TSP to IRA rollovers have benefits, advisors say

For government employees who are at or near retirement, the decision to keep assets in the Thrift Savings Plan versus rolling them into an IRA is not necessarily an easy one to make.

Last week, InvestmentNews wrote about an advisor who allegedly misled clients about the fees charged in the TSP. While the fees in the Federal government’s defined contribution plan are extremely low, financial advisors told InvestmentNews that there are plenty of cases in which moving assets out of the TSP can be a good idea.

The most common reason to avoid doing a rollover is cost, they noted, as investment management fees and total expenses in the TSP are lower than what someone would pay for professional advice outside of the plan. But for some, there are potential tax benefits of doing rollovers. And there are more investment and income options outside of the TSP, advisors said in email responses.

“If the client would like access to professional management, account monitoring, and a greater number of investment options, then a rollover to an IRA will be discussed,” said Daniel Lash, partner at VLP Financial Advisors. “If the client will be retiring shortly then a rollover to an IRA from TSP may be best since you can choose which investments in the IRA to sell to create the income needed. In the TSP if you start distributions for retirement systematically, TSP will sell pro rata from all your investments regardless of the performance of the investments at that time, like dollar cost averaging but in reverse.”

Similarly, Michael Peterson, founder of Faithful Steward Wealth Advisors, pointed to systematic withdrawals in the TSP “reinforc[ing] poor investment discipline.”

“If you are utilizing a systematic withdrawal plan, it's hard to beat the rock-bottom expense ratios on the TSP Funds,” Peterson said. “However, if you demand more certainty from your income plan, you can utilize an income bridge strategy to buy a ladder of bonds with the amounts and maturities matched to your spending needs. Your only choice is to roll over your funds to a Rollover IRA, as the TSP Funds don't offer bond funds with set maturities.”

Investment choices

The TSP added a mutual fund window program in 2022, although it has some restrictions. That option has additional fees, and those who use it have generally higher investment costs than other TSP participants. Additionally, the initial transfer to the fund window must be at least $10,000 but not more than 25 percent of the total assets in one’s TSP account. That 25 percent limit applies to any further transfers to the fund window as well.

Rollovers provide more options, said Devin Pope, managing director at Nilsine Partners.

“We offer private market investments to our clients with IRAs. This is something you don't have exposure to within a TSP,” Pope said. “In my experience of over 20 years in the industry having an advisor is going to provide you better service than working through a group retirement plan – especially if the account owner passes away.”

Investors in defined contribution plans, including the TSP, sometimes neglect their accounts if they aren’t working with an advisor, he said.

“They don't update asset allocation when life events happen. I have seen a client neglect his old retirement plan, which was then rolled over into an IRA without his knowledge or understanding, and it sat in cash for five years. Hard to make that money back.”

But a downside to rolling money out of the TSP is that there is less protection from creditors, he noted.

Another advisor, Patrick Beagle, principal of WealthCrest Financial Services, said that while there is no one answer that applies to all TSP account owners, “generally at least a partial rollover makes sense.”

“There are many sectors not available in TSP. To do a proper diversified investment allocation it may make sense to roll a portion out of the account,” Beagle said.

It can also be better to have the money outside of the TSP for estate planning purposes or for having easier access to the money in retirement, he said.

Roth options

“While the TSP has both traditional and Roth options, Roth conversions of pretax amounts can't be done inside the TSP,” said Gregory Corneille, wealth advisor with Choice Wealth Management. “Converting pretax balances to Roth over multiple years is a very effective strategy to produce tax-free income in later years.”

Additionally, those over 70 who regulatory donate to charity can benefit from rolling TSP assets to IRAs, he said.

“Using Required Minimum Distributions to do charitable giving allows you to avoid paying taxes on the RMD, as well as potentially receive a tax deduction for the charitable donation.”

Benefits of advice and accounts aggregation

Some of the pros of doing rollovers from the TSP are that the assets are “easier to organize, consolidate, and aggregate with other retirement accounts,” said Stacy Miller, founder of BayView Financial Planning. Miller also cited the ability to have full professional investment management and wider access to different investment choices, without the added costs and restrictions of the TSP’s mutual fund window.

The downsides, Miller noted, are the generally higher investment expenses outside of the TSP, including the loss of access to the G Fund. Additionally, there is the “complexity of managing military combat zone tax-free contributions,” as well as “conflict of interest as a fiduciary making this recommendation.”

Matthew Hess, a financial advisor at Berman McAleer, noted that he “would only recommend a client do this after they have committed to retirement, [as] otherwise having the TSP as an investment account for salary deferral is a very strong investment and compounding vehicle.”