Season 2 Episode 6 – “What Should I Do With My TSP?”

In this episode, Mike and Amy discuss the options available for managing your Thrift Savings Plan (TSP) after military service. They explore the pros and cons of keeping the TSP versus rolling it into an IRA, including considerations like cost, investment options, legal protections, and beneficiary rules. The conversation emphasizes the importance of understanding personal circumstances and seeking unbiased financial advice.

Chapters

00:00 Thanksgiving Greetings and Listener Inspiration

01:24 Understanding TSP Options After Military Service

08:13 Reasons to Keep Your TSP

11:14 Reasons to Roll Over Your TSP

22:01 Final Thoughts on TSP Decisions

Takeaways

• You don’t need to make an immediate decision about your TSP.
• TSP has historically been a low-cost investment option.
• The G fund offers unique benefits not found in other accounts.
• Consolidation of accounts can simplify financial management.
• Limited investment options in TSP may lead to a desire to roll over funds.
• Non-spousal beneficiaries face strict withdrawal timelines from TSP.
• Roth conversions can now be done within TSP, simplifying the process.
• Legal protections for TSP funds can be beneficial in certain situations.
• Consider the implications of beneficiary designations when managing TSP funds.
• If unsure, keeping funds in TSP may be the safest option.

Links

Schedule a consultation with Mike: https://nextmissionfinancialplanning.com/contact/

Schedule a consultation with Amy: https://www.instarfp.com/contact

Transcript

Mike Hunsberger (00:00)

Hey, Amy, how’s it going?

Amy (00:01)

Hey Mike, happy Thanksgiving, how are ya?

Mike Hunsberger (00:04)

I’m doing well. Yeah, this is going to release right before Thanksgiving. So one thing we just both wanted to say was we are thankful for all our listeners. So ⁓ we do appreciate it. And ⁓ this episode is actually inspired by a listener comment, isn’t

Amy (00:24)

It is. ⁓ So we had a question come in, a nice review with a question. ⁓ And the question was, can you dedicate an episode to discussing the options and pros, cons of what to do with your TSP after military service? So that is exactly what we’re going to do today. We’re going to get into the considerations for why you might want to leave it and why you might want to roll it into an IRA or do something else. We’ll go through those today.

Mike Hunsberger (01:25)

All right, Amy, yeah, as you said, great question today talking about TSP and what do you do once you’ve either finished military or federal civilian service and have options with your TSP. So there are several things that you should consider when you’re thinking about what to do. The first thing to know is you don’t need to make any kind of immediate decision. ⁓ You can keep the TSP.  you know really forever ⁓ if you want to if that’s the best decision for you so there’s no you know ticking time clock like with some of the other decisions you have to make when you ⁓ are rolling out of the military so that’s that’s one thing that’s important so there are ⁓ you know numerous reasons to keep why don’t we hit those first

Amy (02:17)

Yeah, yeah, I mean, I think so.

A lot of times the first thing on people’s mind is, you know, what’s the cost, right? TSP has from the beginning been ⁓ one of the lowest cost options and there for a long time was absolutely the lowest cost option for you. ⁓ That is becoming less true at this point, but it is still a very cost effective option for good quality investment options. ⁓ So cost is probably the first consideration that might land on your mind is deciding what to do with TSP.

Mike Hunsberger (02:55)

Yeah, like you said, they were for a long time lowest possible, ⁓ you know, before index funds, you know, gained wide acceptance on the outside and really reduced their fees. ⁓ You know, you had Vanguard kind of leading that effort. ⁓ The TSP just, you know, was was that low cost provider originally. So, you know, the outside with.

The amount of money they now have in those index funds have also been able to drive those costs down. yeah, the overall cost of using the general funds within TSP is a great thing. ⁓ The second thing that you consider is some of the options that are available within TSP. Things like the G fund, which really isn’t available outside. It’s a special government. interest-bearing accounts, no risk of 401ks and things like that may have similar things. They call them stable value funds, but they’re not quite ⁓ exactly the same as the G fund. So that could be a reason to do it. The other option is you do have the ability to annuitize ⁓ your TSP balance, you know, ⁓ zero some or all of it. Basically what that means is you’re going to give them basically whatever principal amount that you decide on and at that point they’re going to turn it into a steady stream of monthly income based on either your life or your and your spouse’s life. So that can be an option. Now anuitizing it may not be the best option and there may actually be other annuities on the outside where it could make sense to roll it out into an IRA and find a better annuity, but it is an option there that if you’re considering, I need some additional lifetime income, that can be a reason. Third option that is within TSP is the mutual fund window. This started a couple years ago where you have the ability to move some of your money and they have, you know, I think it’s over 4,000 different funds that are available out there that you can, you know, put some of your money into specific funds if you want to kind of diversify what you have available within the TSP. Now, one thing I will say, you know, it’s kind of expensive.  to do that within the TSP. ⁓ If you need to diversify, it could be better to roll it out, which we’ll kind of talk about some of the reasons you might want to. But ⁓ that is there if you find something specific that maybe it’s just a small portion, and you’re like, yeah, I’m just going to keep it simple, move that over, and be done with it. So any other thoughts on those options, Amy?

