Why Federal Employees Consider Rolling Over Their TSP in Retirement
If you're a federal employee nearing retirement, you've likely built a solid nest egg inside your Thrift Savings Plan (TSP). And rightfully so, the TSP is a powerful, low-cost investment vehicle for accumulating wealth during your working years.
But once retirement begins, the game changes. The focus shifts from growing assets for a future date to drawing on them for income. Because people are living longer, this increases the chance of experiencing market volatility, inflation risk, long-term care needs and even legislative risk.
A question retirees must ask themselves is do I want to spend my retirement years managing all these risks myself or would I rather delegate it to a professional who specializes in helping federal retirees.
To better answer that question, it is important to understand the pros and cons of leaving your assets in the TSP or rolling this money over to an IRA. One option isn’t better than the other, it is a matter of which setup is best in your situation.
Distributions:
When it comes to taking money out of your TSP, distributions are taken proportionately from each of the funds you are invested in. A concern with this approach is the risk of selling stocks in a down market and realizing unnecessary losses that are tougher to come back from. You can also use your TSP to buy an annuity, but that decision is irreversible and may lock in low interest rates for life. If that money were to be rolled over to an IRA, you can withdraw funds from specific holdings to set up customized withdrawal strategies.
Investment Advice:
TSP does a great job at offering simple, low-cost funds. But it’s a do-it-yourself platform. That’s fine during accumulation, but distribution planning is more nuanced. In retirement, the stakes and risks are higher:
- Sequence of returns risk: selling stocks when the market is down
- Inflation
- Tax-efficient withdrawals
- RMDs (Required Minimum Distributions)
- Planning for legacy or a surviving spouse
By rolling the money over to an IRA managed by an advisor, you have a partner to help navigate these decisions. One thing to note is because you are receiving help from an advisor, the management fees are higher than they would be inside the TSP.
Fees:
One of the strongest arguments for keeping your TSP is the ultra-low fees, often around 0.06%. And that’s true, they're among the lowest in the industry. But this is also a do-it-yourself format where the retirees oversee navigating their retirement years and the risks that are associated with this season of life. With an IRA managed by an advisor, industry standard management fees are typically around 1%. However, these management fees typically cover:
- Retirement income planning.
- Tax optimization strategies.
- Estate planning coordination.
- Ongoing market and life-stage adjustments.
Investment Options:
TSP offers 5 core funds plus Lifecycle Funds (L Funds). These are fine during your accumulation years, but some clients want a more tailored investment solution. With an IRA, you have access to thousands of mutual funds that can be both actively and passively managed as well as alternative investments. By having more options, this allows an advisor to help the client build a more personalized, risk-adjusted portfolio.
Final Thought:
Retirees are living longer than ever, and they spend this time checking items off their bucket list or with the people that mean the most to them. An important question they must ask is, how comfortable are they with navigating the risks of retirement. There is a case to be made to keep money in the TSP or roll it over to an IRA. Neither option is better than the other but understanding the pros and cons of either choice allows our clients to make a more informed decision.
If you’re approaching retirement and wondering whether to keep your TSP or roll it over, let’s talk. It’s not about “more products” or “more fees.” It’s about creating a retirement income plan that meets your needs.