Especially as one retires, there can be numerous reasons to move money around into different retirement accounts.
This might be from the TSP (Thrift Savings Plan) to an IRA, a traditional IRA to a Roth IRA, or even a traditional IRA to a separate traditional IRA.
And while it can make a ton of sense to make any one of these transfers (depending on your situation), there are 3 mistakes that end up costing many federal retirees a ton of time and money that you need to avoid.
And while I won’t focus much on the pros and cons of moving to an IRA in this article, you can find more information about that here.
Mistake #1: Rollover or Transfer?
When attempting to move money from your TSP to an IRA, the words you use matter!
When browsing on the internet (or even talking with other investment companies, like Vanguard) the words ‘rollover’ and ‘transfer’ are often used interchangeably. However, whenever you are talking to the TSP there is a massive difference.
The vast majority of the time you are going to want to do a transfer from your TSP to your IRA and not a rollover.
When talking to the TSP, a transfer is when they send money directly from your TSP to your IRA account. A rollover, however, is when they send you a check personally and then you are responsible to deposit the money into your IRA within 60 days.
But the big ‘gotcha’ of a rollover is that the TSP will often withhold 20% of your rollover and send it to the IRS. So if you wanted to not owe any taxes or penalties on your rolled over funds then you’d have to come up with that 20% from other funds and deposit that with the 80% you did receive into your IRA.
For example, let’s say you have $100 in your TSP and you request the TSP to do a rollover. The TSP would then send you $80 and send the other $20 to the IRS. If you only put $80 into your IRA then you would owe taxes and potentially a 10% penalty on the $20 then didn’t make it into your IRA.
However, with a transfer (this is the one that you want to do 99% of the time) you can request the TSP send your full $100 straight to your traditional IRA with no withholdings, taxes, or penalty.
Mistake #2: 50, 55, or 59.5?
I am a huge fan of IRAs and many federal employees prefer them over the TSP in retirement because of the added flexibility. However, one mistake I see all the time is when they move to an IRA too early.
To have access to an IRA or Roth IRA without the 10% early penalty, you have to be at least 59 and ½ years old.
However, as long as you retire in the year you turn 55 (this is age 50 for special provision employees) or later you can access your TSP without the 10% penalty.
As a result, you will not want to move any money to an IRA before 59 and ½ that you will have a chance of needing.
Mistake #3: Moving RMDs to a Roth IRA
As many of you know, at age 72, RMDs (required minimum distributions) come into play. And for those that are unfamiliar, basically RMDs require that you start taking money out of retirement accounts (TSP, IRA, 401k etc.).
This is the government’s way of getting tax revenue from retirement funds that have been growing tax deferred or tax free.
When many people hear about RMDs they think, “no problem, I’ll take money out of my TSP and IRA and then I’ll move it over to my Roth IRA because that is not subject to RMDs”. And before age 72 this is a great strategy, however, once you have reached age 72 then you are not allowed to move your RMDs to a Roth IRA.
However, any amount of money you distribute above and beyond the RMD you could convert that to a Roth IRA if desired.
Let’s do an example of how this might work.
Let’s say that you have a TSP account and a Roth IRA account. If you are required to take out $100 of your TSP for your RMD, then you are not allowed to move any of that $100 into your Roth IRA or any other retirement account. However, if you want to remove more than $100 from your TSP then you’d be able to transfer/rollover the excess to other retirement accounts like normal.
