TSP Explained | How to Rollover TSP to IRA - YouTube

Military and government retirement plans aren’t covered as often by the national media at

least in comparison to 401Ks and IRAs.

And that’s unfortunate, but thanks to a viewer’s request we are going to be diving

into one of them today, known as the Thrift Savings Plan, or TSP for short.

Hey everyone, Daniel here and welcome to Next Level Life a channel where you can learn about

Investing, debt, retirement, and many other general financial education videos because

the school's aren't going to do it for us.

So if any of those topics sound interesting to you or if you want to learn how to better

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Now I do want to say upfront that I have never personally had a TSP.

So everything I say in this video is going to be based on second-hand accounts and research

as opposed to personal experience.

So look at this video as more of a solid starting point for you and definitely consider checking

out the links to the articles that I’ve used while researching this video, which I

will leave in the description below as well as consult with a professional before making

any final decisions regarding your TSP.

With that said, in this video, I’m going to be going over what the TSP is, what your

investment options are within it, as well as the steps to rolling it over into an IRA

or 401K if you want to do that once you’ve left the service.

Let’s get started.

What Is A TSP/Overview of TSP investment options/Cost Comparison:

So first off, what is the TSP?

The TSP is basically like the 401K for military and government workers.

And what’s nice about it is that you are automatically enrolled once you start working.

In a TSP you have a few options to choose from when deciding where to invest your money.

There’s the I Fund, which is an index fund that tracks the Morgan Stanley’s Europe

Australasia and Far East Index.

Its ticker symbol is EAFE if you want to do some more research on it.

There’s the S Fund, which is an index fund that tracks the Dow Jones US Completion Total

Stock Market Index.

It’s mostly made up of small and medium-sized US companies that aren’t featured in the

S&P 500.

There’s the C Fund, which is an index fund that tracks the S&P 500.

There’s the G Fund, which is comprised of short-term US Treasury securities.

The nice thing about this fund is that it allows you to earn interest rates similar

to that of long-term government securities with no risk of principal loss since the principal

and interest payments are guaranteed by the federal government.

Though the average returns aren’t as high as some of the other funds available, which

is understandable since you’re taking on less risk.

There’s the F Fund, which is an index fund that tracks the Bloomberg Barclays US Aggregate

Bond Index.

It’s mostly made up of treasury and agency bonds, asset-backed securities, and non-corporate

bonds.

Finally, there are the L Funds or lifecycle funds, which are made up of a mix of everything

from short-term securities to the other funds I’ve already mentioned.

The amount invested in each item depends on which future date you expect to start withdrawing

your money.

So, the investment options, while limited, appear to be pretty good.

However, the really nice thing about the TSP is that it has about as low of costs as you’re

going to find anywhere.

For example, according to the TSP website, the average net expense ratio was 0.033%,

which translates to $0.33 per $1,000 of investments per year.

That is really good!

I’ve covered expense ratio and the differences they can make in other videos before like

my passive vs active investing video.

But it’s worth reiterating here.

Because many actively managed mutual funds will have expense ratios north of 1% or $10

per $1,000 of investments per year.

But even some low-cost index funds will charge more than the options in the TSP.

Take, for instance, the Vanguard 500 Index Fund.

Its ticker symbol is VFINX if you want to look into it further and it’s a fairly affordable

index fund when you look at the expense ratio of 0.14% in 2017, which translates to $1.40

per $1,000 of investments per year.

It may not seem like much on the surface, but over time the difference becomes clear

as the chart on Mr. Ryan Guina’s article on the pros and cons of transferring your

TSP to an IRA indicates.

The steps to a rollover: So needless to say, the Thrift Savings Plan

is actually probably one of the best retirement plans available because of the low expense

ratios of the funds.

And based on my research there appears to be no added expenses or fees associated with

the ability to keep your tsp account open, which is really nice!

And on top of that, you are able to transfer external funds into your tsp account from

other retirement plans like your 401k, other tsp accounts, or even IRAs.

The tsp website has everything you should need in order to figure out how to roll your

money from other retirement plans into your tsp account and I'll leave a link to that

in the description below if any of you are interested in checking it out.

The only downside, of course, is that you won't be able to make any new contributions

to your tsp if you're no longer serving in the military or working for the federal government.

So the first step in deciding whether or not to roll your tsp over into an IRA is to decide

if closing the tsp is actually right for you.

But if you do decide that you want to roll your tsp into an IRA then you're going to

want to make sure you do everything in the right order to make sure that your transfer

or rollover goes smoothly.

This is because you actually have to do it in a certain time frame defined by the IRS

because if you don't the IRS could classify your transfer as a withdrawal and hit you

with early withdrawal penalties and taxes on the amount that you transferred, assuming

you're under the age of 59 and a half.

I also want to take a quick second to make a side note on some of the terminologies here

because the words transfer and rollover are sometimes used interchangeably when it comes

to retirement accounts but they aren't exactly the same.

A transfer means that you're moving the funds directly from One financial institution to

another.

A rollover happens when one of the funds are sent to the investor in the investor needs

to deposit them into another qualified retirement account within a certain time frame again

defined by the IRS.

