The question “Should I keep my money in the TSP or move it to an IRA in retirement?” comes up with nearly every federal retiree or soon-to-be retiree I speak with. It’s an important decision—and one that deserves careful analysis.
I recently had this exact conversation with a client who has been retired for a couple of years and still has a significant portion of her savings in the Thrift Savings Plan (TSP). Her primary reason wasn’t tied to the benefits of the TSP versus an IRA—it came down to comfort. The TSP is what she’s known for most of her career and what she’s most comfortable with.
While comfort does matter, I prefer to base decisions of this magnitude on a cost-benefit analysis, not familiarity alone. That conversation led me to take a deeper look at the reasons federal retirees either leave money in the TSP or roll it over to an IRA.
Below is a breakdown of the key considerations.
Benefits of Rolling TSP Funds to an IRA
This is where the benefits quickly add up. Rolling your TSP into an IRA can provide significantly more flexibility, control, and planning opportunities.
Key Advantages:
- Better options for beneficiaries
- Easier access to your money
- More favorable tax withholding on distributions
- Broader investment choices
- Ability to make Qualified Charitable Distributions (QCDs)
- Separate investment strategies for Traditional vs. Roth assets
- Control over which assets withdrawals come from
- Easier rebalancing in retirement
- Lower required minimum distributions (RMDs) for beneficiaries
Let’s look at these one at a time.
Beneficiary Considerations – TSP is Different Than IRAs
For many federal employees, especially those with children, this is one of the most important differences.
- A surviving spouse can move TSP assets into a Beneficiary Participant Account (BPA).
- However, upon the spouse’s death, all remaining funds must be distributed, often resulting in a significant tax burden.
- In contrast, inherited IRAs generally allow beneficiaries to stretch distributions over up to 10 years, offering greater tax-planning flexibility.
This difference alone can cost beneficiaries tens of thousands of dollars in unnecessary taxes.
Easier Access to Your Money
Once your funds are in an IRA (at a custodian of your choice), you typically have next-business-day access to withdrawals.
The TSP:
- Requires a 7-day waiting period when adding a new bank account
- Sends funds via paper check by mail when you do a transfer
- This means your money out of the market for 5–10 days during transfers
TSP has also experienced issues in the past where beneficiaries couldn’t access their accounts for a period of time. Some account holders who had put a lock on their account for security purposes ended up being locked out of the account for an extended period of time because TSP couldn’t figure out how to unlock them. I have never experienced anything like that with another custodian.
Taxation on Distributions
The TSP requires a mandatory 20% federal tax withholding on many distributions, particularly those exceeding 10-year installment payments. It also does not allow state income tax withholding.
With an IRA:
- You choose your federal withholding amount
- You can withhold for state income taxes
- You avoid over-withholding and giving the IRS an interest-free loan
This added flexibility simplifies tax planning in retirement.
TSP vs IRA Investment Options
The TSP offers:
- Five core funds (G, F, C, S, I)
- Lifecycle (L) Funds built from those options
While simplicity is beneficial for some, many retirees want greater diversification and customization, including exposure to:
- Growth strategies
- Small-cap value
- Emerging markets
- Sector-specific investments
The S Fund, for example, is more accurately described as a mid-cap fund, not a true small-cap.
Having more options doesn’t mean taking more risk—it means having better tools.
No Qualified Charitable Distributions (QCDs) in the TSP
For retirees age 70½ or older, QCDs are a powerful tax strategy.
- QCDs allow charitable gifts directly from an IRA
- The distribution is excluded from taxable income
- QCDs can satisfy Required Minimum Distributions (RMDs)
Because most federal retirees take the standard deduction when filing their taxes, charitable gifts often provide no tax benefit—unless they are made through a QCD. Unfortunately, the TSP does not allow QCDs but IRAs do.
Cannot Invest Traditional and Roth TSP Differently
Roth assets often have a much longer time horizon due to:
- No RMDs during the owner’s lifetime
- Tax-free growth
- Tax-free distributions to beneficiaries for up to 10 years
Many retirees prefer to leave their Roth accounts to their beneficiaries and would like invest their Roth funds more aggressively. While this is easily done in IRAs, the TSP requires Traditional and Roth balances to be invested identically.
Limited Withdrawal Flexibility
TSP withdrawals are taken proportionally from all funds. If your allocation is 60% C Fund and 40% G Fund, every withdrawal follows that ratio.
This makes strategies like:
- Bucket strategy
- Barbell strategies
- Tactical withdrawals during market volatility
much harder to implement.
Easier Rebalancing in an IRA
In retirement, withdrawals can be a great rebalancing tool.
For example, if a 60/40 portfolio grows to 63/37 after a strong market year, withdrawing from equities helps restore the target allocation. IRAs make this simple; the TSP does not.
Higher RMDs for TSP Beneficiaries
Beneficiaries of TSP accounts must use the Single Life Expectancy Table, which results in higher required distributions than the Uniform Lifetime Table used for many IRAs. Higher RMDs mean higher taxes and less tax-deferred growth.
Benefits of Leaving Money in the TSP
This list is relatively short, but the advantages can be significant depending on your situation.
1. Penalty-Free Access at Age 55 (or Earlier for LEOs)
The primary reason many federal employees leave money in the TSP is early access without penalties.
- If you retire in the year you turn age 55 or later, you can withdraw from the TSP without the 10% early withdrawal penalty.
- IRA owners generally must wait until age 59½ or set up 72(t) distributions, which are inflexible and restrictive.
- Law Enforcement Officers (LEOs) and other 6(c) employees can access TSP funds penalty-free even earlier:
- Age 50 with at least 20 years of service, or
- Any age with at least 25 years of service.
In my opinion, this is the single strongest reason to leave money in the TSP, particularly if you are under age 59½ and need access to those funds. That doesn’t mean you can’t move some money to an IRA—but it does mean you need to be strategic.
2. The G Fund
The G Fund is unique to the TSP. It provides returns similar to intermediate-term U.S. Treasury securities while guaranteeing principal—meaning the share price never goes down.
While the yield itself isn’t unique, the absence of price volatility is. Whether—and how much—someone should invest in the G Fund depends on their broader retirement plan. In my experience reviewing hundreds of portfolios, short-term bond-like holdings typically make up only a modest portion of a well-diversified portfolio.
3. Asset Protection
The TSP offers strong protection from creditors and bankruptcy. IRAs can offer similar protection, though the level varies by state.
Final Thoughts
I’ve always known that IRAs offer more flexibility than the TSP, but this deeper evaluation reinforced just how significant those differences can be—especially in retirement and estate planning.
If you’re a federal employee or retiree and need help evaluating your TSP, IRA rollover options, or retirement income strategy, you’re welcome to schedule an introductory call with me at BobbFinancial.com.