How to roll over a Thrift Savings Plan to an IRA

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Published on March 27, 2023 | 5 min read

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Thrift savings plans (TSP) provide government employees with the ability to save for retirement. If an employee leaves government service, they can roll over their TSP account into an Individual Retirement Account (IRA) or other qualified plan. By doing so, they can maintain the tax-advantaged status of their retirement savings and have more control over their investment choices.

Rolling over a TSP account into an IRA is a fairly straightforward process however, there are some things to consider before making the transfer. Here’s how to roll over your thrift savings plan into an IRA and what to watch out for.

What is the thrift savings plan?

The thrift savings plan is a tax-advantaged retirement plan for federal civilian employees and members of the uniformed services, such as the Army, Navy, Air Force, Marine Corps, Coast Guard, Public Health Service, and National Oceanic and Atmospheric Administration.

Through TSP, individuals can make contributions to a plan via payroll deduction, either on a pre-tax basis, after-tax basis in a Roth account, or both. If contributing to a pre-tax account, the funds are not taxed until withdrawn. In contrast, with a Roth TSP, contributions are taxed upfront but grow tax-free, and any money can be withdrawn tax-free at retirement.

The plans also offer the ability to receive up to a five percent match on employee contributions.

How do you roll over a thrift savings plan to an IRA?

Participants in the thrift savings plan can roll over their money into an IRA or any other eligible plan, including a 401(k) plan, a profit-sharing plan, a defined-benefit plan, a 403(b) annuity plan and a 457(b) plan, among others. Here’s how to initiate the process to roll over into an IRA:

1. Decide whether you want a traditional or Roth IRA

When you’re thinking about rolling over your TSP to an IRA, you have one big decision: whether you want to move the money to a traditional IRA (pre-tax) or a Roth IRA (after-tax), or both. This decision can create major tax liabilities, so you need to carefully decide which IRA you want.

If you transfer a pre-tax TSP to a traditional IRA, you won’t create any additional tax liabilities, since you’re keeping the same pre-tax treatment on your contributions. Similarly, if you roll a Roth TSP into a Roth IRA, you won’t create further tax issues, since both are after-tax accounts.

And even if you have money in both types of TSP accounts, you can transfer that money into the respective IRA and avoid creating any immediate tax liabilities.

However, if you move your money from a pre-tax TSP to a Roth IRA, the IRS will require you to pay taxes on the conversion. That kind of rollover could force you to pay significant taxes, since your pre-tax contributions will count as income and you’ll have to pay at ordinary income rates.

2. Decide where to hold the IRA

Once you’ve decided which kind of IRA you want, you can look at the best brokers for IRAs. An IRA at an online broker allows you to invest in potentially high-return assets such as stocks and stock funds, though you could also opt for an IRA CD at a bank if you want a lower-risk option.

If you prefer professional management of your IRA, consider working with a top robo-advisor, which can set up an investment portfolio that matches your risk tolerance and when you need the money. Alternatively, you can use Bankrate’s financial advisor matching tool to find a reliable advisor in your area.

3. Open your IRA account and initiate the rollover

Once you’ve identified an IRA account that suits your needs, open the account should only take less than 15 minutes. Once the account is created, you can begin the process of rolling over your TSP account.

Contact the TSP administrator to initiate a rollover to your new IRA, and follow their instructions to the letter. The new financial institution or plan must certify that it will accept a check from the U.S. Treasury and must provide rollover information on your distribution request. Each broker, bank or robo-advisor has its own process, so contact yours to see exactly what it needs.

However, the TSP will not accept the forms of other financial institutions.

4. Complete the rollover

Fill out the TSP’s required paperwork, which may require some back-and-forth conversations between the TSP and your new IRA provider to get the information that both sides need.

Once the paperwork has been completed, the TSP will liquidate any investments in your account and issue a U.S. Treasury check for the proceeds to your new financial institution.

Other things to consider when rolling over a TSP to an IRA

As you’re considering whether it makes sense to roll over your TSP into an IRA, you’ll want to think about the following issues:

Tax consequences. Converting from a pre-tax TSP to a Roth IRA can create some potentially significant tax liabilities. Keeping the same tax treatment, like moving a pre-tax TSP to a pre-tax IRA for example, will generally avoid incurring an immediate tax hit. But it’s worth noting that if you contributed tax-exempt money to a pre-tax IRA – for example, if you received tax-exempt combat pay – rollovers from that account will be made from both taxable and non-taxable money proportionally. So a pre-tax TSP with tax-exempt money that is rolled into a Roth IRA would incur less of a tax hit than it would otherwise. If your plan won’t accept tax-exempt balances, the TSP will pay that portion to you.
Expense ratios. The investment funds in a TSP plan have tremendously low expense ratios, the amount of money you pay annually for the fund’s management. You’re likely to pay higher, if not much higher, expenses on publicly traded funds, though you can find low-cost index funds that are as cheap (or nearly so) as TSP investment funds.
Portfolio management. If you roll over your TSP, you’ll need to decide how to invest it, and few individuals are up to that difficult task. A robo-advisor could help here or you can turn to a financial advisor – here’s how to find one who will work in your best interest.

Considering these issues will be critical in deciding what to do with your TSP.

Bottom line

Rolling over your thrift savings plan to an IRA can make a lot of sense, giving your retirement account portability when you change jobs. While it’s relatively easy to roll over your TSP, it may not be a slam dunk choice, so you need to carefully consider the potential issues you’ll run into.