Separating and retiring military service members (& federal employees) are often faced with a number of financial decisions. One of the questions clients ask me most often during this transition is whether or not they should rollover their Thrift Savings Plan (TSP) assets into an IRA. It is not a straightforward yes or no answer, but there are pros and cons to every rollover that should be considered.
In today’s blog, I will list some of the pros and cons of a TSP rollover and provide a resource in the event you would like to take a deeper dive and learn more about the TSP.
The Pros of Rolling a TSP into an IRA
- Easier to organize, consolidate, and aggregate with other retirement accounts – Being organized, consolidating, and aggregating your assets is generally something we recommend to clients at all stages of your financial journey.
- Access to full professional investment management – This is a benefit if you are not an investment “do-it-yourselfer,” and you want advice on which investments to choose, regardless of where those investments are.
- Wider range of investment choices – The TSP offers participants 5 individual funds (G, F, C. S, I Funds) plus 10 target date funds called Lifecycle Funds (L Funds). In 2022, a new option, the Mutual Fund Window (MFW) was introduced which did provide an opportunity for more investment choices at a steep cost.
- G Fund – Government Securities
- F Fund – Fixed Income Index
- C Fund – Common Stock Index
- S Fund – Small Cap Stock
- I Fund – International Stock
- No high Mutual Fund Window (MFW) Transaction Fees – Participants must pay an annual fee of $150 (including a $95 maintenance fee and a $55 administrative fee) and trading fees of $28.75 per trade!
- No MFW rules, including limits on the balance that can be invested – Participants must have a minimum of $40,000 in overall value in the TSP, with a minimum initial contribution of $10,000 into the MFW, limited to a maximum of 25% of the participants overall TSP account value at any given time. Sounds confusing because it is.
- Potentially better customer service and communication – The TSP customer service representatives are just that, customer service representatives. They are not investment advisors.
- Potentially better design and user-friendliness of associated website, software and apps – Financial planners, including, BayView Financial Planning, are focused on the client experience, as well as the financial planning deliverables. While the TSP website and technology was updated in 2022, it was not necessarily better.
- Inheritance rules for IRAs can be better for the beneficiaries – Non-spouse beneficiaries cannot keep the TSP account.
The Cons of Rolling a TSP into an IRA
- Publicly traded mutual fund and ETF expense ratios can be higher than those for TSP funds – Total expense ratios for TSP Individual and Lifecycle Funds are all less than 0.080% (and most under 0.055%), whereas other publicly traded expense ratios can be much more than that.
- Lost access to G Fund – This fund is invested in short-term U.S. Treasuries exclusively issued to the TSP, and the payment of interest and principal is guaranteed by the U.S. Government.
- Complexity of managing military combat zone tax-free contributions – Bottom line, the earnings on tax-free combat zone contributions are taxable (unless they were contributed into a Roth TSP. Therefore the TSP account may include a commingling of tax-free combat pay, taxable earnings on those (tax-free) combat-pay contributions, and taxable contributions from non-combat income. When it is time to withdraw (or rollover) these commingled funds, it can be very complicated.
- Conflict of interest making this recommendation – As a flat-fee fiduciary, BayView Financial Planning will help you to make a decision that is in your best interest. One of the reasons we chose a flat-fee is in part to minimize the possibility of conflicts of interest, like a rollover presents. Another fee-model might present a conflict by increasing their assets under management by doing the rollover.
- You can rollover other retirement accounts into the TSP – If you like the TSP and want to stay, or even keep just some assets in the plan (this is one possible solution to the combat zone commingling problem), you can rollover other retirement accounts into the plan.
- There can be less creditor protection in an IRA – Assets are more protected in the TSP from bankruptcies.
As you can see, for veterans with TSP accounts, making the decision to rollover their TSP assets can be challenging. The transition from civilian to veteran has many financial decisions but this is an important one. If you are interested in a deeper understanding of the TSP overall, I wrote a paper for other financial advisors to help them help other veterans. You can read it here: Navigating the Thrift Savings Plan: Planning Opportunities to Support Federal Employees, Military Servicememebers, and Veterans.
Ready to learn more about how BayView Financial Planning can help you decide if rolling over a TSP is the right decision for you? Schedule a complimentary call.