TSP to IRA Transfer: A How To

UPDATE: January 2023 Update. The Secure Act 2.0 may affect some of this article. Please check out the new laws that impact the TSP. Check the comments section for addendums/issues that are popping up based on unique experiences out there coming in from subscribers.

You’ve separated from the federal government and by golly, now you want to move your investments out of the dastardly clutches of the TSP into a private IRA. How does a fella go about doing such a thing?

(That’s a bit harsh. I don’t think the TSP is evil. They are just a bit out of touch with what the market wants. They are less than transparent with what this new contract costs, i.e. our money they are spending! Their rules are antiquated, cumbersome, and quirky. Not to mention their fees are higher than the more popular brokerages. And their standard of service is far lower. That’s my opinion anyway; I’m not recruiting any followers.)

First and foremost, let’s get one thing straight—I’m not advising you to move your money from TSP. That’s between you, your spouse, and the financial pro of your choice. But, if you have already made the decision to move it, and you’re wondering about the process, and you want a real-world example of how it worked for one person, read on.

Scenario: The ever-lovely Mrs. Barfield Financial retired from the FBI in January of 2022. She fell under the Special Category Employee rules, being a law enforcement officer, and retired at the ripe old age of 49. (That becomes important later on.) Due to the absolute atrocious conduct of TSP during the summer of 2022, with the, shall we say “less than seamless” transfer to the new record keeper, Accenture Federal Services, she has decided to move the majority of her TSP into a private IRA.

Have you read this recent story of the switchover possibly making it easier for fraudsters to get your TSP?

(Probably a story for a different time but Accenture Federal Services started life as Anderson Consulting, the consulting arm of Arthur Anderson, the accounting firm that fell from grace with the Enron scandal and the revelation of widespread accounting fraud. Anderson Consulting changed its name to Accenture on January 1, 2001, after having formally split from Arthur Anderson a few years earlier. Accenture, now based out of Ireland, operates Accenture Federal Services, which has hundreds of millions of dollars worth of U.S. government contracts.)

Let’s walk through a real-world, real-time example of what actually happened when we transferred our money. Bottom line up front: everything went fine, if not exactly fast.

Step One: Create a Destination

September 15, 2022

Before you can have your money sent FROM the TSP, it’s gotta have a place to be sent TO. Therefore, the first thing you’ll want to do is create an IRA account somewhere. (IRA stands for Individual Retirement Arrangement, and we will be discussing these creatures a little later.) You will not be dealing with TSP at all during this stage, but rather the brokerage account or mutual fund company of your choosing.

What Company Do I Choose for my IRA?

You’ll certainly have a wide variety of companies to pick from. Many of them you may have heard of: Charles Schwab, Fidelity, Edward Jones, Vanguard, TD Ameritrade, E*Trade, T. Rowe Price, and any number of other places. I can’t give you any advice on which one(s) to go with. Your criteria will be unique to you. Some offer more services than others. Some are cheaper than others. Some may have branches near you where you could walk in; you may prefer that face-to-face interaction. Some allow you to buy all kinds of individual stocks and bonds and options. And others may be more restrictive to say, just mutual funds. And you may decide you want more than one company, you know — just to spread all that wealth around a bit.

Frankly, among the discount brokers, I feel like most people I talk to overthink this. Go with one. If you don’t like it, switch it to another. I personally, don’t think they are THAT different. Think of it like a bank. Some of you may prefer Bank of America to PNC or Chase. Some of you may have specific reasons you like or don’t like one or the other. That’s pretty analogous to big name brokerages.

We went with Charles Schwab so the following steps will be exactly what we did with Schwab. I’ve been at Schwab for 32 years now and am happy with all the services received there. From what I can find on different websites, Fidelity and the others have a process very similar, if not exactly like Schwab. So do your research and choose the best option for you. (I have no other affiliation with Schwab and get no referral fees or anything like that.)

