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Should I Move My TSP?

So here we are, Jake, our transitioning servicemember is looking back on 10 years. Jake is grateful that he heeded his commander’s advice. He still can hear his commander voice, “Son, put 10% of your income away in that TSP and you will not regret it.” Jake did exactly that and his TSP account was invested.
 
Over the years, Jake weathered financial storms as well as benefited from the fair weather in the markets. His account value today stands at $61,000. In preparation for leaving the Army, Jake attended a financial seminar hosted by a local financial firm and the advisor has suggested that he transfer his TSP account to an IRA account with her firm.
Note: This example is not intended to be used as investment advice or as a guarantee of a final account balance. The amounts used are illustrative purposes only.
 
Tough Act To Follow
The TSP is simply a tough act to follow as the underlying investments of the TSP offers some of the lowest cost investments available anywhere. The TSP track record is simple and effective. Consistently, over a period of 30 years, it has delivered respectable returns for over 5 million participants and has amassed nearly $500 billion in assets. The TSP is now recognized as the largest defined contribution retirement plan in the world.
 
The Question
The transitioning Servicemember decision to roll over TSP funds into an IRA requires consideration of management fees and sales commissions. The question that must be answered first is this… Is this a commission driven decision?

Compelling Reasons*

FERS employees are eligible to receive retroactive Agency Matching Contributions to their civilian TSP accounts if they contributed to their uniformed services accounts for the period of nonpay or separation to perform military service.


FERS and CSRS employees may make up employee contributions to their civilian TSP accounts that they missed because of performing military service. FERS employees will receive Agency Matching Contributions.


FERS employees who were not vested upon separation from civilian service, and who had Agency Automatic (1%) Contributions and attributable earnings removed from their TSP accounts, are entitled to have those funds restored to their accounts


Reversing a Taxable Distribution: If you had a TSP loan that was closed as a taxable distribution because you separated or were placed in nonpay status to perform military service (and the TSP was not notified), you may be eligible to have the taxable distribution reversed after you return to civilian service or pay status. If you also received an automatic cashout of your TSP account when you separated, you must return the cashout (as explained above) to be eligible for a reversal of the taxable distribution of your loan. However, if you voluntarily withdrew your TSP account when you separated, you are not eligible to have the taxable distribution of your loan reversed.

 

*TSP Benefits That Apply to Members of the Military Who Return to Federal Civilian Service (FERS)

Compelling Reasons** 

First…the bad news. No Loans. If you have any outstanding TSP loans, you must pay them off within 90 days of your separation.

Now the good news…Lots of it. You'll still be able to:

  • Enjoy the TSP's low administrative expenses.

  • Move money into your account from an IRA or eligible employer plan.

  • Change your investment mix with inter-fund transfers.

  • Leave your money in the TSP until you reach age 70½.

  • Avoid paying current Federal income taxes on any taxable amounts (and possibly penalties).


Getting Cash from Your TSP Account

**TSP Benefits That Apply to Members of the  Military Who Separate from Federal or Government Service:

All Transitioning TSP participants may be eligible to:


Transfer all or part of your withdrawal to an IRA or eligible employer plan.

Tax Considerations
Your decision has tax consequences:


You will owe taxes on the taxable amount of any payment you receive from your account. The taxable amount of any lump sum payment or monthly payments lasting less than 10 years is subject to 20% Federal income tax withholding if not transferred to an IRA or eligible employer plan.

You may also have to pay a 10% early withdrawal penalty. However, if you separate from service during or after the year you reach age 55 (or the year you reach age 50 if you are a public safety employee as defined by section 72(t)(10)(B)(ii) of the Internal Revenue Code), then the 10% early withdrawal penalty tax does not apply.

Conclusion
In summary, I go back to my original statement.  The transitioning Servicemember decision to roll over TSP funds into an IRA requires consideration of management fees and sales commissions.

 

Additionally, the other factors mentioned above weigh in on the decision as well.

 

It is important for the servicemember to have a conversation with an unbiased financial counselor. One that will not benefit from the decision to transfer TSP Assets.

 

Again, the question that must be answered first is this… “Is this a commission driven decision?”