Before making a rollover decision, it’s worth knowing which factors actually matter

Guest:	Thiago Glieger
Title:	Certified financial planner, RMG Advisors
Summary:	For many federal employees, the biggest retirement decision isn't when to retire. It's what to do with the money they've accumulated in the Thrift Savings Plan. We'll walk through the tradeoffs between staying in the TSP and moving to an IRA.

The Federal Drive with Terry Gerton provides expert insights on current events in the federal community. Read more interviews to keep up with daily news and analysis that affect the federal workforce. Reach out to Terry and the Federal Drive producers with feedback and story ideas at FederalDrive@federalnewsnetwork.com.

Interview transcript

Terry Gerton We got a question from a listener and I thought I’d ask you. He says, I’m retiring with a TSP account and I’m getting a lot of advice on what to do with it. So before we talk about specific options, what are the major decision points someone should evaluate for themselves at this point about whether to keep their TSP or do something else with it?

Thiago Glieger Sure, you know, this is a really big topic Terry because the TSP is such a great program but there are certainly good reasons to Consider using an IRA and we want to be careful with picking sides or assigning any kind of loyalty And there’s pros and cons to each and the most objective way to make this assessment It’s just to remember that the investments are simply a tool It’s a tool we use to live the life we need and we Want to use the tool that is best designed for the job at hand So when we look at the Tsp or other options These toolboxes, there’s really seven broad categories I want people to consider when making this assessment. They’re gonna be in the areas of the costs, services, products, guarantees, and then considerations on withdrawals, taxes, and beneficiaries. So those are the major categories that people should pay attention to.

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Terry Gerton That’s a great list, let’s talk about a few of them in the time that we have today. So let’s start with costs. A lot of times, people are worried about not only the cost of the account, but also the cost the advice.

Thiago Glieger That’s right. We want to compare the all in costs and expenses. The TSP, as we know, has very, very low cost funds, especially when we’re talking about the five core funds. The IRA platform has a complete open architecture and there’s a lot of investments that are very, very cost effective. In fact, some of them are even cheaper than some of the core five TSP funds, but there’s lot of them that are also very, very expensive. When we look to the TSP mutual fund window, That same open window then begins to give you a lot of greater costs. There’s trading costs with the every trade that you place in the mutual fund window. There’s expense ratios inside the investment choices that you’re going to pick. And then if you’re gonna actually have an advisor as well, well that advisor is going to come with a cost as well.

Terry Gerton So lots of factors on cost to consider. What about services, especially if you’re getting an advisor?

Thiago Glieger The costs and the services have to be looked at together, right Terry? Because if we’re gonna pay for something, well, we better be get something that’s worth that cost. And so some of the things from services to consider is number one, simplicity and familiarity. We love the TSP. We are familiar with the TSP. It is very simple to use and that’s valuable to something. The access to loans. The TSP allows you to have access to loans special purpose or random things that you might need money for. You cannot do that inside an individual retirement account or known as an IRA. Okay, there’s no loans inside IRAs. The ability to have access to a managed account or investment advice for managed services, that’s something that is available in IRAs but is not typically in the TSP, right? A lot of folks think the TSP is managing the money for their accounts. The TSP creates the funds and then you get to pick those. The life cycle funds is a little bit more managed because they’re kind of creating this curated mix of those five core funds. So that’s kind of a hybrid in between. And then beyond that, there’s just the general availability of guidance or materials, publications about investments. You get a lot of that more if you are working with an advisor with IRAs. Sometimes there are cash access accounts where you can actually have a card for your investment account. Some people like to pay taxes that way, or just having more organization around all of the accounts, because if you are married and your spouse is not a federal employee, well, you are not gonna have all of the accounts in the same place. Whereas if you find a financial custodian, you can organize and consolidate all of your investments together. And sometimes that’s just easier to have things in one place for folks.

Terry Gerton Is that a little bit like the TSP is simple but basic and advisors might be more complex but more customizable?

Thiago Glieger That’s a good way of putting it. I think that the IRA platform is more custom. Whether you work with an advisor or not is separate from having an individual retirement account. You can still have an individual retirement account in IRA with Fidelity, Schwab, Pershing, all of those big financial institutions and not have an advisor at all. That is a perfectly possible situation. And in doing so, that platform is gonna give you more options and choices than the Thrift Savings Plan will. This is by design. The TSP is not unique in this. 401Ks all have limitations and a menu of options that they give to you because they want to make sure people are not having analysis paralysis. You know, if you give people too many options they start to make a lot of not great choices. So of course that’s the danger with the mutual fund window, although that is an option to have a lot more choices in there too.