Mrs. BF went to Schwab.com on 9/15/22 and created an IRA online in just a few minutes. While there were several choices as to the type of account she could create, she picked the “Rollover IRA” since that is what we are doing here. Rollover can mean different things to different people due to the definition sort of morphing over time. But a direct rollover is what we wanted, i.e., the money bypasses us. It goes directly from TSP to Schwab. It does not pass Go and it does not stop at our house. This means it is a non-taxable event. No taxes are owed on a transfer. It does not count as income for the year in any way. And that makes sense because we have not withdrawn the money, simply transferred it directly from one trustee (TSP) to another trustee (Schwab).

Please make sure you understand the distinction. I hear people using the word “withdraw” all the time with their TSP when what they really mean is transferring it. You may think those two things are similar but they are vastly different in regards to the rules that govern them.

Back to the account set-up….We did not need to fund this new Schwab IRA account immediately. In other words, we didn’t worry about making a deposit; we just left it with a $0 balance. For now. That’s perfectly fine. They don’t require you open it with money at first.

By the way, we need to stop again and clarify one other thing. We are talking 100% about Traditional TSP and Traditional IRA. We are NOT talking about Roth IRA or Roth TSP. Just keep that in mind for now.

If you would rather have someone guide you through the set up instead of doing it online yourself, Schwab would be more than happy to. Simply call 866-855-5635 and ask for a Rollover Consultant. Speaking just from personal experience, every call I have made to Schwab in the past has been handled very satisfactorily. Wait times were not long. The individuals that I have spoken to were knowledgeable, polite, and resolved whatever the issue was immediately.

Step Two: Requesting the Transfer

September 26, 2022

There was a little bit of confusion on our part regarding trying to get paperwork from Schwab to initiate the transfer. Turns out, we were making it harder than it needed to be. Once the IRA is set up, you are pretty much done with Schwab. That was the point we were unclear on. We thought we needed some paperwork from Schwab to send to TSP. We didn’t. Plus, a few days went by with us being busy and not doing anything with this process. Hence the delay between 9/15 and 9/26. But again, a phone call to Schwab and it was all clear. On to the TSP (the harder part by far).

Mrs. BF got into her TSP account. Then:

Under “Quick Links” at the top center of the page, clicked on “Withdrawals and Rollovers Out”. This provided us with 3 choices:

1. Annuity Purchase

2. Partial Distribution

3. Total Distribution

We clicked “Partial Distribution” and indicated the amount we wanted to withdraw. Here’s where things start to be, shall we say, not intuitive. We had to fill this out twice because there is a choice of having some cash sent to you in addition to doing the rollover. We didn’t want that, so we did just the rollover. This might be easier for you to understand once you see it, rather than me trying to explain it. My best advice is don’t read anything into it, just follow the steps one by one.

As of this writing, the choices we had to choose from were:

1. Roll Over an Amount to an IRA or Another Employer’s Plan

2. Partial Rollover with an amount paid to you

3. Amount paid to you

Next a choice has to be made whether you want the rollover to come to you or an institution. As I mentioned earlier, we are interested in a direct rollover—TSP trustee to IRA trustee. We don’t want the money coming to us at all. So institution it is. Here’s where curveball number two came in. We could not complete the transfer. DENIED.

Why?

Well, if you have not already entered the destination institution (Schwab in our example) and their address into your TSP account, like where you want a transfer to go (which of course we had not-we didn’t know we had to), there is a 7-day waiting period after you enter the destination institution. In other words, in order to transfer money from your TSP to an IRA, the TSP must have a record of this institution inside your account for 7 days. This is imposed by the TSP. I had never heard of this requirement, and haven’t read it anywhere in TSP or other literature out there. I do not think it is a law. I think it is just some random rule TSP came up with? I’m not exactly sure, since I can’t find anywhere it is cited in any literature. But understand that it does exist. We did not know anything at all about it. But now you do.

So on 9/26/22 the only thing we ended up being able to accomplish was entering the destination details for the new Schwab IRA inside the TSP account. And then we waited 7 days….

…..waiting…..

On 10/3/22, the waiting period was over and now we could proceed with the rollover request. So back to the screens above that we tried earlier. This time it worked since the Schwab account was now listed. Once Mrs. BF clicked the appropriate choices, and entered the amount to be transferred, the spousal approval request came to me via email.

