Thinking about rolling over your Thrift Savings Plan (TSP) into an Individual Retirement Account (IRA)? It’s a big decision, and knowing the ins and outs of both options can help you make the right call. Many TSP participants choose to roll their funds into IRAs, but what makes it worth considering? Let’s break it down!
Can You Have Both a TSP and an IRA?
Good news—yes, you can! TSP and IRA contributions don’t cancel each other out, meaning you can contribute to both. Many people don’t realize this and miss out on maximizing their retirement savings.
What Sets TSPs and IRAs Apart?
While both are tax-advantaged, they’re structured differently:
- TSP: Employer-sponsored with streamlined investment options.
- IRA: Individually managed with broader investment choices.
Some rules overlap, like Roth-qualified withdrawals, but others—like early withdrawal penalties—differ.
Earned Income: A Must for IRA Contributions
To contribute to an IRA, you need earned income. If one spouse isn’t working, they can still contribute through a spousal IRA. Contribution limits for 2024 are:
- Under 50: $7,000 per year
- 50 and older: $8,000 per year
What You Get With a Traditional IRA
Traditional IRAs offer tax-deferred growth and potentially deductible contributions. Here’s the deal:
- Withdrawals: Taxed as income if you made pre-tax contributions.
- Penalties: A 10% early withdrawal penalty applies, but rules depend on whether your contributions were deductible.
Don’t forget: You’ll need to take required minimum distributions (RMDs) starting at age 73—or 75 if you hit that age in 2033 or later. Miss one, and you could face a 25% penalty!
Considering a Roth IRA Rollover?
You can roll your TSP funds into a Roth IRA, either by:
- Moving Roth TSP funds directly to a Roth IRA.
- Converting traditional TSP funds into a Roth IRA (taxes apply to converted amounts).
Why Roth IRAs Are a Game-Changer
Roth IRAs stand out because:
- Contributions are made with after-tax dollars.
- Withdrawals are tax-free if the account is at least five years old and you’re 59½ or older.
- No required minimum distributions.
Keep in mind, though—income limits apply for contributions.
Make the Choice That’s Right for You
Rolling over your TSP to an IRA can be a smart move, but it’s not one-size-fits-all. Take the time to evaluate your financial goals and the pros and cons of each option. Need help deciding? A trained FRC® advisor can guide you toward the best choice for your retirement.
