TSP Rollover Questions and Answers
Question: Should I rollover my TSP?
Answer: Your individual circumstances determine whether it’s in your best interest to rollover a TSP account to an IRA. For some federal employees the answers could be yes, but for others, it could be no. You should consult with an experienced financial advisor, such as a Chartered Federal Employee Benefits Consultant (ChFEBC) who can assess your situation and help you determine if rolling over your Thrift Saving Plan (TSP) is in your best interest. A Chartered Federal Employee Benefits Consultant is a financial professional that has been specially trained on the complexities associated with the retirement and other benefits offered to federal government employees.
Question: What is a TSP Rollover?
Answer: "Rollover" is the term commonly used to describe the transfer of assets (money) from the Thrift Savings Plan (or other employer retirement plan) to another tax-deferred account such as an IRA or the retirement plan offered by a new employer. Rollovers can also be classified as direct or indirect.
Question: What's the difference between a direct rollover and an indirect rollover?
Answer: A direct rollover is a situation where the Thrift Savings Plan makes a distribution (cashes out) your balance and issues a check payable directly to an IRA provider or a new company's plan. An indirect rollover is a transfer where the distribution is payable to you, minus a mandatory 20% federal tax withholding, and you then deposit the balance into an IRA or your new company's plan.
Question: How do I rollover funds from my TSP to an IRA?
Answer: Form TSP-70 Request for Full Withdrawal is available for download at www.tsp.gov. This form is used to initiate a full or partial TSP rollover to an IRA. This same form is used for general withdrawals from the Thrift Saving Plan. Those general withdrawals would be subject to federal income taxes and penalty (if under age 59 ½). Note: A general withdrawal is allowed only after you’ve separated service from the federal government.
Question: Can I withdraw from my TSP while still working?
Answer: If you’ve reached age 59½, then you are eligible to make an age-based in-service withdrawal allowing you to roll over a TSP account to an IRA. This rollover can be done on a partial or total rollover basis. Form TSP-75 Age-Based In-Service Withdrawal Request is available for download at www.tsp.gov.
The TSP also offers a financial hardship in-service withdrawals in certain instances. To qualify, you must have an immediate and significant financial need that necessitates a distribution from your TSP account AND your need must arise out of either a recurring negative monthly cash flow situation, medical expenses, legal expenses for separation or divorce, or personal casualty loss. Form TSP-76 Financial Hardship In-Service Withdrawal Request is available for download at www.tsp.gov.
Other than an age-based in-service withdrawal or a financial hardship in-service withdrawal, you cannot make a general withdrawal from the Thrift Savings Plan while still employed by the federal government.
Question: When I roll over my retirement account, what does it go into and what does it pay?
Answer: A financial institution serves as your IRA custodian or trustee. That financial institution can be a bank, credit union, mutual fund company, insurance company, or brokerage firm. What it goes into depends upon what's offered by your IRA custodian. If your IRA custodian is a bank or credit union your IRA funds are normally invested in a money market account or certificate of deposit (CD) and you would earn what is the current interest rate. If your IRA custodian is a mutual fund company, your IRA funds are invested in the offerings of that mutual fund company and can be invested in a diversified portfolio of stocks and/or bonds and your earnings would be determined by the performance of the funds in which your IRA is invested. If your IRA custodian is an insurance company, your IRA funds are usually invested in a fixed, indexed, or variable annuity. An annuity is a contract between you and insurance company where the insurance company promises to pay you a certain amount of money on a periodic basis for a certain amount of time, including lifetime. For fixed annuities, your earnings are determined by the rate offered at the time of your investment. For indexed annuities, the rate offered depends upon the performance of market indices. For variable annuities, the rate of return is determined by the performance of the subaccounts in which your funds are invested. If your IRA custodian is a brokerage firm, your IRA funds can be invested in any combination of stocks, bonds, mutual funds, and other investments. The rate of return for your IRA invested at a brokerage firm would depend upon the performance of the investments selected.
Question: Don't taxes go away on these accounts at age 59 1/2?
Answer: No. What goes away at age 59 1/2 is the 10% early withdrawal penalty associated with withdrawals from tax-deferred accounts such as the Thrift Savings Plan. Ordinary income taxes are still due when money is withdrawn from the TSP.
Question: What's the maximum amount of a TSP rollover I can make into an IRA?
Answer: There is no maximum amount associated with a TSP rollover to an IRA, meaning you can rollover a portion or all of your Thrift Savings Plan to an IRA.
Question: Will the 20% be all of the taxes I owe and does it include the 10% early withdrawal penalty if I'm younger than 59 1/2?
Answer: The 10% is in addition to any taxes withheld. Think of the 20% withholding as a "down payment" on your taxes for withdrawing money from your tax-deferred account. The seven (7) tax brackets are the 10%, 12%, 22%, 24%, 32%, 35%, and 37%. If you are under age 59 1/2 and in the 10% tax bracket, then it is likely that the mandatory 20% withholding will cover the 10% tax and 10% early withdrawal penalty. To estimate the total tax, if you're 59 1/2 or younger, essentially add 10% to the seven tax brackets listed above.
Question: What are the fees associated with a TSP Rollover to an IRA?
Answer: IRA fees vary depending upon the company chosen to be the custodian of the IRA, but generally range from $0 to $100 per year. This fee only covers the charge for a particular company serving as custodian. There are separate fees that may be associated with the particular investment(s) selected inside of the IRA.
Question: This question I have is not covered above. Where can I get help?
Answer: Click here to contact us or call today at 901-312-9166 or 800-754-1218 to learn more about your TSP rollover options. Jones Wealth Management Group does not provide tax advice and this information should not be used as a basis for tax advice. Please consult your tax professional as it pertains to your situation.