Considering A Thrift Savings Plan Rollover? Consider This.
By the FINRA Investor Education Foundation
Did you know that Americans saving for retirement have more money in IRAs than in employer-sponsored retirement plans like the Thrift Savings Plan (TSP)? And the largest source of IRA contributions comes from individuals who move their money from the TSP or similar 401(k) or 403(b) plans when they leave a job, according to the Employee Benefit Research Institute.
That's called a rollover—and you've likely seen ads or heard messages encouraging you to roll your TSP account to an IRA. But if you are thinking about rolling over money from your Thrift Savings Plan (TSP) into an IRA, take some time to consider your options—one of which is to stay put in the TSP, or even transfer money from another retirement account into your TSP.
- Evaluate your transfer options. You have four choices. 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.
- Minimize taxes by rolling Roth to Roth and traditional to traditional. If you decide to roll over your TSP assets to an IRA, you can choose either a traditional IRA or Roth IRA. No taxes are due if you roll over assets from a traditional TSP account to a traditional IRA, or if you roll over your contributions and earnings from a Roth TSP account to a Roth IRA. But if you decide to move from a traditional plan to a Roth IRA, you will have to pay taxes on the rollover amount you convert. It's a good idea to consult with your plan administrator, as well as financial and tax professionals about the tax implications of each option.
Tip: Special Treatment of Employer Matches in Roth Plans. The IRS requires that any employer match of contributions made to a Roth plan be placed in a pre-tax account and treated like matching assets in a traditional plan. Military members do not receive an employer match into TSP, but a future employer might offer one. To avoid taxes when rolling over a Roth plan that includes matching contributions from your employer, you will need to request the transfer of your contributions and earnings to a Roth IRA and your employer's matching contributions and earnings to a traditional IRA.
- Think twice before you do an indirect rollover. With a direct rollover, you instruct the TSP to send your TSP assets directly to your new employer's plan or to an IRA—and you never have to handle the money yourself. With an indirect rollover, you start by requesting a lump-sum distribution from TSP and then take responsibility for completing the transfer. Indirect rollovers have significant tax consequences. You will not get the full amount because the plan is required to withhold 20 percent to ensure that taxes will be paid if the rollover is not completed. You must deposit the funds in an IRA within 60 days to avoid taxes on pretax contributions and earnings—and to avoid the potential of an additional 10 percent tax penalty if you are younger than 59½. If you want to defer taxes on the full amount you cashed out, you will have to add funds from another source equal to the 20 percent withheld by the plan administrator (you get the 20 percent back if you properly complete the rollover).
- 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."
- 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.
Read this article in its entirety for five more rollover tips.
Saving for retirement is a top financial concern for Americans, and many are confused about their retirement savings options. 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.
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Written by Guest Blogger
Published: 23 December 2014