Can a TSP Be Rolled Into an IRA?

Moving funds from a Thrift Savings Plan (TSP) to an Individual Retirement Arrangement (IRA) is known as a rollover. This allows individuals to consolidate retirement savings or seek different investment opportunities. Federal employees and uniformed service members should understand the rules and implications of such a transfer.

TSP and IRA Rollover Eligibility

The Thrift Savings Plan (TSP) is a retirement savings and investment plan for federal employees and uniformed services members. An Individual Retirement Arrangement (IRA) is a personal retirement savings account offering tax advantages. Rollovers from a TSP into an IRA are permitted, allowing funds to transfer while maintaining tax-advantaged status.

There are two primary rollover methods: direct and indirect. A direct rollover involves the TSP sending funds directly to the new IRA custodian. This method prevents immediate tax withholding and avoids strict deadlines. An indirect rollover occurs when the TSP distributes funds directly to the account holder. The account holder then has a limited timeframe to deposit these funds into a new IRA.

Indirect rollovers have more complexities. When funds are distributed directly, the TSP withholds 20% for federal income taxes. To avoid current taxation, the account holder must deposit the entire amount, including the 20% withheld, into the new IRA within 60 days of receiving the distribution. If the full amount is not redeposited within this window, the unrolled portion is treated as a taxable distribution and may be subject to an additional 10% early withdrawal penalty if the individual is under age 59½.

Key Information for a Rollover Decision

Before initiating a rollover, understand the distinctions between Traditional and Roth IRAs as potential destinations. A Traditional IRA accepts pre-tax contributions, deferring taxes until retirement withdrawals. Roth IRA contributions are made with after-tax dollars, and qualified withdrawals are tax-free. The choice depends on your current tax situation and projected retirement tax bracket.

The tax status of your TSP funds impacts the rollover process. Rolling Traditional TSP funds (pre-tax) into a Traditional IRA does not trigger an immediate tax event, maintaining tax-deferred status. Similarly, Roth TSP funds (after-tax) can be rolled into a Roth IRA without immediate tax consequences, preserving their tax-free nature.

However, rolling pre-tax TSP funds into a Roth IRA is a taxable conversion. The entire converted amount becomes taxable income in the year of conversion. This can result in a substantial tax bill, requiring careful planning. It is advisable to have funds available to cover this tax liability, rather than withdrawing from the converted amount, which could incur further taxes and penalties.

Before any rollover, gather account information from your TSP, including your account number and tax status. Research and select an IRA custodian that aligns with your investment goals and offers the IRA type you intend to open. Understand their fee structures, investment options, and requirements for accepting rollovers. Once chosen, obtain their account details and any required forms.

Steps to Complete a TSP to IRA Rollover

To roll over TSP funds to an IRA, first open an IRA account with a financial institution. Select a rollover IRA type, designed for employer-sponsored plans. Ensure its tax status (Traditional or Roth) matches your TSP funds to avoid unintended tax consequences.

For a direct rollover, initiate the transfer through your TSP account online. Navigate to the “Withdrawals and Rollovers” section. Select the account and indicate if you are transferring the entire balance or a portion. Provide the receiving IRA custodian’s details, and the TSP will send the funds directly. This method helps avoid potential tax withholding and the strict 60-day deadline associated with indirect rollovers.

If opting for an indirect rollover, request a distribution from your TSP. The TSP will send the funds directly to you, typically via check, with 20% of the taxable amount withheld for federal income taxes. Upon receiving the check, you must deposit the entire distributed amount, including the 20% withheld, into your new IRA within 60 calendar days. Failure to do so results in the distribution being taxable income and potentially subject to a 10% early withdrawal penalty. If you cannot make up the 20% withheld from other sources, that portion will be taxed.

Report the transaction accurately when filing taxes. Direct rollovers are reported to the IRS even without tax withholding. For indirect rollovers, if the full amount is redeposited within 60 days, report it as a non-taxable rollover. Keep detailed records of all communications, forms, and transaction confirmations.

Managing Your Rolled-Over Funds

Once TSP funds are rolled into an IRA, you gain greater control and flexibility over your investments. IRAs offer a broader range of investment choices than a TSP, including stocks, bonds, mutual funds, and exchange-traded funds (ETFs). This increased flexibility allows you to tailor your investment strategy more precisely to your financial goals and risk tolerance.

Ongoing IRA management includes understanding Required Minimum Distributions (RMDs). For Traditional IRAs, you must begin annual withdrawals at age 73, which are taxable as ordinary income. Roth IRAs do not require the original owner to take RMDs during their lifetime, allowing for continued tax-free growth. Beneficiaries of inherited IRAs are subject to RMD rules, often requiring distribution within a 10-year period.

Designating beneficiaries for your IRA is important. While TSP allows designations, IRA rules may offer different distribution options upon death. Review and update beneficiaries periodically, especially after life events.

Lastly, rollovers are not new contributions and are not subject to annual IRA contribution limits. However, you can still contribute to your IRA annually up to specified limits if eligible. For 2025, the IRA contribution limit is $7,000, with an additional $1,000 catch-up contribution for those age 50 and older.