Thinking about rolling over funds from your Thrift Savings Plan? Consider this.
By Gerri Walsh, President, FINRA Investor Education Foundation
If you are leaving the military—or if you have already separated—you may be thinking about what to do with the retirement savings you’ve built up in your Thrift Savings Plan (TSP). Many service members don’t realize that one choice is to stay put in the TSP—and perhaps even transfer money from other retirement accounts into your TSP.
Before you consider a rollover of TSP funds to an IRA, consider these tips. They can help you make a more informed decision.
Know Your Options. You have four choices regarding TSP transfers and rollovers. You can keep some or all your savings in your TSP. You can transfer assets to your new employer's plan, if allowed (check with a new employer’s benefits or human resources office). You can roll over your plan assets into an IRA. Or you can cash out your balance. There are pros and cons to each, but cashing out your account is rarely a good idea for younger individuals. If you are under age 59½, the IRS generally will consider your payout an early distribution, meaning you could owe a 10 percent early withdrawal penalty on top of federal and applicable state and local taxes.
Be wary of "Free" or "No Fee" claims. Competition among financial firms for IRA business is strong, and advertising about rollovers and IRA-related services is common. In some cases, the advertising can be misleading. FINRA has observed overly broad language in advertisements and other sales material that implies there are no fees charged to investors who have accounts with the firms. Even if there are no costs associated with a rollover itself, there will almost certainly be costs related to account administration, investment management or both. Don't roll over your retirement funds solely based on the word "free."
Understand fees and expenses. Both the TSP and IRAs involve investment-related expenses and plan or account fees. Investment-related expenses can include sales loads, commissions, the expenses of any mutual funds in which assets are invested and investment advisory fees. Plan fees can include administrative costs (recordkeeping and compliance fees, for instance) and fees for services, such as access to a customer service representative. In some cases, employers pay for some or all of the plan's administrative expenses. IRA account fees can include administrative, account set-up and custodial fees, among others. Before making a rollover decision, know how much you are currently paying for TSP to manage your retirement funds. The expenses for TSP funds are among the lowest to be found anywhere. Compare those to the fees and expenses of a new plan or IRA. For more information about 401(k) fees, see the Department of Labor's publication, A Look at 401(k) Fees. For IRA fees, ask your financial professional to provide you with information about fees and expenses, and read your account agreement and any investment prospectuses.
Realize that conflicts of interest exist. Financial professionals who recommend an IRA rollover might earn commissions or other fees as a result. In contrast, leaving assets in the TSP or rolling the assets to a plan sponsored by your new employer likely results in little or no compensation for a financial professional. In short, even if the recommendation is sound, any financial professional who recommends you move money from the TSP into an IRA could benefit financially from that move.
If you choose to keep your money in the TSP after you leave the military (or the federal government), you can no longer continue to contribute from income you earn elsewhere—but you can transfer assets from other retirement accounts into the TSP. Here’s how that works: You can move into the traditional balance of your TSP account both transfers and rollovers of tax-deferred money from traditional IRAs, SIMPLE IRAs and eligible employer plans. The TSP will accept into the Roth balance of your TSP transfers from Roth 401(k)s, Roth 403(b)s and Roth 457(b)s. If you don’t already have a Roth balance in your existing TSP account, the transfer will create one. But you can’t rollover Roth funds into your TSP after receiving a distribution from your employer-sponsored plan, and can’t move money from a Roth IRA into your TSP account. The TSP web site has more detail on these procedures.
The decision to move your retirement nest egg or stay put is an important one. In many cases, you don't have to act immediately upon switching jobs or retiring. Take the time to assess your options. Ask questions and do your homework to determine what is best for you.
To receive the latest military-focused and other important saver and investor information sign up for the SaveAndInvest.org Military Newsletter.
- Written by Guest Blogger
- Category: Blog
- Published: 09 October 2014