As you approach retirement, you will likely ask yourself if you are better off keeping your money in the TSP, or are you better off rolling your TSP into an IRA?
To answer that question we’ll need to point out that both options have their PROs and CONs. I’ll let you be the judge….
Here are 8 key differences to consider:
- Fees and Commissions: The TSP doesn’t charge sales commissions and their management fees are tiny. The TSP expense ratios for the C, S, I, F and G funds have averaged less than 0.06 percent over the last 20 years, most probably the lowest expenses in the investment industry. In an IRA, you typically will have commissions and higher management fees. These fees can erode your investment’s earning power.
- Investment Options: The TSP offers only 5 investment vehicles, namely the G, F, C, S and I funds. (The L funds are merely different allocations of the 5 funds.) In an IRA you have almost every investment vehicle as an option, such as individual stocks, real estate, emerging markets, commodities, call or put options. More investment choices provide more opportunity for growth. They also can be used to hedge, or reduce your investment volatility and risk exposure.
- Accessing to your money: Accessing your money is easier from an IRA than from TSP in a number of ways:
- Speed: If you request a distribution of money from your TSP, it will take a few weeks before you get the check in the mail. With an IRA, you can get a check within 3-5 days, and sometimes access your money the same day if your IRA provides you with check-writing privileges or ATM card.
- Multiple lump sum distributions:The TSP allows only ONE lump sum distribution. If you need a 2nd lump sum distribution, the TSP will require you to liquidate your account. An IRA will allow you as many distributions as you wish. This can be important if you need money unexpectedly.
- Strategizing your withdrawals: An IRA will allow you to strategize your withdrawals. The TSP will not. For example:
- Specify Roth vs. Traditional: With an IRA you can specify whether you want your withdrawals to come from your ROTH IRA or Traditional IRA. This can help you minimize the taxation of your distributions. You cannot make such specifications from your TSP. Any money you withdraw from TSP will come from BOTH ROTH and Traditional pro-rata.
- Specify Investments: With an IRA you can specify whether you want your withdrawals tocome from your stocks or bonds or whatever you’re invested in. This will allow you to cash in on specific investments that have gains or get out of investments that have become more risky. You cannot make such specifications from your TSP. Any money you withdraw from TSP will come from ALL FUNDS pro-rata.
- Creditor Protection: Creditors cannot touch your TSP but they can touch your IRA. Employer Retirement plans, including TSP, are protected against lawsuits and bankruptcy. IRAs are only protected against bankruptcy up to a limit, and not much at all when it comes to other kinds of lawsuits (varies by state).
- Required Minimum Distribution (RMD) Penalty: Starting the year you turn 70 ½, you will have to start taking RMDs every year from both IRA and TSP. If you don’t take your RMD in a given year, you will be penalized. How much is the penalty? In your IRA, the penalty is 50% of what you should’ve taken as your RMD. In the TSP the penalty is a forfeiture of your entire TSP balance!!! (You can reclaim your TSP balance but will not have any gains in the account from the date of forfeiture, and will have to withdraw entire TSP when you reclaim it.)
- RMDs if Still at Work: In an IRA, the above RMD requirement and penalty apply even if you still are working. However, in the TSP, the RMD requirement and penalty does not apply if you are still working for the Federal Government. If you are working outside the Federal Government, you will need to take your RMDs even from your TSP.
- Preserving Tax-Deferral for Beneficiaries: This is not so well known but TSP beneficiaries may have trouble stretching tax deferral to later generations.
Let me illustrate:
If a spouse is named as beneficiary of your TSP, they may remain in the TSP in a ‘beneficiary participant account.’ If this happens, 100% of your TSP will be moved into the G-fund until the surviving spouse reallocates the funds. That’s not necessarily a problem. The problem begins when the surviving spouse dies. When the surviving spouse dies, the beneficiary of the ‘beneficiary participant account’ cannot transfer the account into any IRA and thus will have to pay the tax on the entire TSP balance! Contrast this with IRA rules: If a spouse inherits an IRA, the investments stay where they are. When the surviving spouse dies the inherited IRA can still remain in a new inherited IRA and you can continue tax deferral.
The above points are presented in a terse manner to keep this article short. Each bullet point could receive many, many pages of detailed elaboration. Please consult with a competent advisor before acting on these points.
As always, wishing you much success,