What Do I Do With My TSP After leaving Military?

When you leave the military, one of the decisions you will have to make is what to do with your TSP (Thrift Savings Plan). Depending on your situation, there are a few different options that may suit you based on your quantitative and qualitative circumstances. There is no one-size-fits-all answer for what to do, and the right move for every family will be different.

There are 3 broad options when you separate or retire from the military:

1. Leave the money in the TSP
2. Roll it to an IRA or another employer-sponsored plan
3. Take a distribution in the form of a lump sum or annuity
   

Leave the Money In the TSP

Leaving your money in the TSP is going to be the easiest and likely lowest-cost option for most people. For those who don’t want to hassle with doing anything and won’t be drawing down on their accounts anytime soon, this might be a good option. Also, for those that don’t mind the TSP website and app and feel comfortable and confident in managing their accounts, this might make sense. If you leave your money in the TSP, you will have access to some of the world’s lowest-cost investing as current expense ratios are 0.038% per year, much lower than the industry average for index funds. You could do something as simple as investing in the TSP Target Date Funds, which will invest your money for you in the different TSP funds and automatically move your account to have less risk over time per your desired retirement date. Another positive of leaving money in the TSP allows for the ability to conduct backdoor Roth IRA contributions if you avoid rolling out pre-tax assets. This allows you to avoid the IRS aggregation rule that makes backdoor Roth IRAs a headache for high earners.

The downsides of keeping your money in the TSP have to do with investment options and lack of consolidation. There are limited investment options inside the TSP when compared with the thousands of options you have on the marketplace with your IRA. This may or may not be a negative for you depending on your investing style. Also, this is just another login and place that you have to go to monitor or check in on your investments. If you roll your TSP to an IRA, you can have all or most of your retirement account assets in one place.

Roll it to an IRA or another Employer-Sponsored Plan

Many people will choose to roll their TSP to an IRA. The advantages of this have to do with the consolidation of accounts and improved investment options. When you have your IRAs at one institution, it can make things easier to manage and opens up a world of investment opportunities. A word of caution though, you should still strive to keep investments simple, low-cost, automatic, and diversified, or "LADS" as Spencer from the Military Money Manual calls it. Regardless of where your investments are, picking individual stocks and actively managed mutual funds is a loser’s game on average. The downsides of rolling your TSP to an IRA include the lack of ability to take a loan from the account like you could from your employer-sponsored plan, as well as the limitation of the effectiveness of a backdoor Roth IRA if you have Traditional (pre-tax) assets.

Another option would be to roll your TSP to an employer-sponsored plan like a 401(k) at your new job. The advantages of this come down to the consolidation of assets as stated above as well as the ability to conduct backdoor Roth IRA contributions if you can eliminate your Traditional IRA assets. This involves the strategy of making a nondeductible Traditional IRA contribution, and then immediately converting the full amount to your Roth IRA. This is a strategy for those who are over the AGI limit of $153,000 for single and $228,000 for married filers in 2023. The downside of this is that your new 401(k) plan may have higher fees than the TSP or an IRA as well as less investment flexibility.

I will add that one last thing to consider if you are going to roll your TSP out is to leave a balance in the TSP (as little as $200) to be able to have the account open still and have access to roll funds back into the plan if necessary. This allows you to have the optionality to roll in pre-tax assets for Backdoor Roth IRA eligibility, as well as have access to the G Fund which is a very unique fund that is fully guaranteed and usually pays great rates that may be attractive to you later in life.

Take a Distribution in the form of a Lump Sum or Purchase an Annuity

Taking a distribution from your TSP is usually not advisable for those who are still in your working years, but can always be considered an option. If you are 59 and a half, you can withdraw the full sum. Taking a distribution before 59 and a half usually requires a 10% penalty and you will miss out on significant compound interest.

Purchasing an annuity with your TSP would be an option for someone who doesn’t want to manage a portfolio and take withdrawals over time. Annuities are insurance contracts, so they are usually more expensive and will deliver lower average returns than a normal portfolio, so beware when being sold anything around your time of separation or retirement. Always read the fine print and realize the fees that you are paying for what you are getting.

In general, for those who are not in the retirement or distribution stage of life, withdrawing the funds or purchasing an annuity won't be the best option, but it depends on individual circumstances.

Conclusion

The decision of what to do with your TSP is not an easy one and the right decision is going to vary for each family. In general, I think the “easy button” is going to be to put your TSP into a lifecycle fund and don’t touch it. For those that are willing to take it out, rolling it to an IRA is going to provide the most investment flexibility as well as consolidation of assets. You could roll it to an IRA and invest it alongside your current IRAs in broad based index funds or ETFs. The only thing to be cautious of with rolling assets over to an IRA is to make sure to keep investment expenses low and beware of backdoor Roth IRA eligibility as it relates to your Traditional assets.

Lastly, for anyone rolling the TSP over, keeping a $200 balance inside the TSP might be smart to keep your options open later if you want to use something like the G fund, or need to roll funds back in to open up backdoor Roth IRA contributions.

Ultimately, the decision of what to do is going to depend on your unique goals and preferences around investing and the TSP system.