Military and government retirement plans aren’t covered as often by the national media at
least in comparison to 401Ks and IRAs.
And that’s unfortunate, but thanks to a viewer’s request we are going to be diving
into one of them today, known as the Thrift Savings Plan, or TSP for short.
Hey everyone, Daniel here and welcome to Next Level Life a channel where you can learn about
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Now I do want to say upfront that I have never personally had a TSP.
So everything I say in this video is going to be based on second-hand accounts and research
as opposed to personal experience.
So look at this video as more of a solid starting point for you and definitely consider checking
out the links to the articles that I’ve used while researching this video, which I
will leave in the description below as well as consult with a professional before making
any final decisions regarding your TSP.
With that said, in this video, I’m going to be going over what the TSP is, what your
investment options are within it, as well as the steps to rolling it over into an IRA
or 401K if you want to do that once you’ve left the service.
Let’s get started.
What Is A TSP/Overview of TSP investment options/Cost Comparison:
So first off, what is the TSP?
The TSP is basically like the 401K for military and government workers.
And what’s nice about it is that you are automatically enrolled once you start working.
In a TSP you have a few options to choose from when deciding where to invest your money.
There’s the I Fund, which is an index fund that tracks the Morgan Stanley’s Europe
Australasia and Far East Index.
Its ticker symbol is EAFE if you want to do some more research on it.
There’s the S Fund, which is an index fund that tracks the Dow Jones US Completion Total
Stock Market Index.
It’s mostly made up of small and medium-sized US companies that aren’t featured in the
S&P 500.
There’s the C Fund, which is an index fund that tracks the S&P 500.
There’s the G Fund, which is comprised of short-term US Treasury securities.
The nice thing about this fund is that it allows you to earn interest rates similar
to that of long-term government securities with no risk of principal loss since the principal
and interest payments are guaranteed by the federal government.
Though the average returns aren’t as high as some of the other funds available, which
is understandable since you’re taking on less risk.
There’s the F Fund, which is an index fund that tracks the Bloomberg Barclays US Aggregate
Bond Index.
It’s mostly made up of treasury and agency bonds, asset-backed securities, and non-corporate
bonds.
Finally, there are the L Funds or lifecycle funds, which are made up of a mix of everything
from short-term securities to the other funds I’ve already mentioned.
The amount invested in each item depends on which future date you expect to start withdrawing
your money.
So, the investment options, while limited, appear to be pretty good.
However, the really nice thing about the TSP is that it has about as low of costs as you’re
going to find anywhere.
For example, according to the TSP website, the average net expense ratio was 0.033%,
which translates to $0.33 per $1,000 of investments per year.
That is really good!
I’ve covered expense ratio and the differences they can make in other videos before like
my passive vs active investing video.
But it’s worth reiterating here.
Because many actively managed mutual funds will have expense ratios north of 1% or $10
per $1,000 of investments per year.
But even some low-cost index funds will charge more than the options in the TSP.
Take, for instance, the Vanguard 500 Index Fund.
Its ticker symbol is VFINX if you want to look into it further and it’s a fairly affordable
index fund when you look at the expense ratio of 0.14% in 2017, which translates to $1.40
per $1,000 of investments per year.
It may not seem like much on the surface, but over time the difference becomes clear
as the chart on Mr. Ryan Guina’s article on the pros and cons of transferring your
TSP to an IRA indicates.
The steps to a rollover: So needless to say, the Thrift Savings Plan
is actually probably one of the best retirement plans available because of the low expense
ratios of the funds.
And based on my research there appears to be no added expenses or fees associated with
the ability to keep your tsp account open, which is really nice!
And on top of that, you are able to transfer external funds into your tsp account from
other retirement plans like your 401k, other tsp accounts, or even IRAs.
The tsp website has everything you should need in order to figure out how to roll your
money from other retirement plans into your tsp account and I'll leave a link to that
in the description below if any of you are interested in checking it out.
The only downside, of course, is that you won't be able to make any new contributions
to your tsp if you're no longer serving in the military or working for the federal government.
So the first step in deciding whether or not to roll your tsp over into an IRA is to decide
if closing the tsp is actually right for you.
But if you do decide that you want to roll your tsp into an IRA then you're going to
want to make sure you do everything in the right order to make sure that your transfer
or rollover goes smoothly.
This is because you actually have to do it in a certain time frame defined by the IRS
because if you don't the IRS could classify your transfer as a withdrawal and hit you
with early withdrawal penalties and taxes on the amount that you transferred, assuming
you're under the age of 59 and a half.
I also want to take a quick second to make a side note on some of the terminologies here
because the words transfer and rollover are sometimes used interchangeably when it comes
to retirement accounts but they aren't exactly the same.
A transfer means that you're moving the funds directly from One financial institution to
another.
A rollover happens when one of the funds are sent to the investor in the investor needs
to deposit them into another qualified retirement account within a certain time frame again
defined by the IRS.
This difference is important because it can have major tax implications if not done correctly
as I said before.