Amy (05:58)

Yeah, yeah, no, ⁓ and I mean, I agree with you in terms of the mutual fund window. It’s nice that it’s there. If you want simplicity, if you want to stick with a custodian that you’ve known your whole career, ⁓ and you trust, it’s an option, but it is expensive relative to what you could do elsewhere.

The other point I’ll make is, know, annuities may not be the best option for you. However, it absolutely could be the best option for you in certain circumstances. And you could certainly roll the money out and buy an annuity off, you know, the, you know.

from the private market type thing. ⁓ the TSP annuities are a little bit unique in that they do meet the 72T distributions, which means that if you needed income before you were 59 and a half, it’s a way to access that income without the penalty. Having said that, it’s a very permanent solution to potentially a short-term problem. So it is not right for everyone. It is absolutely a consideration and only a consideration. It doesn’t mean that if you’re under 59 and a half or whatever, it’s the right option for you. But it is something to consider. And then just the last quick note on GFund Mike. I read articles and it’s kind of funny. there’s, I feel like we do this a lot. There’s people who love it, people who hate it. GFund is very unique. ⁓ And I think that GFund has, can get a bad rap. ⁓ And maybe we should do a show on exactly how GFund works.

⁓ because that might help people understand why G fund is good and why they may feel like it’s less good at certain times. It really depends on the interest rate environment and the special way that G fund is currently constructed. ⁓ So those are kind of my added comments to that, but you those are good reasons to consider keeping. One other reason, and this is kind of big Mike, backdoor Roth opportunity.

Mike Hunsberger (07:51)

Yeah.

Amy (08:04)

So for those who don’t know what a Bactel Roth is, that is where, you know, if you have more income and if you’re going to be a military retiree and your spouse works.

⁓ There’s a very good chance that you will not be able to make an Roth IRA contribution directly. However, you could contribute to a traditional IRA, non-deductible, and then immediately convert that money to Roth or sometime in the future convert that money to Roth. And that’s what people call a backdoor Roth. ⁓ But you can only do that without tax consequence if you don’t have pre-tax money in an IRA outside your employer plan. So if you want to execute a backdoor to Roth strategy that’s quote clean, meaning no tax consequence, then it is best to leave your TSP pre-tax assets in the TSP so that you don’t have to consider that big pre-tax IRA balance. What are your thoughts about that, Mike?

Mike Hunsberger (09:01)

Yeah, I agree. It’s good. And even if you think you want to roll everything out, maybe in the future, leave a little bit in there just to keep the account open in case you ever need to do something like the ⁓ backdoor Roth in the future where you can actually roll your money back into the TSP and then

execute, ⁓ like Amy said, the clean backdoor Roth at that point. ⁓ yeah, even if you don’t, again, keep it all there. You could keep some just to have some of those options ⁓ going forward in the future. But yeah, that’s a great ⁓ reason to ⁓ potentially keep your TSP open. ⁓ The third piece is ⁓ legal protections. So within

When you have your money in the TSP, you’re protected from creditors and ⁓ in most cases Also, if you go bankrupt that money will be protected you roll it out different states treat bankruptcy is a state-by-state thing They treat it differently so potential that if you move money into the IRA that could be seized by creditors and stuff in a bankruptcy, so ⁓ just understanding that can

can make sense for some people to keep it in the TSP.

Amy (10:28)

And it’s important to note that some states treat different types of balances, different types of IRAs differently. So some states do extend creditor protections to traditional IRAs, so your pre-tax money, but not to your Roth IRA. ⁓ So there are lots of states that don’t protect the Roth IRA.

⁓ Some that do, but definitely this is something that you’re gonna wanna check into, particularly if you’re in a profession or in a situation where you feel like you might be exposed to creditors and lawsuits. ⁓ Mike, with that, let’s go ahead and move into reasons it might be a good idea to roll TSP into another place. You wanna kick us off?