Remember this rule?

To withdraw money from TSP, the spouse of the account holder has to approve it. This request used to have to be notarized. No longer. So that is an improvement at least. Now it’s just an email sent to the spouse that they have to approve and send to TSP. Know what would be an even better improvement? If there was no spousal approval needed at all in the first place! Here’s another way the IRA beats the TSP—no spousal request required. You want your money? You make your withdrawal. I mean it is your money after all.

Anyway, I signed off on the spousal request on 10/3/22, and the TSP transfer request was approved the following day on 10/4/22.

From here, it was easy, although fairly slow by 21st century standards. On 10/6/22, TSP withdrew the money, cut a paper check (yes, an actual paper check) and mailed it (yes, through the actual mail) to Schwab. Check arrived without issue and was deposited 10/11/22 into the newly minted IRA.

Start to finish was just under 30 calendar days.

Part of that delay was due to some confusion attributed to our first time, and the one-time 7-day delay imposed by TSP. Any future requests from this same account should be a lot faster. Probably less than 10 days….assuming the check doesn’t get lost in the mail! (I don’t know what the procedure would be in that circumstance! But I would really hate to find myself in that situation!)

However…..

Another (not as good!) real world example: P.K. sent me an email where he did the exact same thing as I did. But it just didn’t work. 2 1/2 weeks into the transfer, still no check at Schwab. He called TSP and they showed the transfer still pending but couldn’t understand why the money wasn’t actually withdrawn and sent. After being on the phone for 2 hours, no one could figure it out, including the supervisor. Bottom line: still no transfer. Funds in limbo. Ugh.

Stories like this suck, but understand this is TSP’s fault, not Schwab or Fidelity or wherever. The problem is not the transfer, the problem is TSP not executing properly. This is just another example of how hit and miss TSP service and function is. And why I predict more and more people will be leaving it.

Knowing what I know now, after setting up the Schwab account, I would immediately go into TSP and enter the Schwab details to get the 7-day waiting period going. This is, in fact, what I will be doing to transfer most of my account out, now that I am no longer a government employee. I would anticipate my transfer taking no more than about 15 days, start to finish.

Summary of our steps:

1. Open Schwab IRA online

2. Enter Schwab details (address) into TSP account

3. Wait 7 days

4. Request withdrawal from TSP

5. Spouse signs authorization for the withdrawal

6. TSP check is cut and mailed

7. Check arrives at Schwab and is deposited

8. Actual time = 9/15/22 to 10/11/22 and part of that delay was attributed to us

Some points of interest:

• As mentioned earlier, this is all Traditional, both TSP and IRA. Neither of these accounts are Roth. The distinction for transfers is this: Traditional TSP can be rolled into a Traditional IRA, and in the future, if so desired, can be rolled back (partially or wholly) into the Traditional TSP, assuming you left the TSP account open. Roth TSP can only be transferred to Roth IRA. Then it is stuck. It cannot be transferred back into Roth TSP. Roth transfers are a one-way trip (see page 10). TSP literature is clear on this—it does not accept Roth IRA transfers into the account. We are going to discuss this in a future paper, but as you can imagine rolling money into the TSP is not super easy either. So while you can do it, it’s not something you want to be doing on a monthly basis. It’s just not that convenient yet.

• What distributions/transfers/payments from a TSP are allowed to be rolled over into an IRA? I’ll just let the TSP tell you.

• Personally, I would never close out the TSP, even though my wife and I are transferring the majority of our money out. I think more options are better than fewer options, so I’ll keep the TSP open. TSP says only $200 is needed to keep the account open. I will always leave at least $1,000 in there for a cushion. While I plan on using the G Fund for the cash/safe portion of the Barbell strategy, there may come a time in the future (particularly after 59 1/2) where I may want to use something else as the safe portion. Even if I do go away from the G Fund to some private sector bond fund, I will still not close the TSP out. I’ll at least keep $1k in there to keep my options open.

