Rolling Over Your TSP: What You Should Consider Before Taking Action

By on January 12, 2015 in Current Events with 24 Comments

A recent article entitled Your TSP Investment: Where’s the Money Going and Why Do ‘They’ Care? generated a number of responses and discussions among readers with views on the pros and cons of moving money from the Thrift Savings Plan, usually upon retiring from the federal government. The issue addressed in the article started making news in financial publications after forty-five percent of participants who left federal service in 2012 removed all of their funds from the plan and closed their accounts by the end of 2013.

Upon leaving federal service, a TSP investor can leave the entire account balance in the TSP if there is at least $200 in the account. A former federal employee cannot continue to make employee contributions but can transfer eligible money into the TSP account from IRAs and employer retirement plans that may be eligible. Upon leaving federal service, a TSP participant can make a partial withdrawal or a full withdrawal from the TSP account. (See When You Leave Federal Service, Should You Leave Money in Your TSP?)

The Thrift Savings Plan commented on the issue of leaving money in the TSP or withdrawing from the TSP as reported in various publications. Gregory Long, the plan’s executive director, wrote in a memo to board members that, “Swayed by the financial industry’s marketing efforts,” Thrift Savings Plan members “have become an even more popular target” for companies luring them into higher-cost IRAs.

One of the more common comments about the TSP from some FedSmith.com readers was “limited withdrawal options.” One reader wrote: “Greater flexibility in the proportion of the accounts that are withdrawn, such as allowing an annual partial withdrawal, might go a long way toward making federal employees be willing to keep money in the TSP post-retirement.” This reader has apparently given the issue some thought and concluded: ” …I will use my partial withdrawal to transfer my Roth balance to a trustee, then I will do a full withdrawal to transfer the balance to a trustee so that I can take advantage of the tax brackets and convert the taxable TSP balance to a Roth account in a tax-efficient way.”

Another issue that sometimes arises with the TSP is the argument that there are limited investment options. As an example, one reader wrote: “I left within 3 months of retiring. I wanted access to more bond funds, small and mid cap funds (separately) Frontier markets, and Developing markets. My fees are very reasonable (.30%) and I did much better than staying in the TSP.”

In that regard, most readers are satisfied with the TSP benefits they have as a result of working for Uncle Sam. One reader opined: “If TSP wants to amend the withdrawal rules, fine, more flexibility in this regard could be a good thing. But the TSP does NOT require additional investment types, particularly if it means sacrificing the ultra low cost.”

Various financial writers have commented that the TSP advantages should be used by those who are eligible to participate. (See, for example,  A Financial Advantage for Federal Employees and Military Personnel)

Scott Burns, a financial writer, made this observation with regard to pulling money out of the TSP upon leaving federal service: “It does not make sense for the vast majority of government employees most of the time. The reason for this is simple: there is no way that you can replace either the safety of the government bonds fund or the low cost of the low cost index funds with a product available in the private market.”

Kim Weaver, Director, Office of External Affairs for the Federal Retirement Thrift Investment Board (FRTIB), provided several observations on the TSP and the FedSmith article. She noted there are a number of reasons people may want to withdraw their money and that growing the TSP into a bigger organization is not relevant to decisions in managing the TSP. Also, she made it clear that investments in the TSP belong to participants who are free to withdraw their money. She summarized the situation in this way:

  • Money is coming out of the TSP as “boomers” age and retire;
  • “Economy of scale” is an important issue as it keeps expenses down for all TSP participants;
  • Once a TSP account is emptied out, it cannot be put back into the TSP and TSP investors should be aware of this when making their investment decisions;
  • The FRTIB does not coordinate with the Administration (it is statutorily independent) and there is not a goal or target for the size of the G Fund; and
  • Financial advice is not free and TSP investors transferring their investments out of the program should be aware of all costs when moving their money.

A TSP investor may have good reasons for moving money out of the TSP when leaving or retiring from the federal service. Anyone making this decision to withdraw money from the TSP needs to understand the total cost of moving the money into another investment—including any commissions or annual expense fees that may be involved in order to make a fully informed decision. A qualified financial adviser can be invaluable in understanding the total cost of other investments and assist in understanding considerations for other investments taking into account the overall financial situation of the individual investor.

© 2016 Ralph R. Smith. All rights reserved. This article may not be reproduced without express written consent from Ralph R. Smith.

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About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources.

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