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Consider Rolling Over Your TSP to an IRA After You Retire

By Carolyn Walder

For those of you retiring from the federal government with a TSP, consider transferring those funds to an IRA. Transferring to an IRA is beneficial in the following ways:

1. It offers better estate planning options.  If you die before you access your TSP money, the TSP distributes 100% of the account balance to the beneficiary(s) named on the TSP-3 form, less 20% mandatory tax withholding. The only exception to this is, if the beneficiary is a spouse, then he or she can roll the balance to his or her own IRA. For those with very large TSP balances, the tax hit can be a significant bite out of the account. Whereas in an IRA, your heirs have the option of minimizing the amount of money they must take out by only taking their minimum required distributions.

2. Your investment options are essentially unlimited with an IRA. Although there are several good, very low cost index investment options in TSP, there are a number of asset classes not represented, such as emerging markets, real estate, commodities, etc. Lifetime Wealth uses Dimensional Fund Advisors (DFA) asset class funds, which are also very low cost and capture the return of the asset class with none of the downside to index funds (such as  index reconstitution issues).

3. You will have fewer general administrative concerns. The TSP bureaucracy can be cumbersome when transferring to beneficiaries. Dealing with an IRA is much easier and quicker, especially when working with an advisor, who can work with beneficiaries to execute complete transfers in days rather than months or longer.

When deciding between your TSP and an IRA, the issue of estate planning and tax planning is generally more pressing than investments. If you would like more information, we would be happy to assist!

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