Can You Roll Over a TSP? Definitions and How-To Guide

If you’re leaving a government job and looking for a way to bring your retirement account with you, a TSP rollover might be the right solution. When you have a TSP account—short for Thrift Savings Plan—you can initiate a direct or indirect rollover into other employer-sponsored retirement plans like 401(k)s or Individual Retirement Accounts (like Roth IRAs or Traditional IRAs).

You have access to various options for a TSP rollover. Some may be on the complicated side, while others make moving your TSP funds reasonably straightforward.

In this article, we’ll explain everything you need to know about TSP rollovers, including their benefits, the options you have around them, and the steps you can take to move your TSP retirement funds.

What is a Thrift Savings Plan?

You may not have heard of a Thrift Savings Plan (TSP) if you aren’t a federal employee. A TSP is an employer-sponsored retirement plan, like a 401(k), for individuals employed by the federal government and/or the uniformed services.

Like those to a 401(k), the IRS treats contributions to a TSP as pre-tax, meaning you don’t pay federal income taxes on that money in the year you make a contribution. Employees who leave the military or a federal job can roll over their retirement savings into an IRA or 401(k) of their choosing — all while maintaining the benefits of tax deferral. In some cases, this might be a new employer’s plan at a private sector job.

TSP Rollover Benefits

You may benefit from rolling over your TSP into your new employer-sponsored plan or a new IRA account. While you can leave your money in the TSP even when you change jobs or move to the private sector, your account may lose some valuable features, like employer contributions.

But when you complete a TSP rollover, you can gain control over your retirement funds, merge your old account with a new account, and access professional money management through new plan administrators.

Control Over Investment Choices

The federal TSP only offers six mutual fund types as investment choices. If you choose to roll your TSP over to a current 401(k) at a different financial institution, you may gain access to a wider variety of mutual funds. Some 401(k) plans even offer access to discounted company stock.

Remember that TSPs are known for being fairly low-cost compared to other retirement plans, so you may find that your new plan manager ends up being more expensive. If this is the case, you might consider leaving your TSP right where it is.

Individual Retirement Account (IRA)

With a TSP-to-IRA rollover, you’ll often gain access to even more investment choices than you would if you were to merge your TSP with a new 401(k) plan. Still, like a TSP, traditional IRAs have Required Minimum Distribution (RMD) mandates beginning at age 73.

If you have a Roth balance in your TSP, you can roll it over to a Roth IRA since Roth accounts are after-tax investment vehicles.

Professional Financial Planning

As we mentioned, you have limited investment options with a TSP — you can even take a look at them on the TSP website (www.tsp.gov). When you roll over your funds, you have greater access to professional financial planning through your new financial institution or brokerage. You may even be able to open a savings account within the same institution to keep all your finances in one place.

Easier Integration with a SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees IRA) is a retirement savings account that allows employers to make contributions to their employees’ retirement plans.

If you are thinking about moving your pre-tax TSP, you can complete a direct rollover to a SIMPLE IRA if your employer offers one. We will discuss direct transfers in greater detail below.

Are There Tax Implications if You Roll Over Your TSP to an IRA?

If you have a traditional TSP account and want to roll it over into a traditional IRA, you won’t owe any taxes since both accounts are tax-deferred. Rolling over a Roth TSP to a Roth IRA is also tax-free since they are both post-tax accounts.

At least a portion of your TSP will likely be tax-exempt if your contributions were made while serving in a combat zone and you were earning tax-exempt pay. In this case, you’ll want to opt for a Roth IRA rather than a traditional IRA to avoid the possibility of taxation later in life.

Maintaining your tax-free rollover status depends on the type of rollover you execute. Next, we’ll discuss how to work with your brokerage to ensure you don’t pay taxes on your retirement funds during a rollover, avoid an early withdrawal penalty, and remain compliant with eligible rollover distribution rules.

Two Main Ways to Execute a TSP Rollover

When former government employees or members of the uniformed services complete a TSP rollover, there are two ways it can be done: via a direct rollover or an indirect rollover. Each has its benefits and drawbacks, but the direct rollover is preferable for most people for the reasons we’ll outline below.

Direct Rollover for Your TSP

A direct rollover means that your TSP funds are transferred straight to your new employer’s retirement plan or IRA; the money never enters your hands directly. Here, you’ll instruct your TSP administrator to send your TSP account balance to an eligible employer plan or an IRA, and they’ll make a direct transfer (sometimes called a “trustee-to-trustee” transfer).

For most accountholders, this type of rollover is preferable because you don’t ever gain access to the funds — they simply move from one institution to another. Your direct rollover should be both tax- and penalty-free so long as you’re transferring a pre-tax TSP to a pre-tax IRA or QRP, or a Roth TSP to a Roth IRA or Roth 401(k). Fortunately, your direct rollover won’t affect your contribution limits for that year.

Indirect Rollover for Your TSP

With an indirect rollover, your TSP account manager liquidates and sends the funds directly to you. The TSP administrator must also withhold 20% of your account balance as tax withholding. From there, you must reinvest the money into a new retirement account within 60 days to avoid taxes and penalties.

Make sure to re-deposit the entire initial amount (100% of your initial TSP balance, not just the 80% you received) to your new retirement account to ensure your rollover remains tax and penalty-free. If you fail to do this, you could be charged income tax and an early withdrawal penalty on the entire amount of the distribution. Ouch!

So, why would anyone choose an indirect rollover?

Typically, an indirect rollover is reserved for occasions when people need to grant themselves a short-term loan using the funds — and they’re confident they’ll have enough money to re-deposit the entire TSP balance into their new retirement account within 60 days. It’s a process riddled with risks, but it can work in the right situation.

Making Sound Decisions for Your Future

When you leave your government position, it’s essential to make a well-informed decision about managing your TSP retirement funds. Conduct thorough research, plan ahead, and talk to a financial professional to learn which type of account is best to help you reach your financial goals.

As you embark on the process of transferring accounts or completing a rollover, work with a trusted partner who can help you navigate the regulatory requirements and complexities.

At Capitalize, we have a track record of helping individuals manage the entire process of rolling over their retirement funds, including left-behind TSPs.

Learn more about how we can help make your rollover process fast, seamless and free.