Should You Roll Over Your TSP? Do Not Go Gentle Into That Good Night (2024)

Should you roll over your TSP to an IRA? It seems like a simple question. The Thrift Savings Plan, or TSP for short, is the 401k plan for federal employees, including the military.

Whether to roll over TSP funds into an IRA is, at first glance, no different than whether a non-government employee should rollover their 401k or 403b. Upon closer examination, however, there is a big difference. In fact, there are two significant differences.

First, many 401k plans are riddled with fees. While these expensive investment options are an employee’s only choice if they want to invest in a 401k, once they leave they can move the money to an IRA that offers unlimited options. The TSP, however, offers some of the lowest cost investments available anywhere. We’ll come back to this point in a minute.

I want to focus on the second difference. There are unscrupulous investment advisors set to profit handsomely if they can convince you to withdraw your money from the TSP. If you Google the question of whether to roll over your TSP to an IRA, you find advisors who try to scare you out of your TSP. In one instance I found a firm focused exclusively on postal workers (who also have access to the TSP). It made my stomach turn.

So I first want to address the scare tactics many advisors use. Then we’ll turn to the question of when, if ever, a TSP-to-IRA rollover is a sound choice. Before we get to these two issues, let’s first address the fiduciary rule.

There are two types of advisors: fiduciaries and non-fiduciaries. Fee-only advisors follow the fiduciary standard, which requires them to put the best interest of their clients ahead of their own. They typically do this by refusing to accept fees from the investment products they sell. While that sounds good, and it is, they accomplish this by charging you the client. They typically charge an annual fee of 1% or more of the balance of your investment accounts that they manage. The more they manage, the more they earn.

Now imagine asking this fiduciary whether you should roll your TSP over into an IRA that they will manage. Could there be any clearer example of a conflict of interest? I don’t think so. And yet they freely give this advice, while at the same time basking in their role as a fiduciary. It should come as no surprise to anybody that they often tout the rollover.

As for non-fiduciary advisors, they often promote expensive and complex annuities and other insurance products. We’ll look at their sales pitch in a moment.

When it comes to the TSP, it’s amazing the reasons some advisors come up with as to why an IRA is better. And that brings us to two scare tactics I’ve encountered.

Scare Tactics

Scare Tactic #1: Limited Investment Options

One of the beautiful things about the TSP is its simplicity. It offers just five mutual funds plus what it calls Lifecycle Funds. Four of the funds are extremely low-cost index funds, one is a low-cost government securities fund, and the Lifecycle funds are low-cost target date retirement funds.

It’s everything any smart invest could hope for. If you want to follow the 3-Fund Portfolio popularized by the Bogleheads, no problem:

C Fund: S&P 500 index fund

I Fund: International stock index fund

F Fund: Bond index fund

If you want to mimic the investment plan Warren Buffett designed for his wife, the TSP has you covered:

C Fund: S&P 500 index fund

F Fund: Bond index fund

If you want to tilt your portfolio to small caps, the TSP offers the S Fund. The S Fund is a broad U.S. stock fund excluding the large S&P 500 companies.

And finally, if you prefer to put your money in one well-diversified fund, the Lifestyle Funds have you covered. These funds divided your money among the other five funds based on when you plan to retire.

The simplicity reminds me of something Steve Jobs said. “Simple can be harder than complex: You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end because once you get there, you can move mountains.”

You can move mountains with the TSP investment options.

And yet advisor after advisor looking to talk retirees out of the TSP complain about the limited options. They view it as a negative. As if more options, many weighed down by excessive fees, will result in better returns. They won’t. And if you don’t believe me, listen to Warren Buffett.

Scare Tactic #2: Risk

The second scare tactic is that the investments inside the TSP are risky. What the advisor generally means is that the stock market is risky. While it can go up many years, we all know it can go down fast. This roller coaster ride necessarily concerns many retirees.

There are important ways to address this risk. Never leave money in stocks that you’ll need to spend within five years. To accomplish this, adjust your asset allocation accordingly. Reduce your exposure to stocks even further based on your risk tolerance (although never below 50% in my opinion). Yet many advisors push retirees into expensive annuities based on the promise of a guaranteed return. It’s usually a guaranteed bad return on an after-fees basis.

I’m not suggesting that all annuities are bad all the time. I am suggesting that many commissioned advisors push expensive annuities on unsuspecting retirees because of the fees they generate for the advisor. The retiree loses the low-cost TSP account, gains an expensive annuity, while the advisor pockets a big fee.

If you are considering annualizing some or all of your TSP, please do two things. First, considered the annuity offered through the TSP. It may or may not be right for you, but you should investigate the option. Second, speak to Vanguard. They offer some of the lowest cost annuities available.

When Should You Rollover a TSP?

Now let’s get to the question at hand. As an initial matter, the burden of proof should fall on moving out of the TSP. Its beautiful simplicity coupled with rock bottom costs make it an ideal investment option. One should not lightly move their retirement savings from the TSP.

If you are considering it, watch these vides from the TSP.

In some cases, retirees want investment advice. They were comfortable managing their investments during their working years. As they move into retirement, however, they are concerned about managing withdrawals and making investment mistakes. That’s understandable.

There are two good options. The first is to seek out an investment advisor who charges a flat fee rather than a percentage of assets under management (AUM). While most charge a percentage of AUM, more and more are turning to a flat fee. It’s much less expensive, and you can keep your money in the TSP if that’s what you and your advisor choose. They have no incentive to talk you out of the TSP.

A second alternative is to roll over the TSP to an IRA at Vanguard. You can let Vanguard manage your investments for just 0.30% a year. You’ll have access to a CFP for financial planning. And while the Vanguard funds are a bit more expensive, we’re only talking a few basis points.

Another reason to consider a rollover is because of withdrawal options. One of the biggest downsides to the TSP is that it limits how you can take money out in retirement. In many cases, these limits won’t present an issue. But if you need more flexibility, a rollover may be necessary. If that’s the case, give Vanguard a call.

Finally, keep in mind that you can also do a partial rollover. You don’t have to roll over 100% of the investments you have in the TSP. You may decide to roll over some assets for a specific reason, leaving the rest with the TSP.

Whatever you decide, get advice from a knowledgeable advisor who has no financial interest in your decision. Pay a CFP for an hour of his or her time to get truly conflict-free advice.