As regular readers of my column know, I am generally against rolling over your Thrift Savings Plan balance into an individual retirement account (IRA) after you separate from service. It’s not that I’m against doing it for any reason — only for the wrong reasons.

With retirement looming for many federal workers, the disposition treatment of TSP funds is an important
issue. Income from the TSP account will have a significant impact on the standard of living for many retirees. In addition, constant and increasing pressure from investment companies to “capture” your TSP assets via rollover to an IRA makes careful attention here critical. Financial services companies see IRA rollover as a key opportunity to profit from the coming federal retirement wave.

You can leave your balance in your TSP account for life and manage it there, subject to IRS mandatory distribution rules beginning at age 70½, or later if you’re still working. Or, any time after you separate from
federal service, you may move the cash from your TSP account, all or in part, to a traditional IRA without
incurring taxes. The tax rules that apply to IRA accounts are somewhat different than those for TSP.

For one thing, TSP allows more liberal, penalty-free withdrawals than IRAs before age 59½ under certain
circumstances. If you retire during or after the year in which you reach age 55, you may access your TSP
account freely without penalty. This is not true for an IRA account, which imposes tight restrictions on
access before age 59½.

IRAs offer a virtually limitless choice of account custodians and more investment flexibility than TSP. An
IRA can be housed at a mutual fund company, investment broker, bank, insurance company or credit union, for example. It can contain a wide variety of investment securities including stocks, bonds, mutual funds, certificates of deposit, exchange-traded funds and more.

While there are a number of bad reasons to leave TSP for an IRA, there are also a few good ones:

  • An IRA can increase your withdrawal flexibility. TSP is unfortunately restrictive in the ways it allows you
    to withdraw your money after you separate from service. You may take up to two lump-sum withdrawals or initiate a regular monthly stream of payments.

Many IRA custodians allow you to withdraw your money whenever you want, including using checks or a
debit card that access your IRA directly — allowing unlimited lump-sum withdrawals. They also will process and manage regular withdrawals according to your specifications.

This is a reasonable option if the costs of maintaining the new IRA account are low, and if the investment
strategy used in the IRA is appropriate to your needs and implemented efficiently. If you’re going to
replace your TSP account with an IRA, I recommend that you try to emulate the TSP’s characteristics —
extremely low investment costs and unmanaged index fund investments — as closely as possible. This is
usually best accomplished in a discount brokerage account using exchange-traded funds to fill out the
appropriate asset allocation strategy.

  • Purchasing an IRA can be a way to obtain financial planning or investment advice. Some advisers may
    require that you transfer or roll over assets to accounts that they manage, since they must derive
    compensation from these accounts through sales commissions or service fees that are regularly and
    automatically deducted from such accounts.

This can be convenient since you won’t have to write a check or provide a credit card to pay for the
services of the adviser — but it can also be dangerous since the cost of these arrangements tends to be
overlooked by the investor as they accrue.

This is a reasonable option if the services are valuable and the costs are reasonable. I recommend that
you insist on independent advice — that is, advice not related to the sale of any securities — whenever
possible. I also recommend that investors seek to limit total planning and investment costs to no more
than 1 percent of covered investment assets. For example, an investor seeking planning and advice
directly covering $500,000 in assets should not pay more than about $5,000 per year for the adviser’s
fees, transaction costs, such as brokerage commissions, and the cost of the investment securities,
themselves — typically mutual fund management expenses.

  • An IRA is a means to buying a non-TSP immediate annuity. You may be interested in using all or part of your TSP balance to purchase an immediate annuity and may find a more attractive alternative than that offered by the TSP’s provider. Since the purchase of an immediate annuity is irreversible, use caution and careful consideration before taking this step.

This is a reasonable option if the annuity option is clearly appropriate for you, if the type of annuity you’re
considering best meets your needs, and if the associated costs are competitive and reasonable.

Remember that since the TSP’s costs are so low, there will always be a price to pay for moving to an IRA.
You should carefully evaluate the costs and benefits of a rollover before making the commitment — since
it will be irrevocable.

There are good reasons to consider rolling over your TSP balance to an IRA, but they should be
evaluated on your terms, with your best interests in mind.

Written by Mike Miles
For the Federal Times
Publication October 16, 2006