TSP or Not TSP? THAT is the Rollover Question!

In the third article in his series on federal retirement, FedSmith.com author Randy Silvey addresses one of the most common questions he has received from FedSmith.com users: “Should I roll my TSP over to an IRA after leaving federal service?”

“Should I leave my retirement savings in the Thrift Savings Plan (TSP) when I retire or should I perform a rollover to an IRA?”

This was the second most asked question I received from FedSmith.com readers in my first two articles in this series. I will cover this subject in more detail here in part 3. For parts 1 and 2, see Federal Retirement Facts and Myths: Do You Know the Difference? and Feds Ask, ‘Where Can We Find Retirement Income Facts?’.

The short answer is – It depends! The right answer is contingent on who you are, your expertise, your inclinations and what you need after leaving federal service.

My fervent advice – If you have left federal employment, are already retired, are within a year of retiring or have passed 59 ½ years old, this is an important subject in which you should immerse yourself.

So is a rollover right for you?

Let’s start with a brief “Rollover” education:

  • Simplified “Rollover” definition – Removing employer sponsored retirement assets (TSP, 401k, 403b, etc…) and placing them into an Individual Retirement Account (IRA).
  • What’s an IRA? It is a personal retirement account. The owner can invest in a wide variety of options. Rules and guidelines can be addressed by a good advisor.
  • When can a rollover be performed? Typically, at one of three milestones. They are: 
    1. When you leave an employer and move to a different employer.
    2. When you retire.
    3. When you turn 59 ½.

The TSP is a great place to SAVE for retirement! BUT, it isn’t ALWAYS the best place to LEAVE retirement funds.

TSP and IRA ins and outs

Common characteristics of both the TSP and IRAs include the following:

  • Tax deferred growth.
  • Identical tax treatment when used for income; including the traditional and Roth options.
  • Ability to Rollover/Transfer to another “qualified” plan.
  • Ability to cash out.

Unique characteristics of the TSP:

  • Low costs.
  • Limited investment choices; currently 5 basic options.

Note: I didn’t include the Lifecycle funds as they are the same 5 alternatives just mixed together in assorted proportions, nor am I addressing the possible options for 2016. The mutual fund window (MFW) will likely increase costs and thus offset the main benefit of remaining in the TSP. MFW is long overdue and a nice addition for those still contributing to TSP. But, I have doubts it will be of any additional value to those that have reached any of the rollover milestones.

  • Guarantee against loss of principle in the G Fund. However, officials are considering eliminating the guarantee altogether.
  • Self-managed, the investor is on his own in selecting investment options. Feds don’t receive personal guidance or direction, potentially causing the detriments of poor selections and improper blending, to more than offset the low cost benefit.
  • Once retired, Feds can no longer contribute to their TSP.
  • Limited ability to track gains/losses and cost basis. Tracking is important to have a clear picture of net worth and asset allocation, along with short term and long term performance.

Unique characteristics of IRAs:

  • Immense investment opportunities. As an advisor, I like for my clients to have greater diversification beyond the few investment options that TSP offers. If a Fed stays in the TSP, he can’t invest in individual sectors such as technology, healthcare, emerging markets, precious metals or even REIT’s.
  • Personal control of retirement assets.
  • Professional/Personal management. In a fee based IRA, you should expect (included within the fee) ACTIVE management, along with consistent reviews and monitoring programs.

Note: It is strongly recommended to obtain the advice and personal management of an advisor that specializes in Federal employee retirement planning.

  • Generally higher expenses. Commissions and fees are typical costs of rolling over into an IRA.
  • Ease of tracking gains/losses and cost basis. With most outside options the ability to track is part of the cost.

At the end of July 2015, I talked to Tom ToSsuP, a 60 year old fed that is within 6 months of retirement. Tom told me that he had plans to keep his retirement money in the TSP because he heard it has low costs. He was emphatic that he didn’t want to work with an advisor. According to Tom, “They just want to take part of your money.”

Tom had called my office to receive a Federal Retirement Readiness Review that I offer to Feds for free. He was looking for my opinion as to whether he was truly prepared (financially) for his impending retirement. During the review process, I asked Tom if his TSP was set up to match his risk tolerance.

Definition of Risk Tolerance – An individual’s panic point during market downturns vs. the desire/need for investment gains. Issues that usually affect someone’s risk tolerance include; how much they feel they can afford to lose? How much time they have before they need the money? What type of average gain do they need/want to meet their financial goals?

Tom got very quiet and said that he didn’t know. I explained that it’s nearly impossible to select the right investments that could fit his risk tolerance, if that risk tolerance is unknown.

Understanding and managing for one’s risk tolerance, in my opinion, is the most important factor in investing retirement assets.

Together we uncovered several other issues Tom hadn’t considered. Tom is an intelligent medical expert, however, he doesn’t possess the life experiences to properly handle his retirement planning.

At the end of the conversation, Tom said, “I pay my mechanic to manage the upkeep on my cars, because I don’t know much about cars. Maybe paying an advisor to manage my retirement planning would be a good idea as well.”

When presented with logical and professional alternatives, Tom ultimately decided that cheap wasn’t the most important determining factor for him. He needed guidance and an investment manager that understood his retirement planning needs better than he did.

The final analysis:

  • If a Fed is sufficiently knowledgeable, confident, understands how to manage his or her risk tolerance and possesses the inclination to manage retirement assets, he or she may be able to find an acceptable investment mix within TSP, but no one should elect to stay in TSP for costs alone.
  • If a Fed isn’t prepared to handle the management on his own, he should strongly consider rolling over their assets and utilizing an advisor that is both knowledgeable and experienced in Federal retirement income benefits. This turned out to be the case with Tom.

If you are at or past one of the three milestones, then it’s time to perform your own “Risk/Benefits” analysis. What’s right for you, the TSP or an IRA?

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risks, including the loss of principal. No strategy assures success or protects against loss. Securities offered through LPL Financial, member FINRA/SIPC.

About the Author

Randy Silvey is the published author of You FIRST, Federal Employees Retirement Guide, one of the bestselling books of its kind on Amazon and Kindle. For over 18 years, he’s been educating and guiding Feds in pursuing wealthier retirement lifestyles. Randy can be reached at 816-524-1515 or visit his website at www.silverlightfinancial.com. Securities offered through Infinity Financial Services. Member FINRA/SIPC.