When they retire from government, about half of the people with Thrift Savings Plan accounts move their retirement nest egg into an outside Individual Retirement Account. Their money is still tax-deferred. They can also usually find an IRA with more investment options (not always a good thing). And it is generally easier to get money quicker from the outside IRA (again, not necessarily a good thing). Investment firms are delighted to get big chunks of money grown in the TSP. Most of them charge higher administrative fees. Many financial advisors are also happy to see money moved from their clients TSP accounts into an IRA.
Many workers and retirees are delighted with their TSP and plan to stick with it for life. Others can’t wait for the opportunity to get out. So what’s your plan? And what should you consider? We asked Abraham Grungold, a full-time fed and part time financial advisor, what he thought. He has done extremely well in the TSP and has offered tips before. It’s nice to check in with a working fed who is also a successful investor. Especially one who has investigated the pros and con of the TSP vs. an outside IRA. Not an easy choice. Here’s what he said:
TSP vs IRA or Apples vs Oranges
Federal retirees are always struggling with the decision of whether to keep their money in the Thrift Savings Plan (TSP) or transfer it into an Individual Retirement Account (IRA). First, let’s define what the TSP is and what an IRA is. The TSP is a tax deferred “employer” retirement plan for federal employee comparable to a 401k plan in the private sector. An IRA is a tax deferred “individual” retirement plan. Big difference! The TSP must follow the administrative rules from Section 401k of the Internal Revenue Code. The IRA follows the administrative rules from Section 408 of the Internal Revenue Code. So, they are as different as apples and oranges. Yes, both are fruit, but different taste and they grow in different climates.
The TSP, just like any other 401k must offer a variety of investments. It offers a G Fund, F Fund, C Fund, S Fund, and an I Fund. A corporate 401k provides similar options such as a government securities fund, a bond fund, a large cap fund, a small cap fund and an international fund. The IRA is not required to offer diversified options because you, the investor, must figure it out on your own or hire a professional to help you. The IRA can be invested in a multitude of investments. But there is no rule that says you cannot invest all your money into just one stock. Even if you invest in only one of the TSP funds offered, that fund contains a multitude of investments protecting you from just picking one stock.
The TSP has the lowest expenses in the industry of 401k plans. When you have millions of federal participants, the expenses are spread throughout each investor. A lot of companies pay for their employees’ 401k plan, but many do not pay these administrative expenses. So, if your company has 1,000 employees, the administrative fees are allocated among all the employees. Fewer employees mean their administrative expenses would be considerably higher than the TSP. The IRA has many fees even for those investors who are self-directing their own investments. There is front load, back load sales expenses, 12b-1 expenses, and custodial expenses. Let’s say you are picking stocks for your IRA and you are paying zero commissions. Picking stocks maybe be easy for some but difficult for many other investors, so using a financial advisor or an investment manager would create large advisory fees coming out of your IRA.
The greatest protection that the TSP and 401k plans offer is protection from outside companies who are trying to sell you insurance, annuities, and precious metals. You hear these presentations at retirement conferences. You hear “move your money from your TSP to an IRA” so that you can purchase investments which usually lead to high commissions and fees for financial advisors. IRA investors will get cold calls from advisors from the brokerage firm who is holding their assets. And these solicitations even come from the major financial brokers. This never happens in the TSP.
The TSP is not perfect, because it is required to follow stricter IRS rules. The TSP allows you full control in investing your own account. But you are limited in the number of transactions you can perform each month. The TSP does this to protect employees from being day traders. Furthermore, the IRA has more liberal distribution rules and flexibility in donating to charities compared to the TSP. The TSP administrative management is doing their job the same as private sector companies do for their 401k plans. The IRA does not have anyone protecting them. It is the Caveat Emptor principle; may the buyer beware. IRA investors can buy and sell daily but doing this at the wrong time in the market can create realized losses to their accounts.
As a Financial Coach. I have many federal employees who contact me regarding their TSP. We discuss investment goals, strategies, and retirement goals. I have helped clients who have returned to me to assist them with opening an IRA and how to find the right investments for their financial goals outside of the TSP. There is nothing wrong with keeping your money in the TSP or transferring it to an IRA. But you need to realize that they are two different retirement plans and each one has their pros and cons.
Financial success can easily be achieved; it only takes a little effort.
The International Astronomical Union, the body that sets definitions for planetary science, describes dwarf planets like Pluto as “a celestial body orbiting a star that is massive enough to be rounded by its own gravity but has not cleared its neighboring region of planetesimals and is not a satellite. More explicitly, it has to have sufficient mass to overcome its compressive strength and achieve hydrostatic equilibrium.”