Hopefully while you were in uniform you were able to put some funds into the Thrift Savings Plan (TSP). Now that you’re leaving the military, you might be wondering, “What should I do with my TSP?” The good news is you don’t have to do anything as you make the transition.
In fact, you don’t have to do anything with your thrift savings plan account until you turn 70 ½ years old (let’s hope we can remember we have something to do when we turn 70 ½!). As you make your transition to the civilian sector you basically have two choices (there is actually a third…to take a distribution, but I don’t want you to do that. Too many taxes and penalties).
- Leave the funds in thrift savings plan
- Move the funds to another tax advantaged account
Leave the funds where they are. There are some really good reasons to leave your funds in the TSP.
- Phenomenally low expense ratios. It is very inexpensive to leave your funds with TSP. The expense ratios are lower than just about anything you can find outside of TSP. And, expenses matter. Some research has indicated that expense ratios are the single best predictor of long-term investment performance (low fees = greater growth).
- Tax exempt balances. If you served in a combat zone prior to the introduction of Roth TSP and contributed to TSP, you may have a tax exempt balance. This could also be the case if you deployed to a combat zone and didn’t switch your contributions to Roth TSP. It is really hard to move the tax exempt funds out TSP. The only way to move the funds is if the receiving institution is able to accept and account for tax exempt balances. Most can’t.
- Access to the G Fund. If you want to hold a portion of your portfolio in cash or cash equivalents, the G Fund is about as good as it gets. Think of it as a money market on steroids. You’ll get medium to long-term interest rates without the risk of the investment losing money.
Move the funds. There are also some good reasons to move the funds to either an IRA or your new employer’s qualified retirement plan.
- Simplicity. It isn’t too hard to imagine moving around a bit after you leave the military and having more than one job. It’s really pretty common. That could mean more than a few retirement accounts. You can avoid this by rolling your TSP funds into another account when you hang up you uniform
- Access to other asset classes. You can build an adequately diversified portfolio in TSP, but there are assets classes to which you really can’t get access. If that is important to you, then rolling the funds might make sense.
Remember, you can take your time on this and if you roll your funds out of TSP, you don’t get a “Do Over”. Next month, beware of tax consequences if you roll over from TSP.