Terry Gerton Thiago Glieger is a certified financial planner with RMG Advisors. Thiago, let’s come back to our either-or combination and talk about the investments or the products a little bit more. We were just starting down that road.

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Thiago Glieger Yeah, the investment suite in the TSP is absolutely rock solid, especially if you are in what we call accumulation mode, meaning you’re saving your money, you are growing the funds. Really, we want to use the power of the markets and that compounding effect. I mean, I often joke with people, put your money in the C, S and I funds and look away for 30 years. Just keep shoveling money in there, let the markets do their work. But we have to understand that they are very passive investments. So they’re going to follow whatever the markets are doing, okay? The life cycle is the autopilot version, where you can pick a date that is relatively close to your retirement date. And the closer it gets to that date, the more F and G fund that it’s gonna have in your account and the less C, S and I funds. Where the C, S and I funds are the growth stocks and the F fund is a bond fund and then the G fund is everybody’s favorite cash fund. The G fund very unique. It protects you from principal loss. You cannot lose money inside the G Fund. That’s a very unique thing. But we often use the word safe when referring to the G fund. It’s only safe from market volatility, but it also doesn’t grow very well. So it’s not safe from long-term inflation, which is another thing we need to worry about. When we look at IRAs, there’s almost limitless investment options, which can be a bad thing. There’s a lot of costly, expensive investments that you could drive a car from point A to point B, gets you there well and safely. You could also spend $300,000 on a car, and it does the same thing. And that’s the kind of analysis that people need to be careful with.

Terry Gerton I guess the last major consideration here, we are talking about retirees. So they are gonna be planning to take distributions. How does that factor in to stay in the TSP or roll over to an IRA?

Thiago Glieger Yes, the retirees are looking at the decumulation phase. And there’s a couple of important factors and rules to remember. If you are retiring as a federal employee prior to the age of 59 and a half, this is a really important age, very random age, but important nonetheless. If you take money out of your IRA and send it to your bank account, and you’re not 59 and half, you might be subject to a 10% penalty on that cash. There are some exceptions to the rules, but for the most part, consider it not within reach until 59 and a half. Well, that’s a problem because a lot of special provisions can retire at 50. A lot of people can retire sooner than that. MRA for folks is 57. So we have that rule of 55 for retirement accounts that if you leave service 55 or older, special provisions excluded, you can access your TSP account without that 10% penalty. And that is critical, especially when thinking about whether to move the money to IRA because I see too many people do this and then not realize that they can’t move, they can’t actually access their money. We also want to understand how the TSP takes the money out of each of the funds. We like to sell high, buy low, right? So when we are selling investments to take out of our accounts, we don’t want to sell from investments if they’ve fallen. This is a challenge in the TSP. They just sell across all of the investments. In an IRA, you get a little bit more customization. So these are some of the things to think about.

Terry Gerton And what about beneficiary consideration? Is that different across the two options?

Thiago Glieger The big thing with beneficiary considerations is that we know that a spouse can keep a TSP. There is such a thing as a spousal TSP, but children cannot. They’re going to have to roll that money out. And so there is, it’s not entirely complicated, but it is paperwork intensive. They have to go find a custodian for an inherited IRA. They have send them all of the paperwork. They have to call the TSP and then initiate that rollover, make sure it gets done correctly. And then there’s the Secure Act, which came in and changed how quickly people need to distribute funds. So, non-eligible beneficiaries, so non-spouses, kids, they have to take the money out of the retirement accounts within 10 years. And every dollar that they take out is completely taxable to them. So even thinking about, okay, where can I do better tax planning? Where can I do roth conversions in a way that’s going to support, which, by the way, the TSP now offers, thank God. But where can I do those conversions in a way that is going to not only be beneficial to me, but if I’m gone, my kids are not gonna be crushed with a really big pre-tax account? Those are things to think about too.

Terry Gerton All right, so you have laid out an incredible amount of information in a very short period of time. If a federal employee had only an hour to kind of make this decision, what are, would you say, the three most important things they should be thinking about?

Thiago Glieger Terry, I would say the three most important things to think about are going to be relative to cost. If we’re paying for anything, we need to be getting more value than what we are paying. The second is going to the services. Does my choice give me the options and flexibility for me to achieve the objectives that I need so that I can have financial safety and security for my family? And the third, I would say to consider some of those tax considerations because seldom do we pay, I think, enough attention to how tax impacts all of our finances. And when we look at tax, it has to be one of our biggest expenses in retirement. I know that, I see retirees and what they pay in tax. And so think about how you can manage tax in a more efficient manner so that it really binds the rest of your choices and your retirement plan.

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