Can a Thrift Savings Plan Be Rolled Into an IRA?

The Thrift Savings Plan (TSP) is a retirement savings program for federal employees and uniformed services, similar to a private sector 401(k) plan. An Individual Retirement Arrangement (IRA) offers a personal retirement savings vehicle with broader investment choices. Many individuals consider transferring funds from their TSP to an IRA to gain more control over their retirement assets. This article explores the conditions, procedures, and tax considerations for moving TSP funds into an IRA.

TSP Rollover Eligibility

A TSP rollover to an IRA requires specific conditions. Eligibility typically begins upon separation from federal or military service. Some options are also available at age 59½, even if still employed by the federal government or military.

The TSP account type dictates the corresponding IRA for a tax-free transfer. Traditional TSP accounts, funded with pre-tax contributions and growing tax-deferred, can be rolled over into a Traditional IRA without incurring immediate taxes. Roth TSP accounts, with after-tax contributions and tax-free qualified withdrawals, should be rolled into a Roth IRA to maintain their tax-advantaged status.

Individuals often consider a TSP rollover for various reasons, such as seeking more diverse investment options than the TSP’s limited choices, or consolidating multiple retirement accounts for simplified management. An IRA also offers greater flexibility in withdrawal options and access to professional financial advice. These factors help determine if a rollover aligns with financial goals.

The Rollover Procedure

Once eligible, TSP funds can be transferred to an IRA via a direct or indirect rollover. A direct rollover (trustee-to-trustee transfer) sends funds directly from the TSP to the IRA custodian, bypassing the participant. This method is preferred as it avoids tax withholding and simplifies the process.

To initiate a direct rollover, log into your TSP account online. Navigate to the withdrawal or rollover section, select the amount, and provide the receiving IRA details (custodian name, address, account number). Ensure the IRA’s tax status matches the TSP account (Traditional to Traditional, Roth to Roth) to prevent unintended tax consequences. The TSP processes the request and issues a U.S. Treasury check directly to the IRA provider. This transfer typically takes two to four weeks for funds to be deposited.

An indirect rollover involves the TSP issuing a check directly to the participant, who must deposit funds into a new IRA within 60 days. Failure to deposit the full amount within 60 days makes the un-rolled portion a taxable distribution, potentially subject to penalties.

For indirect rollovers, the TSP withholds 20% for federal income taxes. To avoid full taxation and penalties, the participant must deposit the entire distribution, including the 20% withheld, into the new IRA within 60 days. This often requires using other funds to cover the withheld amount.

Tax Implications

Understanding tax consequences is important when rolling over TSP funds to an IRA. Rolling Traditional TSP funds into a Traditional IRA is not a taxable event, as both hold pre-tax contributions and grow tax-deferred. Similarly, rolling Roth TSP funds into a Roth IRA generally incurs no taxes, as both use after-tax contributions and offer tax-free qualified distributions.

Converting Traditional TSP funds to a Roth IRA has different tax treatment. The entire amount rolled over is a taxable distribution in the year of conversion, as it moves from a tax-deferred to an after-tax account. This increases taxable income for that year, potentially placing you in a higher tax bracket. The TSP may issue Form 1099-R to report the distribution.

For indirect rollovers, failure to deposit funds into an eligible IRA within 60 days results in the entire amount being treated as a taxable distribution. If under age 59½, a 10% early withdrawal penalty may apply to the taxable portion, unless an exception applies. If a Required Minimum Distribution (RMD) was due from the TSP for the prior year, it must be satisfied before the rollover to avoid penalties.

Post-Rollover IRA Management

After TSP funds have been successfully rolled into an IRA, the focus shifts to managing the newly funded account. The first step often involves selecting an IRA custodian or provider if one was not already established for the rollover. These custodians are responsible for holding the assets and providing administrative services.

One of the primary advantages of an IRA is the expanded range of investment options available compared to the TSP’s more limited choices. Within an IRA, individuals can typically invest in a wider array of securities, including individual stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This flexibility allows for greater customization of the investment portfolio to align with personal risk tolerance and financial objectives.

Accessing funds from the IRA occurs through distributions, which are subject to IRA distribution rules. The IRA custodian provides regular statements and is responsible for reporting certain activities to the IRS, such as contributions (on Form 5498) and distributions (on Form 1099-R). Understanding these reporting requirements helps ensure compliance with tax regulations.