP. They typically deduct 20% from each distribution you take out for taxes in addition to imposing an early withdrawal penalty of 10% if you withdraw before age 59 1/2.
Noting the TSP has some of the lowest fees in the industry is essential; an IRA could incur significantly higher charges. When considering all your options and consulting a financial professional to reach your retirement goals.
Investing options
When rolling over your TSP to an IRA, it’s essential that you select a new account to transfer funds into. This process is known as direct or indirect rollover; with an indirect rollover option available only through TSP administrators; in such case 80% of your distribution would be given directly back to you; you must then reinvest that entire sum within 60 days in your new retirement account or face paying taxes and penalties.
An IRA gives you more control of your investments, but you should always factor in fees when selecting an account to invest your money in. Fees related to IRAs include account set-up and administrative charges as well as expenses of mutual fund investments; additionally you may incur investment-related costs like sales loads and commissions that eat into returns. A financial professional might help in comparing all expenses across various accounts.
Retirement planning
As tempting as it is to fiddle with your investments, be mindful of the costs that may incur in doing so – they could add up to as much as one percent of assets under management! Instead, it might be better off leaving things alone or hiring an advisor who can manage TSP assets while keeping in mind your retirement picture more comprehensively. SmartAsset’s free tool connects users with pre-screened advisors in their area.
Investing 15% consistently can help secure your retirement, especially if you’re a federal employee. But before switching your TSP account to an IRA, make sure to follow the 7 Baby Steps of financial wellness, being debt free and with an emergency fund in place before considering whether paying fees to expand investment options and gain control.
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