Look before you leap from the TSP 

The TSP has prepared a new fact sheet titled, Information for TSP Participants Leaving Federal Employment that provides useful information for employees who may find themselves facing the end of their federal careers in 2025 under the Deferred Resignation Programs (1.0 and 2.0) along with VERA/VSIP (Voluntary Early Retirement Authority/Voluntary Separation Incentive Program) early retirement offers and for some - a sobering RIF (Reduction in Force) notice, which is an involuntary separation from federal service where employees who are eligible can apply for a DSR (Discontinued Service Retirement).   

Another TSP Fact Sheet, titled Rollovers from the Thrift Savings Plan to Eligible Retirement Plans, provides information about moving TSP Funds to other eligible retirement accounts such as an IRA or other employer plan. To withdraw TSP funds, if a participant has a traditional balance and a Roth balance, they have several options for taking distributions. This includes having them paid proportionally from each balance. In that case, the traditional portion and Roth portion will be distributed and rolled over separately.  

Participants may also request a distribution from the traditional balance only or from the Roth balance only. Distributions from accounts containing tax-exempt contributions will be made proportionally from taxable and nontaxable amounts. If an IRA or plan does not accept tax-exempt balances, the tax-exempt portion of an intended rollover will be paid directly to the participant.   

Another tool for separating federal workers is a seven-question "scorecard" recently emailed to TSP participants that help compare the TSP with other plans that accept tax-advantages retirement savings such as an IRA.  The questionnaire is titled Keeping Score, and offers questions that you should ask to see how another plan measures up with the TSP. Theinformation includes the following considerations: 

1. Before moving money from the TSP, consider that the net administrative expenses charged to TSP participants for every $1,000 invested is $0.36/year ($500,000 investment will have an expense of $180/year while it is invested in the TSP).   

2. There is also a low 3-cent fee paid to TSP investment managers per $1,000 invested oranother $15/year on a $500,000 account balance. 

3. The TSP makes zero “profit” from your investments.    

4. The scorecard also points out that the TSP has a responsibility to put your interests ahead of their own.  

5. The TSP protects your funds from creditors’ claims.  

6. Distributions options from the TSP includes electing a series of scheduled withdrawals to receive income without giving up control of your account, and 

7. The TSP allows you to change your investments and take withdrawals without surrender fees or back-end charges.  A surrender fee is a penalty charged by insurance companies when an annuity contract is terminated or funds are withdrawn before a specified period, typically during the early years of the contract. This fee is designed to deter early withdrawals and help the insurance company recoup some of the costs associated with issuing and administering the annuity.  A backend fee, also known as a deferred sales charge or a contingent deferred sales charge, is a fee charged by a mutual fund when an investor sells or redeems their shares. Back-end fees are typically expressed as a percentage of the redemption amount and often decrease over time as the investor holds the shares. 

These are all great characteristics to be aware of before you make a move to withdraw your TSP funds and use them to purchase an annuity product or move them to another investment like an IRA.  

However, there are some good reasons to consider moving some TSP money to an outside investment. To learn more, I asked five CFPs (Certified Financial Planners) who I have worked with over the years, and who have many years of experience working with federal employees and annuitants to help them set financial goals and make wise decisions. A CFP by definition is a fiduciary, meaning they are legally and ethically bound to always act in the best interests of their clients when providing financial advice and financial planning service.    

All five of these financial professionals pointed out that if you want to invest in index funds like the TSP offers in the C, S, and I Funds, there are private sector index funds that have a lower expense ratio. Of course, this assumes that you use self-directed funds. Cost will certainly be higher if an advisor is engaged to manage the assets. But the TSP is self-directed, so for an apples-to-apples comparison, lower cost and similar investments are now available to all investors.   

NOTE:  To see if this was correct, I did a little research and found that the expense ratio of Vanguard 500 Index Fund – Admiral Shares (VFIAX), Schwab S & P 500 Index Funds (SWPPX), Fidelity Zero Large Cap Index (FNILX), and T. Rowe Price Equity Index 500 Fund (PREIX) had expense ratios of 0.0% up to 0.18% which would be $20 - $90/year on a $500,000 account balance). 