• The main advantage (at least in my mind) the TSP has over an IRA is the ability to have early withdrawals without paying the 10% penalty. Early being defined as prior to 59 1/2. If you are Regular FERS and you leave the government in the year you turn 55 or later, you can withdraw from the TSP penalty free even though you are not yet 59 1/2. If you are SCE FERS, the same rule applies, but the age is even more forgiving. You only have to work into the year you turn 50, not 55. Fail to meet these exceptions, and you don’t get to withdraw when you turn 50 or 55; you now don’t get to withdraw until you turn 59 1/2. (There are some complicated exceptions you can read about here.)

• You cannot withdraw penalty free from IRAs until 59 1/2 (barring some special IRS exceptions). Those age 50 and 55 exceptions don’t apply to IRAs. What do you do if you want to make a withdrawal from the IRA prior to 59 1/2 and you want to avoid the 10% early withdrawal penalty? You simply transfer the withdrawal amount from the IRA to the TSP and withdraw from there. As you’ve seen above, it’s not a super quick process, so you probably don’t want to do it frequently. In the Barbell Strategy paper, I use the example of the fictional character doing it once at the beginning of each year. Once an individual turns 59 1/2 however, they no longer have to jump through this hoop. Withdrawals directly from the IRA are no longer consider early and thus, no longer subject to the additional 10% penalty.

• “But Chris, the TSP fees are so low! Why transfer money out?” TSP fees are higher than Vanguard, Fidelity and Schwab. See my article on the subject. Or better yet, research it yourself from those websites. TSP fees are low. But they are not unique in that regard any more as industry fees have continued to fall for about 2 decades now. However, we have to be fair. If we are comparing TSP fees to actively managed brokerage accounts—meaning a human is managing your money for you and discussing it with you— TSP is probably WAY cheaper. Just understand what you are paying for and what you are getting. Having an investment manager at Edward Jones, for example, may be worth it to you, even though he may charge 1% of total assets. You may like the peace of mind of discussing investments with him, and he may generate more than an additional 1% return each year. So totally up to you. Just please understand the fees you are paying, no matter what company you ultimately go with.

• There is a lot of discussion regarding Roth Conversions. I’m not going to delve into it in this article. But I will say TSP does not allow Roth Conversions within the account. You can’t take part of your Traditional TSP and convert it to Roth TSP, and pay the taxes on it. This is permissible in IRA’s for the most part. Get some tax advice here if you are interested in this. There are some potential pitfalls, including a possible 10% early withdrawal penalty if you are under 59 1/2.

Proportional Withdrawals

Here is something that just baffles and frustrates me as well as many of you that have written me about it. And one of the big reasons an IRA has an advantage over the TSP: proportional withdrawals.

Unfortunately, it appears as if TSP has spent a majority of its energy creating the Mutual Fund Window, the financial equivalent of a self-licking ice cream cone. In other words, something virtually no one wants. At the same time, it seems they have completely ignored the main request everyone complains about to me: not being able to designate which fund you want to draw money from in the TSP. Have 70% C and 30% G? Any withdrawal or transfer will be made exactly in that percentage. 70% will come from the C and 30% will come from the G.

“But Chris, my C Fund is down 25% this year! I don’t want to be forced to sell that! I want to just pull from my G Fund (which is up!) and leave my C Fund alone to recover!” I hear you. I feel the same way. So do many of the retirees that are bewildered by this rule. But to date, TSP has not changed this. And I’ve seen nothing to indicate they are planning on changing it in the near future. Too busy inventing that self-licking ice cream cone, I guess.

With an IRA you don’t have that problem. You can sell any investment you want and have that money come from that investment.

So that brings up a good question regarding any transfer to an IRA. What happens when you want to say, transfer only your C Fund to the IRA and leave the G Fund alone in the TSP? Sorry, no dice. TSP won’t play. They’ll cash in your withdrawal amount proportionately. 70% of your withdrawal will come from C and 30% will come from G.