Mike Hunsberger (11:14)

Sure. So the one big reason is consolidation. If you have all your other accounts, at some other, a Vanguard, a Schwab, any of the major players or even minor players, all your stuff’s there. You’ve got several, each of you have an IRA, traditional and Roth. Maybe you got a brokerage account. Maybe you got the 529 for the children there.

So in that case, hey, maybe I don’t want this other account just hanging out there on its own. It can possibly make sense to just move it all over, have it all in one place so that you know where it is and you get that single place that you can go and look at that and kind of invest it as a overall, make better portfolio decisions across all the account versus having to also

you know, think, well, what’s the TSP invested in? How does that work? So consolidation is definitely a reason to consider moving it over.

Amy (12:24)

Yeah, and I mean…What we don’t want is one more login, right? That’s that makes us change our password. ⁓ And sometimes TSP can, you know, if you need to reset your password, you have to get something mailed. And if you don’t have your address up to date, it’s a big thing. ⁓ So consolidation could just be a matter of ⁓ convenience for you at one of the major custodians or at any custodian of your choosing. ⁓ Now, the one point here is that, you know, you can consolidate most of your money.

⁓ outside the TSP, but to Mike’s point from earlier, maybe just keep, you know, thousand bucks in the G fund in there just to keep it open because you can always roll pre-tax money back in. You can’t roll Roth money in, but you can roll pre-tax money back in. So you’ve consolidated pretty much all of your money. ⁓ You know, a thousand dollars is a lot of money, but you know, you don’t have to worry. You don’t have to track it.

at all, ⁓ really. So that’s just one point of consideration for you if you do want to move to consolidate everything. ⁓ Another reason to move it, and this argument has changed a little bit, just like ⁓ the cost argument has changed. So inside TSP, you have five investment options, ⁓ literally five. So yes, there’s life cycle funds, but those are made up of the same five investment options plus the mutual fund window. So we’ve already talked about, the mutual fund window being relatively expensive. If you’re looking for mutual funds, it can make a lot of sense to roll that portion out ⁓ to access mutual funds that you want more cheaply. ⁓

Now in terms of limited investment options, you you’ve got the total or you’ve got the S &P 500. So you’ve got the biggest stocks in the US markets. You’ve got the Russell 2000, the S Fund. So you’ve got 2000 small US stocks. And then you have the I Fund. Now the criticism of the I Fund in the past was that it was only developed markets. As of July of this year, that has since changed. So emerging markets are now part of that index, which I think is a big benefit. So you do now have exposure to emerging markets, but it still may not be as much diversification as you would like. You’re not going to get into certain sub-asset classes specifically. ⁓ Take real estate, for example. If you’re looking for a REIT, there’s not a REIT only choice inside TSP. You have some real estate in there, but it’s not specific. ⁓ Treasury and inflation protected securities aren’t in there. You’re not going to get high yield bonds.

⁓ you know, you’re not going to be able to control bond duration. So, you know, I’m throwing lots of sub-asset class information at you, but this is exactly, you know, what we’re talking about. And TSP was not designed for that. So that might be a good reason ⁓ if you’re looking for just a little bit more diversification.

Mike Hunsberger (15:24)

Now, what you could do is if that’s your core, if you are going to hold a some portion of the S &P 500, okay, that could stay in TSP. Or if you’re going to do the Russell, using the S fund for that piece and then maybe you do your bond and fixed income allocations outside the TSP in other accounts. But again, it’s going to depend on your total portfolio, how big the TSP is compared to those other funds. But yeah, great point that there are, it is relatively limited versus the wide, wide, you know, universe that’s out there when you’re, when you’re at, you know, other places. But again, you know, a lot of times on the 401k side, which the TSP is similar to, you don’t have

Blanket you can invest in every security there now a lot of times they have a little bit more but again It is is something to think about so Third reason to Consider moving it is you have non spousal Beneficiaries, so what does that mean if you know you’re splitting it, you know, maybe 50 % go into your spouse and 25 % each to two kids. ⁓ ESP isn’t real friendly to ⁓ those if the money is going to go directly to a non-spouse beneficiary. They’re going to make you get that money out super quick. So a spouse can continue to, they can have their own account after you die and no issues there.

So, Amy, correct me if I’m wrong, I think it’s 90 days that you have, if you’re a non-spousal beneficiary, to get the money out of the TSP by, you know, basically rolling it over into an inherited IRA. Is that correct?