David Fei, CFP®, ChFEBC℠, AIF®  noted that the TSP is not covered by ERISA (Employee Retirement Income Security Act) laws. Private sector retirement plans have to follow ERISA while the TSP is governed only by the thrift board. Board members are appointed by the President (not elected). According to the Department of Labor, the provisions of ERISA were enacted to address public concern that funds of private pension plans were being mismanaged and abused. Since its enactment in 1974, ERISA has been amended to meet the changing retirement and health care needs of employees and their families. The role of EBSA has also evolved to meet these challenges. 

All the advisors brought up inheritance issues, especially regarding Beneficiary Participant Accounts (BPA), which are created for a spouse beneficiary of a deceased civilian or uniformed services TSP participant’s account. Non-spouse beneficiaries also have accounts set up for them, however, those accounts are temporary. 

• For the surviving spouse who maintains a BPA, after the spouse passes, the entire account is distributed to beneficiaries. Rollover to an inherited IRA is not allowed after the spouse dies. 

• For primary non-spousal beneficiaries, they have 90 days before their beneficiary participant's account is distributed, there’s no 10-year stretch within the TSP. Rollover to an inherited IRA is allowed within 90 days. 

Another financial advisor, Mark Keen, CFP® agreed that TSP rules regarding beneficiaries can be quirky.   

• Due to the Required Minimum Distribution rules and the lump sum distribution at death, it only makes sense to maintain a beneficiary participant account in very specific circumstances. In most cases, the surviving spouse is better off transferring the beneficiary participant account to an IRA of their own.  

• For TSP participants, one existing rule and two changes to the beneficiary rules can lead to unintended consequences. The long-standing issue is that the TSP doesn’t allow a per stirpes designation when naming beneficiaries. With a per stirpes designation, if one of the beneficiaries predeceases the TSP participant, his or her share will go proportionately to his/her descendants (think kids to grandkids). This can lead to descendants of beneficiaries being disinherited. With the new TSP system implemented in 2022, changes were made where: 

• Participants no longer link contingent beneficiaries to specific primary beneficiaries, and  

• Participants can no longer revoke a beneficiary designation to rely on the Standard Order of Precedence (which offers a per stirpes payout).  So, now a parent can’t name their kids as primary beneficiary and link their kids’ kids (grandchildren) to their respective parent.  And without the per stirpes designation, the grandkids could potentially be disinherited. Now, no contingent beneficiary will receive a payout until all primary beneficiaries are gone. The old workaround was to revoke beneficiary designations and elect to use the order of precedence. 

Several of the financial experts also pointed out that couples who have over 10 years of age difference will not be able to use the joint life table for RMD calculation within the TSP. The TSP only uses the uniform life table (hence higher RMD amounts). 

• The government can delay payment to the G fund in times of debt ceiling limitations.  

• Mark offered that while you don’t need to move money from the Traditional TSP to a Traditional IRA before converting to a Roth, a Roth conversion does require you to move out of the TSP to a Roth IRA.  In-plan conversions will be allowed in the TSP beginning in 2026; however, TSP participants will not be able to use conversion dollars to pay the taxes. This is not necessarily a bad thing; however, it can be financially beneficial to do a conversion even if you need to use the retirement plan money to pay the taxes. Anytime you can pay a lower tax rate on the conversion than the money would otherwise be subject to in future distributions (assuming it wasn’t converted), the conversion will be beneficial even when using retirement plan money to pay the taxes. 

Mark also noted that TSP participants cannot allocate Traditional and Roth TSP balances differently. In many/most cases, Roth money will not be touched for a very long time – maybe never during the owner’s lifetime – allowing the Roth money to be allocated more aggressively as a result. Afterall, why not maximize the tax-free growth?  Obviously, this reason isn’t only specific to Roth conversions, but a reason why a TSP participant with an existing Roth TSP balance may want to transfer that balance to a Roth IRA. He also added that the TSP won’t allow withholding for state taxes from TSP distributions. Not a big deal, but many individuals would rather have taxes automatically withheld rather than having to worry about making estimated payments. 

Another issue noted by Karen P. Schaeffer, CFP® is it would be great to have the ability to invest the Traditional money differently than Roth money. Because the timing of withdrawals from Traditional and Roth accounts can be done strategically for optimal tax advantage, investing them based on the anticipated timing can allow some accounts to be more aggressively invested and others more conservatively. 