However, if you wanted to transfer just the C Fund, there is a roundabout way of accomplishing almost the same thing. The artificial way to do this would be to request your transfer through the process I detailed above. Once the transfer money comes out of the TSP, take the portion of the TSP account remaining that is still C Fund and put 100% into the G Fund. That will be the semi-equivalent of transferring out only the C Fund and leaving only the G Fund in the TSP. Once the money hits the Schwab account, you can immediately purchase the SP 500 Index fund of your choice (the C Fund equivalent). At that point, you would have accomplished what you wanted to do: TSP is 100% G Fund, IRA is 100% C Fund/SP 500. You just had a couple extra hoops to jump through to arrive at where you wanted to be.

Or you could transfer everything to the G Fund first and then transfer out the money you are interested in transferring out. Same end result.

Some of you are undoubtedly going to get hung up on the timing. A lot of you are still big into trying to time things. Which you are spending far too much brainpower on in my humble opinion. You’re wondering if you should transfer everything into the G before or after the transfer. And some of you are worrying about what happens if the market goes up when your check is in transit? I don’t know what to say to that other than I do not worry about this in the slightest. The market may go up while my check is in transit. It may also go down. It may also go sideways. I make the transfer when I’m ready to do so regardless of what the market is doing. I have no idea (nor do any of you) what the market will do over any 2-week period.

There is this concept called paralysis by analysis. If you want to make the transfer, make it. If you want to wait and try to time it, wait and try to time it. Just please don’t send me an email asking me when is a good time to do the transfer.

Remember, all funds in the TSP with the exception of the G Fund, have an equivalent in the private sector. The only investment completely unique to the TSP is the G Fund, which consists of special government bonds created and held exclusively in the TSP. Once you get your money into the IRA you could purchase the equivalent of the C, S, I, or F Funds. Or you could purchase individual stocks, or mutual funds, or a whole host of other investments. Some of these investments will have no transaction fees associated with them, unlike the TSP Mutual Fund Window, which charges $150 a year and $28 a trade. You also won’t be limited to 2 trades a month, and you won’t be limited to 1 withdrawal a month from your account like in the TSP.

Finally, there is a whole host of tax rules related to both TSP and IRA’s. And we aren’t going to dig into that here. But the main thing to know is that withdrawals from Traditional TSP or Traditional IRA are generally fully taxable as income. And they are both subject to Required Minimum Distributions (RMDs). (Roth IRAs are not subject to RMD’s, but Roth TSPs are, if that is a concern of yours.)

Special Roth 5 year rule. Please read this carefully. In order for your Roth IRA earnings distributions to be completely “qualified” (in other words, tax-free), you have to have had a Roth IRA open for 5 years. And the time you had the Roth TSP doesn’t count. So if you transfer your Roth TSP that you’ve had for 15 years to a Roth IRA and this is your first Roth IRA you’ve ever contributed to, then you have to wait 5 years for everything to be able to be withdrawn completely tax-free. However, if you already have a Roth IRA opened and funded, then the clock started when that one was opened. Moral of the story? Open a Roth IRA ASAP if you’re planning on transferring your Roth TSP to a Roth IRA down the road. Once the initial 5 year period is up, you’re good for future Roth IRAs that you open.

Disclaimer: There is a LOT of information that is not discussed here, particularly in the area of taxes. It is always best to get professional help with these decisions. Some of the brokerage companies may not even charge you for this advice. I am not giving you any investment advice. the only thing i am encouraging you to do is more research and further your education of possible options for you.

I want to REITERATE; I am not advising any of you to move your TSP money to an IRA. You may love the TSP and don’t want to fool with all of this. Perfectly acceptable choice. As I say in all of my retirement seminars over and over, personal finance is very personal. Make sure what you are doing is right for you, regardless of what someone else is doing. The only financial situation that matters is yours. Don’t blindly follow anyone, including me. If you are not sure what you should do, you need to speak to a professional.

If you want to read pros and cons regarding moving your TSP, look at my other article HERE.

I appreciate all of you that responded to my Facebook request of what you want to see in this article. Some of you may realize I didn’t get it all in. It’s just too much. So this article will serve as a part one of sorts. I’ll expand on other items in the future. And I’ll explain how to get money BACK into the TSP from the IRA. This is important for those that are under 59 1/2 and want to make withdrawals without paying the early 10% withdrawal tax.

Stay tuned….