Editor’s Note: This column has been updated with new data from the Thrift Savings Plan to reflect the new authorities in the TSP Modernization Act.
The TSP Modernization Act is anticipated to expand the withdrawal options for TSP participants in the following ways:
The most recent details and FAQ on the TSP Modernization Act can be found here:
If you read the list above, you may be shocked (outraged?) that such flexibility wasn’t there before. In fact, a TSP participant survey showed that such lack of withdrawal flexibility motivates federal employees to roll their money out of the TSP.
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The above changes are anticipated to go into effect by September of 2019. And now is the time to consider the classic question: Are you better off keeping your money in the TSP, or are you better off rolling your TSP into an IRA?
Both options have their pros and cons. Here are some key differences to consider:
However, if you don’t use an asset manager and instead invest in unmanaged index funds like ETFs (exchange traded funds), those fund fees are about the same as the TSP, some as low as .04 percent, or $0.40 per $1,000 invested.
What does this mean to an investor?
Strategizing your withdrawals: An IRA will allow you to strategize your withdrawals.
Specify Investments: With an IRA you can specify whether you want your withdrawals to come from your stocks or bonds or whatever you’re invested in. This will allow you to:
You cannot make such specifications from your TSP. Any money you withdraw from TSP will come from ALL FUNDS pro-rata, even the funds that have declined in value.
Let me illustrate:
If a spouse is named as beneficiary of your TSP, they may remain in the TSP in a ‘beneficiary participant account.’ If this happens, 100 percent of your TSP will be moved into the G-fund until the surviving spouse reallocates the funds. That’s not necessarily a problem. The problem begins when the surviving spouse dies. When the surviving spouse dies, the beneficiary of the ‘beneficiary participant account’ cannot transfer the account into any IRA and thus will have to pay the tax on the entire TSP balance!
Contrast this with IRA rules: If a spouse inherits an IRA, the investments stay where they are. When the surviving spouse dies the inherited IRA can be moved into an inherited IRA and you can continue tax deferral.
The next points are directly impacted by TSP modernization act.
With the coming of the TSP Modernization Act, these last two points will be less of a concern, because, as mentioned above, the TSP is hoping to offer more withdrawal options with Roth-vs.-Traditional specificity.
The above points are presented in a terse manner to keep this article short. Each bullet point could receive many, many pages of detailed elaboration. Please consult with a competent advisor before acting on these points.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Stephen’s retirement guidance, benefits guidance and allocation guidance for Thrift Savings Plan (TSP) investing is available online at www.StephenZelcer.com and www.tspplanning.com, but should only be relied upon when reviewed with a competent advisor as part of a thorough financial plan.
Stephen Zelcer is a financial advisor for federal employees, and a pre-retirement/financial literacy instructor for federal agencies. Zelcer has personally delivered over 300 pre-retirement seminars, teaching thousands of federal employees about the interrelationship between Federal Benefits and personal financial planning. Stephen is also a blogger and author of the retirement readiness workbook “Ready, Aim, Retire!” Learn more about how Stephen helps federal employees at www.StephenZelcer.com.