When it comes to distributions, Karen noted that the TSP doesn’t allow targeted withdrawals. Taking withdrawals from cash when the market is down helps preserve the account. There is no ability to draw from specific funds; all withdrawals are made pro rata between G, C, F, S, I and L Fund distributions. The TSP does allow withdrawals specifically from the traditional or Roth funds (you must elect this to avoid a pro-rated distribution from both).     

Another interesting point that Karen made is that it isn’t possible to do Qualified Charitable Distributions (QCDs) from the TSP. After age 70 ½, IRA owners can authorize a QCD paid directly to a qualified charity of their choice, no taxable income to them or the charity. Once they are of RMD age, the QCD amount counts against the RMD.  This is a very popular choice with our clients, she noted. 

Joe Sullender, CFP®, pointed out that having additional investment options allow you to diversify FAR more than you can with the five core funds in the TSP. There are entire categories and asset classes that can help diversification that are not available in the TSP. Additionally, for the five categories the TSP funds represent, there is only one choice – the index for that particular asset class. In an IRA, you can fill that asset class with MULTIPLE funds from the same category.

For example: If my allocation warrants 30% invested in large-cap US stocks, the TSP only has the S&P 500 index as an option (C Fund). In an IRA, you might invest in between three and four different stock funds – all with different styles. Maybe one that is aggressive growth-oriented, one that is dividend-focused, one that buys undervalued stocks and even one that is exactly like the C fund. You can then blend these styles together and rebalance every year to take advantage of different stock management styles getting “hot” or “cold” (buying low and selling high). This additional diversity helps you build and manage portfolios with complementary funds and thus reduces the overall volatility.

Frankly, when you are retired, reducing volatility of the TSP is paramount. This can either be done by investing more in the G and F funds (which means lower returns) OR by reducing the risk of your stock holdings through additional diversification. This can be done so much more deeply in an IRA. I find myself making a MUCH stronger case for people to move the stock portion of their TSP than the G and F portion for this very reason. 

Joe also added the following comments on the TSP Scorecard, items No. 3 and No. 4. It’s such a loaded question to ask participants “how much profit the firm makes” if they invest privately. If they are simply moving to Vanguard or some other fund family where there will be no advice at all, then question No. 1 and No. 2 apply and are valid. “What are the net administrative expenses of the funds there vs. TSP?”    

But when someone hires an advisor, the fees are not just for the portfolio construction, investment and ongoing management of the funds, but also for all the peripheral financial planning and advice that an advisor charges. For many people I talk to, this is a PLUS in their lives. While they are working, they may not have enough other investment capital to invest with an advisor that has asset management minimums. We have hundreds of prospects that we have helped prior to retirement but aren’t ongoing clients yet. Many of them call us right after retirement and move some of their TSP so they can “have our services” to help them navigate their plan throughout retirement.   The TSP survey cheapens this a little bit and generally disregards what you have as  No. 4.   

 Wes Battle, CFP®, ChFEBC℠, AIF®, RICP® added that it is misleading to imply that the Thrift board has a fiduciary duty to run the plan. According to the Bureau of Fiscal Services, the government’s fiduciary activity regarding the TSP is that the Federal Retirement Thrift Investment Board is charged with operating the TSP prudently and solely in the interest of the participants and their beneficiaries. The TSP Call Center reps do not and cannot give financial advice and do not have a fiduciary responsibility. In addition, be aware that the Thrift Board has stated that they DO NOT have fiduciary duty over the funds in the mutual fund window.  

“Unlike our low-cost TSP funds, mutual funds available through a brokerage account aren’t vetted by a plan fiduciary to determine whether they are wise investments. This means that you need to carefully review the prospectus for each mutual fund you consider and make your own decisions about which ones will meet your investment goals.”   

Wes also pointed out that the TSP only allows two trades per month, after the first two transactions, you can only move money into the G Fund. He also noted that access to TSP distributions can be delayed for up to 30 days following your retirement while waiting for the payroll provider to notify the TSP of your separation.   

The TSP has been sending communication strategies for separating participants -- informing them they do not need to separate from the TSP along with separating from their agency or service. This is in response to survey data suggesting some participants believed they needed to separate from the TSP upon leaving government service. According to the TSP Quarterly Metrics Report for FY25, in the first quarter of FY25, 68.7% of participants retained a balance with the TSP one year after separation. At the end of January, the TSP notified more than 303,000 participants regarding their 2025 required minimum distributions amount. The total assets of the TSP at the end of January were $985 billion with $73 billion in Roth assets.