All right side note over, so the Second Step, once you have decided to roll over your tsp,
is to open an IRA account before you start any other paperwork.
You could of course just have the tsp write a check to you but it's much faster and probably
easier to directly transfer the funds into an IRA that's already been opened.
This also reduces the likelihood of running into issues with the IRS that I explained
earlier.
When you make the transfer you're going to need to provide your bank or brokerage account
number and your IRA account number before moving on to the next step which is to complete
the required tsp paperwork.
The tsp paperwork you're going to need to complete is the form tsp 70 or the form tsp
77 depending on whether you want to do a full withdrawal or partial withdrawal.
If you're filling out the form tsp 70 for a full withdrawal then you'll need to fill
out Pages 1, 2, and 4 and or possibly five if you're transferring a Roth balance.
Page one includes all your personal information about you and your spouse if your married
and you'll need to get your spouse if you have one to sign off on the transfer and get
the signature notarized.
This is an extra security feature to make sure both parties agree to the transfer.
In page 2, section 4, you declare how you want to take the withdrawal as either a single
payment, life annuity, or monthly payments from the tsp.
If you're transferring to an IRA, of course, you can choose one hundred percent for the
single payment option.
And on page 4 and 5 if you use it you can indicate where you want the funds to be sent
including the address of your IRA custodian and the account number where you want funds
to go.
If you're filling out the form tsp 77 the process is very similar but the numbers in
sections may be a little bit different.
Obviously as always read through the directions very carefully and make sure you don't miss
anything.
If you have any questions contact your Ira custodian to walk you through the form.
Even if they don't do a lot of tsp transfers they should be able to understand it well
enough to help you through it.
If they don't, well then you might want to start looking around for an IRA custodian
with better customer service.
Also, something to keep in mind when going through this process is that you want to make
sure that you're transferring traditional tsp funds to traditional IRA and Roth tsp
funds if you have any to Roth IRAs.
It sounds basic but you want to get this right the first time because both the tsp 70 and
tsp 77 have sections for traditional and Roth contributions and transfers.
Also, Ryan Guina, the author of the articles that I'm taking most of this information from
for this video recommends based on his experiences but if you want to convert a traditional account
to a Roth account it's best to do it in two separate transactions.
He recommends that you complete your tsp to IRA rollover and then after that perform a
traditional IRA to Roth IRA rollover.
And he explains this further in his article which I will, of course, link to in the description
below and I highly recommend you check it out.
Because as I said at the start of this video I don't have a tsp so I've never personally
gone through this process, but he has, in fact, he's done it twice.
The last thing that I want to mention where the rollover is concerned is that you want
to be careful with any tax-exempt contributions that you have.
For example, if you had participated in a traditional tsp when you were in a tax-free
location you most likely made some tax-exempt contributions.
You can verify this if you see something like this on your tsp statement (insert picture
found on Military wallet.com here).
You do not want to transfer your tax-exempt contributions into a traditional IRA.
Those contributions are tax-exempt so you are eligible to roll into a Roth IRA and the
long-term benefits of this are huge!
Because the funds you transfer into a traditional IRA will be taxed when you make withdrawals
in retirement, but anything transferred into a Roth IRA will never be taxed again!
And I won't go into the exact specifics in this video of how to fill out the forms to
make sure that your tax-exempt contributions are handled correctly because Ryan in his
article already went over that and I want him to get the traffic for doing the work.
So again I will leave a link in the description to his article on the military wallet.com
and I highly recommend you check it out if this applies to you.
So to wrap these steps up in most cases there won't be any issues if you transfer your funds
directly from a traditional tsp to a traditional IRA or a Roth tsp to a Roth IRA.
In both cases, the tsp will issue you an IRS form 1099-r at the end of the year.
This informed the IRS that there was a distribution from your retirement account.
The company that receives the IRA will issue you an IRS form 5498.
This is a tax form that shows that the funds were deposited into another retirement account
and they will help prevent you from getting tagged with any early withdrawal penalties,
taxes, or any other surprises that are unwanted.
And as you might guess the time that it takes to complete a transfer or rollover does vary
depending on how busy your IRA custodian is, and how long it takes the tsp to process your
paperwork.
In Ryan's case, both of his transfers were completed in less than 2 weeks but he says
it can take up to a month in some cases.
So that's how to roll a tsp into an IRA.
But as I said there are many factors to consider when transferring retirement accounts of any
kind, so you want to make sure that you consider any possible impacts on your tax situation,
whether now or in the future, and your future retirement goals and plans before making any
final decisions.
Depending on your situation you may also wish to consult with a professional for more personalized
and specific advice to your situation.
But remember don't feel any pressure that you to make a decision right away take your
time assess your options and make the choice that best fits with your financial goals and
plans.
Thankfully, in the case of TSPs, you do still have the option to keep the account open and
roll stuff into an IRA.
That's what the tsp form 70 is there for.
You just got to make sure that you have at least $500 left in your tsp account after
the transfer because that's the minimum that's needed to keep the account open.
But that'll do it for me today once again if you enjoyed this video be sure to subscribe
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