What is Dave Ramsey’s advice for federal employees about rolling over their Thrift Savings Plan (TSP) accounts to an IRA after they retire or leave federal service? Has his advice changed after the passage of the TSP Modernization Act?
The TSP Modernization Act (H.R. 3031) made a number of significant changes to the TSP, most notably that federal employees with TSP accounts are now allowed multiple age-based or post-separation withdrawals from the TSP whereas previously they were only allowed one.
Dave Ramsey on TSP Rollovers to IRAs
A woman who had recently retired from her federal job called Dave Ramsey’s national radio show to ask him about doing a TSP rollover to an IRA. Ramsey is a well known financial advisor who teaches people about handling money, most notably by leading them out of debt and teaching them how to invest and save for retirement.
The crux of her question stemmed around the new law—she noted that she had heard Ramsey tell people in the past to always roll their TSP account over to an IRA after leaving federal service. She assumed this was because people would have better access to their funds outside of the TSP.
“And better rates of return,” said Ramsey.
“Well, I’ve been doing pretty good; I feel like I have [with my TSP investments],” said the caller.
“You’ve got the C Fund, the S Fund, the I Fund; that kind of thing, and you can buy mutual funds in the open market that will outperform those funds,” he said.
“Ok, maybe I need to start looking some more,” said the caller.
On her question about more withdrawal options and better access to funds under the TSP Modernization Act, Ramsey said, “You’ve got infinite withdrawal options if you move it [the TSP] to an IRA. I would roll the whole thing to a traditional IRA rollover (there’s no taxes on that at all) and you can withdraw whatever the flip you want if you’re over 59 and a half out of that IRA.”
The caller noted that she was 68, so this fact would apply to her situation.
“You have mandatory withdrawal out of anything [when you hit] the RMD [Required Mandatory Distributions] at 70 and a half, but it’s a minor amount. I would roll it over to an IRA and I would pick good mutual funds that outperform the market. The C Fund is basically an S&P 500 (and that is ‘the market’), and you can outperform that. Not all funds do; as a matter of fact, a lot of them don’t, but you wouldn’t pick a fund that doesn’t outperform the market,” he said.
He went on to say that talking further with a financial advisor would probably be in order so she could learn more about mutual funds available, and make the best choice for her situation.
“If you need help picking a fund and discussing this further before you make the decision—I wouldn’t make a decision that big based on some goob on the radio—I’d want to learn more about it if I were you, so I teach you to make decisions yourself,” concluded Ramsey.
Which TSP Funds Does Dave Ramsey Recommend?
Dave Ramsey also has provided general advice to federal employees about which TSP funds to invest in over the course of a long federal career. He suggests that federal employees stick with the core stock funds and avoid the G, F, and Lifecycle funds completely.
Ramsey suggests this allocation for regular TSP contributions:
- 80% in the C Fund
- 10% in the S Fund
- 10% in the I Fund
Federal employees who need advice on how to invest their TSP accounts or how to develop a financial plan that meets their needs should speak to a qualified financial advisor who specializes in working with federal employees.