Rolling Your TSP into an IRA – Roth or Traditional

Updated: April 18, 2021

Table of Contents

    When service members separate from the military, they can leave retirement funds in their Thrift Savings Plan, or TSP. But, this isn’t always the best option. Alternatively, veterans can move retirement funds into an Individual Retirement Account, or IRA, which provides some key advantages. As such, we’ll use this article to explain rolling your TSP into an IRA – Roth or traditional.

    Rolling Your TSP into an IRA - Roth or Traditional Specifically, we’ll discuss the following:

    • TSP Overview
    • IRA Overview
    • Advantages to Rolling TSP Funds into an IRA
    • TSP to Traditional IRA Rollover
    • TSP into a Roth IRA Conversion
    • Tax Exempt TSP Contributions
    • Final Thoughts

    TSP Overview

    The TSP, or Thrift Savings Program, provides federal employees an employer-sponsored retirement savings account. As a result, the TSP is loosely equivalent to a 401k plan offered by many civilian employers. The TSP acts as a tax-advantaged, defined-contribution retirement plan. Simply put, this means that the TSP: A) provides tax benefits for retirement savings; and B) has a guaranteed government contribution on top of member contributions (as opposed to a pension, which is a guaranteed benefit).

    With respect to taxes, TSPs offer two options: traditional or Roth. With a traditional TSP, individuals get a tax benefit now. Every dollar you contribute to a traditional TSP reduces your current taxable income. Conversely, Roth TSPs provide a tax benefit later. You don’t reduce your current taxable income with contributions. But, every dollar you withdraw after retirement age (59 ½) comes out tax-free.

    When service members separate from the military, they do not need to close their TSP accounts. Instead, the federal government allows you to keep your account open for as long as you’d like. For many service members, this option makes sense for two primary reasons:

    • Low expense ratios: The available investment fund options in the TSP have extremely low expense ratios (amount you pay to hold the funds).
    • No account charge: You also do not need to pay the government any sort of administrative charge to keep your account open.

    IRA Overview

    Unlike TSP accounts and 401k plans, IRAs are not employer-sponsored plans. Rather, as the name suggests, any single person can open an IRA to save for retirement (so long as they’re earning income). This means that IRAs are entirely funded with your own contributions, as opposed to defined-contribution plans, which have a guaranteed employer contribution.

    Aside from this contribution difference, IRAs offer largely similar retirement advantages to TSPs. That is, you can use these accounts as tax-advantaged retirement savings vehicles. If you open a traditional IRA, you receive the same present tax benefit, lowering your taxable income for every dollar you contribute up to an annual maximum (though this benefit phases out at certain income levels). Alternatively, you can open a Roth IRA and receive a deferred tax benefit, withdrawing funds tax-free in retirement (also age 59 ½).


    Advantages to Rolling TSP Funds into an IRA

    As outlined above, a couple benefits exist for keeping retirement savings in a TSP once you separate from the military. However, there are also some major advantages to rolling those funds into an IRA. If any of the below advantages resonate with your unique situation, moving your TSP funds into an IRA may make sense.

    Advantage 1: Investment Options

    While the TSP offers extremely low expense ratios, it also has very limited investment options. Within your TSP account, you can only choose from five individual funds or several life-cycle funds (which automatically rebalance your portfolio as you approach retirement age). This means that investors looking to purchase individual stocks, exchange-traded funds, or other common investment options cannot do so in a TSP.

    Alternatively, IRAs typically offer a wide variety of investment options, limited only by the account custodian. For more sophisticated investors who prefer building a personalized retirement portfolio, IRAs simply offer far more flexibility. Additionally, some investors eventually choose to use retirement funds to invest in alternative assets (e.g. real estate, precious metals, etc.). While you cannot do this with a TSP or normal IRA, you can with a self-directed IRA.

    Advantage 2: Simplicity

    As people approach retirement age, many try to simplify their financial situation. This may mean limiting the number of open retirement accounts you have. If you served in the military, worked in a civilian job, and started an IRA, you could potentially have three retirement accounts (TSP, 401k, and IRA) – and that doesn’t even include your spouse’s accounts.

    Rather than monitor these separate accounts, some retirees prefer the simplicity of a single account. And, rolling your TSP and 401k funds into an IRA can help achieve this simplicity.

    Advantage 3: Continued Contributions

    Once you separate from the military, you can no longer make direct retirement contributions to your TSP account. You can transfer balances from other retirement accounts back into the TSP, but this creates additional administrative headaches. And, as stated above, moving funds back into a TSP inherently limits your investment options.

    Alternatively, you can consolidate TSP funds into an IRA. This lets you: A) structure your retirement portfolio with the investment options of your choice; and, B) continue to make the IRS-allowed annual contributions into that IRA.

    Advantage 4: Potential Tax Benefits (Roth-specific)

    Converting your traditional TSP into a Roth IRA also offers a potentially sound tax strategy, depending on your unique situation. As discussed, traditional TSP contributions are pre-tax, whereas Roth contributions are post-tax. So, if you move funds from a traditional TSP into a Roth IRA, you’ll need to pay taxes on the entire amount.

    If you plan on entering a lower tax bracket when you leave the service, this strategy could save you a ton of money. For example, say you have $100,000 in your traditional TSP when you separate. If you move those funds into a Roth IRA, you’ll need to pay income taxes on the entire $100,000. But, you’ll gain the advantage of tax-free withdrawals on that amount plus all earnings when you reach retirement age.