This difference is important because it can have major tax implications if not done correctly

as I said before.

All right side note over, so the Second Step, once you have decided to roll over your tsp,

is to open an IRA account before you start any other paperwork.

You could of course just have the tsp write a check to you but it's much faster and probably

easier to directly transfer the funds into an IRA that's already been opened.

This also reduces the likelihood of running into issues with the IRS that I explained

earlier.

When you make the transfer you're going to need to provide your bank or brokerage account

number and your IRA account number before moving on to the next step which is to complete

the required tsp paperwork.

The tsp paperwork you're going to need to complete is the form tsp 70 or the form tsp

77 depending on whether you want to do a full withdrawal or partial withdrawal.

If you're filling out the form tsp 70 for a full withdrawal then you'll need to fill

out Pages 1, 2, and 4 and or possibly five if you're transferring a Roth balance.

Page one includes all your personal information about you and your spouse if your married

and you'll need to get your spouse if you have one to sign off on the transfer and get

the signature notarized.

This is an extra security feature to make sure both parties agree to the transfer.

In page 2, section 4, you declare how you want to take the withdrawal as either a single

payment, life annuity, or monthly payments from the tsp.

If you're transferring to an IRA, of course, you can choose one hundred percent for the

single payment option.

And on page 4 and 5 if you use it you can indicate where you want the funds to be sent

including the address of your IRA custodian and the account number where you want funds

to go.

If you're filling out the form tsp 77 the process is very similar but the numbers in

sections may be a little bit different.

Obviously as always read through the directions very carefully and make sure you don't miss

anything.

If you have any questions contact your Ira custodian to walk you through the form.

Even if they don't do a lot of tsp transfers they should be able to understand it well

enough to help you through it.

If they don't, well then you might want to start looking around for an IRA custodian

with better customer service.

Also, something to keep in mind when going through this process is that you want to make

sure that you're transferring traditional tsp funds to traditional IRA and Roth tsp

funds if you have any to Roth IRAs.

It sounds basic but you want to get this right the first time because both the tsp 70 and

tsp 77 have sections for traditional and Roth contributions and transfers.

Also, Ryan Guina, the author of the articles that I'm taking most of this information from

for this video recommends based on his experiences but if you want to convert a traditional account

to a Roth account it's best to do it in two separate transactions.

He recommends that you complete your tsp to IRA rollover and then after that perform a

traditional IRA to Roth IRA rollover.

And he explains this further in his article which I will, of course, link to in the description

below and I highly recommend you check it out.

Because as I said at the start of this video I don't have a tsp so I've never personally

gone through this process, but he has, in fact, he's done it twice.

The last thing that I want to mention where the rollover is concerned is that you want

to be careful with any tax-exempt contributions that you have.

For example, if you had participated in a traditional tsp when you were in a tax-free

location you most likely made some tax-exempt contributions.

You can verify this if you see something like this on your tsp statement (insert picture

found on Military wallet.com here).

You do not want to transfer your tax-exempt contributions into a traditional IRA.

Those contributions are tax-exempt so you are eligible to roll into a Roth IRA and the

long-term benefits of this are huge!

Because the funds you transfer into a traditional IRA will be taxed when you make withdrawals

in retirement, but anything transferred into a Roth IRA will never be taxed again!

And I won't go into the exact specifics in this video of how to fill out the forms to

make sure that your tax-exempt contributions are handled correctly because Ryan in his

article already went over that and I want him to get the traffic for doing the work.

So again I will leave a link in the description to his article on the military wallet.com

and I highly recommend you check it out if this applies to you.

So to wrap these steps up in most cases there won't be any issues if you transfer your funds

directly from a traditional tsp to a traditional IRA or a Roth tsp to a Roth IRA.

In both cases, the tsp will issue you an IRS form 1099-r at the end of the year.

This informed the IRS that there was a distribution from your retirement account.

The company that receives the IRA will issue you an IRS form 5498.

This is a tax form that shows that the funds were deposited into another retirement account

and they will help prevent you from getting tagged with any early withdrawal penalties,

taxes, or any other surprises that are unwanted.

And as you might guess the time that it takes to complete a transfer or rollover does vary

depending on how busy your IRA custodian is, and how long it takes the tsp to process your

paperwork.

In Ryan's case, both of his transfers were completed in less than 2 weeks but he says

it can take up to a month in some cases.

So that's how to roll a tsp into an IRA.

But as I said there are many factors to consider when transferring retirement accounts of any

kind, so you want to make sure that you consider any possible impacts on your tax situation,

whether now or in the future, and your future retirement goals and plans before making any

final decisions.

Depending on your situation you may also wish to consult with a professional for more personalized

and specific advice to your situation.

But remember don't feel any pressure that you to make a decision right away take your

time assess your options and make the choice that best fits with your financial goals and

plans.

Thankfully, in the case of TSPs, you do still have the option to keep the account open and

roll stuff into an IRA.

That's what the tsp form 70 is there for.

You just got to make sure that you have at least $500 left in your tsp account after

the transfer because that's the minimum that's needed to keep the account open.

But that'll do it for me today once again if you enjoyed this video be sure to subscribe

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