By Gerri Walsh, President, FINRA Investor Education Foundation

September 17, 2013

No, this has nothing to do with obedience training for your pooch. “Rollover” is a financial term for when you transfer money from one retirement plan to another without any tax consequences.

Military members who participate in the Thrift Savings Plan (TSP) face a “rollover moment” when they decide to leave the service. Should you leave your money in the TSP? Should you roll it into a new employer’s 401(k) plan? What about an IRA? Or should you just withdraw the money and stash it in your bank account?

If you’re facing a rollover moment, following these tips can help you avoid mistakes that can torpedo your retirement savings: 

  • Take time to comparison shop. In most cases, you don’t need to make a snap decision with respect to your new employer’s retirement savings plan. There’s nothing wrong with simply leaving your TSP retirement savings right where they already are. The TSP fund choices are solid, and management fees are some of the lowest you will find in any retirement plan. You can still move money among the TSP funds. The only thing you can’t do once you leave the service is add money to your TSP account.
  • Compare fees and investment choices. Fees in particular are a key consideration. Small differences in cost can translate into big differences in the overall performance of your investments. The Department of Labor’s A Look at 401(k) Fees provides answers to many common questions about fees and expenses. If you’re considering an IRA, ask your broker how much it will cost to open the account and what ongoing costs are associated with your potential investments. IRA fees are often higher than management fees in an employer-sponsored retirement plan like a 401(k).
  • Be wary of rollover sales pitches that make broad claims that brokerage accounts or IRAs are “free” or have “no fee.” Certain types of fees might not be charged, but others might—such as fees for opening, maintaining or closing accounts or costs associated with particular investment products.
  • Use diversification and other strategies to manage risk—whether you’re moving to a new employer or retiring. 
  • Ask and check to be sure that both your investment professional and investments are registered.
  • Consider engaging an independent financial professional to review your rollover and other financial decisions at separation or retirement.

Generally speaking, the worst financial decision you can make regarding TSP retirement savings is accept an early distribution. Unless you’re at the IRS retirement age of 59½, the amount you withdraw from TSP will be subject to income tax, including state income taxes where applicable. An additional 10 percent tax is applied on top of that as a penalty for receiving tax-advantaged funds intended for retirement. There are some exceptions, but as a general rule, don’t withdraw the money unless you have no alternative.

Tip of the Day

  • Written by Katie Bryan | December 16, 2013

    Check out the guide from @CFPB that helps you to know which questions to ask when shopping for a financial advisor http://ow.ly/rrjYO 

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