    Let’s say your first year as a civilian you and your spouse decide to travel for a year, or you decide to go back to school. In either of those situations, you’ll have very little income, so you’ll fall into one of the lower IRS tax brackets. This gives you the opportunity to pay a 10% or 12% tax rate (as opposed to 22% to 37% for higher earners) on this $100,000. Then, you have the advantage of tax-free withdrawals in retirement. Alternatively, when you’re forced to withdraw traditional TSP funds in retirement via required minimum distributions, you could end up in a far higher tax bracket.

    Of note, if you convert your traditional TSP balance into a Roth IRA when you separate, the TSP administrators will not withhold taxes for you. This means that you must plan for paying taxes on the entire conversion amount when you file your annual taxes.

    Making the Decision

    If the above advantages outweigh the extremely low expenses of the TSP, you may want to consider transferring your balance into an IRA. Of note, two broad options exist: transferring into a traditional IRA (known as a rollover) or into a Roth IRA (known as a conversion). We’ll explain both in the next two sections.


    TSP to Traditional IRA Rollover

    The TSP administrators actually make closing your account a fairly easy process. When you log into your account on TSP.gov, select the “Withdrawals and Changes to Installment Payments” option. This then opens an online withdrawal wizard that walks you through the entire withdrawal process. When you select the “Full Withdrawal” option, the wizard will automatically use your answers to generate the relevant sections of TSP-70, Request for Full Withdrawal.

    To complete this withdrawal wizard, you’ll need your traditional IRA account details (number and account custodian). You can use an existing IRA, that is, one you’ve had open and contributed to for multiple years. Alternatively, you can create a new account and fund it with the rollover proceeds. Opening an IRA is extremely easy, as many institutions even let you open one online.

    Once you’ve completed the withdrawal wizard online, you need to print and sign the form. If you have a spouse as a beneficiary, you’ll also need to notarize his or her signature. Once completed, you then have a couple options for submitting the form:

    • Option 1: Submit the signed TSP-70 to your new IRA account custodian, and they can handle the process on your behalf with the TSP. Eventually, the TSP will mail a check directly to your new custodian, who will alert you that the funds have been received.
    • Option 2: Submit the signed TSP-70 to the TSP directly. You will then receive the withdrawal check, which you must forward to your new IRA custodian for deposit in order to avoid IRS tax and early withdrawal penalties.

    We recommend Option 1. It’s always better to have a professional IRA custodian handle these rollovers, as it limits the potential for mistakes that could cause issues with the IRS.

    TSP into a Roth IRA Conversion

    Completing a traditional TSP to Roth IRA conversion largely parallels the above rollover steps. You use the same TSP withdrawal wizard, and you also have the options of having your new custodian handle the process or doing it yourself.

    Where the Roth IRA conversion differs is with taxes. As discussed above, if you move funds from a traditional TSP into a Roth IRA, you need to pay income taxes on the full amount. And, the TSP will not withhold any funds for tax purposes, meaning you’ll need to plan for the entire tax bill. Instead, in January of the year following the withdrawal, the TSP will mail you a 1099-R. This form – also sent to the IRS – provides you the necessary information to file with your next annual tax bill. Continuing the above example, if you converted your entire $100,000 traditional TSP balance into a Roth IRA, your 1099-R would reflect an additional $100,000 in taxable income.

    However, an option exists to avoid such a large tax bill in a single year. Instead of converting 100% of your traditional TSP balance into a Roth IRA, you can instead structure it over several years. To do this, you complete a TSP to traditional IRA rollover instead, as this will not incur any additional taxes. Then, depending on your broader financial situation, you can do annual conversions from your traditional IRA to Roth IRA. For instance, you could choose to convert $25,000 per year for four years, minimizing your annual tax bill in the process.

    NOTE: Whether you complete a traditional to traditional rollover or traditional to Roth conversion, you avoid annual contribution limits for IRAs. Conversely, with direct contributions to an IRA, you cannot exceed these annual limits.

    Tax-Exempt TSP Contributions

    If you made TSP contributions while deployed in a combat zone, you’ll likely have a tax-exempt balance in your TSP account. These are funds on which you never have to pay taxes. As such, you need to ensure that these funds don’t mistakenly get rolled into a traditional IRA. When you complete the TSP withdrawal wizard, you’ll see a box stating: Check this box if tax-exempt balances are accepted into the account identified above.

    • If completing a traditional TSP to traditional IRA rollover, do not check this box.
    • If completing a traditional TSP to Roth IRA conversion, do check this box.

    Technically, you can pocket those tax-exempt funds as soon as you separate and complete your full TSP withdrawal. But, if you instead contribute them to your Roth IRA, you gain a double-tax benefit: 1) you didn’t pay taxes on the initial amount; and 2) you don’t need to pay taxes on the earnings when you withdraw them.

    Final Thoughts

    When you separate from the military, you can certainly leave your TSP balance in that account. If you prefer the low expense ratios and streamlined investment options of the TSP, this approach makes sense. Alternatively, rolling your TSP balance into a traditional or Roth IRA provides far more flexibility with investment options. And, depending on how you structure the rollover, you can gain some tremendous long-term tax benefits when you move funds from the TSP into a Roth IRA.


    About The AuthorMaurice “Chipp” Naylon spent nine years as an infantry officer in the Marine Corps. He is currently a licensed CPA specializing in real estate development and accounting.


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