Leaving the military means making a lot of decisions — big decisions — often in a short period of time. One important decision, thankfully, doesn't have a time limit: What should you do with the balance in your Thrift Savings Plan account?
Several myths and rumors surround the answer to that question, with plenty of salesmen wanting you to believe that you should move your money out of the TSP. Five clear options exist for service members and their TSP account assets after transitioning from the military. Even though there's no single answer for everyone, three choices are more optimal for most people, and two choices are less right for most people.
The usually-better options include:
- Leave the money in your TSP account.
- Roll your TSP account balance into an Individual Retirement Arrangement.
- Roll your TSP account balance into your new employer's 401(k) plan.
The rarely-better options include:
- Withdraw your TSP account balance in a lump sum.
- Transfer your TSP account balance to a qualified annuity.
Leave the balance in your TSP account
Once you have a TSP account, you can leave your money in there until you have to take required minimum distributions. There is no requirement to move it anywhere, at any time. In fact, most military-savvy financial planners recommend that you leave your retirement funds in TSP.
"As an entering argument, we don't advocate doing anything different with your TSP," says Sean Gillespie of Redeployment Wealth Strategies. "Just because you can't contribute to it any more doesn't mean you have to move it. And with low cost being one of the leading predictors of maximizing your returns, it's darned difficult to do better than you will with TSP."
Pros: Leaving your money in the TSP is by far the easiest option, and it's a good option for many situations. The TSP has very, very low fees. You can move the money elsewhere later. TSP understands tax-free contributions from a Combat Zone Tax Exclusion. You can roll new money from other qualified plans into your TSP account to take advantage of the low costs.
Cons: TSP offers limited distribution options, though they are scheduled to expand this fall. You have limited investment options in TSP. You can't roll from Traditional TSP to Roth TSP, so if you are trying to move your Traditional money into Roth accounts, it will have to be out of TSP. You can't take multiple partial withdrawals out of your TSP account.
Roll your TSP balance into an Individual Retirement Arrangement
Pros: You have total control of how you invest your money, and unlimited investment options. You can still roll the money into a 401 (k) in the future. You can convert money that is currently in a Traditional account into a Roth account, but it will be a taxable event. And it's really nice to put everything in one place!
Cons: IRAs don't have any loan options, and will probably have higher fees.
Roll your TSP balance into your new employer’s 401 (k) plan
Pros: Moving your TSP balance will streamline your accounts, and that balance will be available for borrowing with a 401 (k) loan. (But don't do it!)
Cons: Most 401 (k) plans have higher costs than TSP. You'll still be limited to the investment options in the new plan. There may be a waiting period to participate in your new employer's 401 (k). Not all 401 (k) plans have a Roth option.
Forrest Baumhover, a certified financial planner with Lawrence Financial Planning, suggests caution when moving your TSP to a 401(k).
"When you leave military service, don't be quick to jump out of TSP. It has better and lower-cost investment options than 401 (k) plans."
Withdraw your TSP account balance in a lump sum
Pros: Cash in hand.
Cons: Withdrawing money from your TSP account may be subject to withdrawal penalties (10%) and taxes (probably in the 20% range). More importantly, you'll lose all future earnings on that money, and you can't replace that money into a tax-advantaged account because they have yearly contribution limits.
Transfer your TSP account balance to a qualified annuity
Pros: Predictable, guaranteed income stream for life.
Cons: It is a permanent decision. There may be high fees involved. You may not get anywhere near the full value of your contribution. If it isn't indexed for inflation, the purchasing power of your monthly benefit will decrease each year.
This is a relatively short overview and can't possibly cover every possible situation. As with everything, there are exceptions and nuances for many different scenarios. If you are considering moving your TSP to another investment, you may find value in consulting a financial advisor to figure out which choice is right for you and your specific situation.
Lacey Langford, AFC ®, The Military Money Expert ®, suggests several reasons why you might want to consider using a fee-only financial planner vs. the advisor offered through a bank, insurance company or investment company.
"Fee-only allows you to have a clear picture of what you're paying for and how the advisor is being compensated for the advice and recommendations they're giving you," Langford added.