Amy (17:32)

Yeah, yeah, exactly. 90 days and that 90 days is ⁓ notification. ⁓ It’s from date of death kind of thing. So sometimes it takes a while. ⁓ And if they take a while to track you down, ⁓ then that 90 day period can end up being a very, very short period of time.

Mike Hunsberger (17:53)

Yeah, yeah, you need to really initiate the action on that, that let them know and start that process because, ⁓ you know, the last thing you want is these these accounts still have the, you know, tax free distribution or, you know, tax distribution rules where you can extend, you know, probably up to 10 years for, you know, your kids that they can take it out over that amount of time. And you don’t want to lose that. because basically you hit day 91, they’re going to distribute it and it’s all going to go out in that same tax year and could be a huge, you’re now taking a huge tax hit. And then the second piece of that is even if you have a spousal, transfer it to your spouse after you die, the rules are even more draconian once they own that account. You’re also going to want to take action at the death of the member too. move that out because the you know if if the spouse dies with their account basically it automatically gets distributed to whoever their beneficiaries are there is no tenure there is no you know ability to you know that 90-day doesn’t exist for the spouse so you really want to make sure that you’re thinking about that if somebody’s you know maybe they got a long-term condition

it may make sense to roll it out prior to that just so you’re not having to deal with it and the death at the same time. Because there’s a lot that’s going on when you’re doing the estate stuff and that 90 day clock is pretty quick. So that could definitely be a reason to move it out just to make sure you don’t lose all those good tax benefits that you could have if you. had it in an IRA versus the TSP.

Amy (19:53)

Yeah, and I mean, and just to clarify, because this can be confusing. So you are the first degree owner, right? Say you pass away, your second degree beneficiary, let’s say, is your spouse. So the spouse can keep the account there.but they’re going to designate a third degree beneficiary. That beneficiary has to take the money out as a full distribution. So imagine if you’re older, you know, say you’re in your 80s,  90s and your TSP account value has grown quite a bit and most of it’s pre-tax. Your spouse inherits it, he or she is nearly the same age and dies soon after. Then you’re, let’s just pretend like it’s your child.

So your adult child is going to inherit quite a lot of money all at one time, ⁓ which may not be favorable. So there are trade-offs to the rollover. We talked about the legal protections, things like that. But in a lot of cases, the fact that you have to take that full distribution can be a big reason ⁓ to move it out and accept the risk or accept the downside of moving funds out of TSP.

So I know a lot of people have questions about that sometimes, and sometimes that’s news to people. It’s a little bit confusing. So I just wanted to hopefully clarify for people. ⁓

Mike, one other reason to think about moving it, moving TSP in the past has been if you wanted to convert, if you wanted to do a Roth conversion, so from pre-tax balance to Roth balance, you used to have to move that out. In fact, if you want to do that this year, you have to move those funds, you have to roll them out of TSP. Now this is going to change TSP. I think this is a nice development because it means you can do Roth conversions before you leave service, if that makes sense. And for a lot of people,

can, ⁓ not for everyone, but for some people it can. But this year, you want, if you definitely want to do a Roth conversion, if it makes sense for your situation, then your only choice is to move it out ⁓ into that Roth IRA or traditional IRA and then convert it. ⁓

So I think Mike, kind of hit probably the biggest considerations. You know, obviously there’s personal preferences in here, but I think we hit the biggest considerations. Anything else to add?

Mike Hunsberger (22:14)

No, think it’s, and I do think it’s great that you’re now going to be able to do those ⁓ conversions within TSP. It was something that definitely was needed and yeah, supposedly going live in January. So I know they sent out some emails just ⁓ maybe a week or two ago about that. yeah, if you’re thinking about that and have always had it in your head that, I got it.

Amy (22:34)

Mm-hmm.

Mike Hunsberger (22:42)

I got to do this and get the money out of the TSP when I do the Roth conversion. Well, that is changing. So that’s definitely a good thing. yeah, otherwise, ⁓ I think we hit the major things that I usually think about when I’m considering what to do when talking with folks about TSP and, hey, what do we do with this ⁓ type thing?

Amy (23:08)

Yeah.

I mean, the only other thing I would add is that, you know, I do see a lot ⁓ of questions on social media about, you know, hey, I’m leaving. What do I do with my TSP? ⁓ You know, this is a great place to start in answering that question. ⁓ If you really feel like you need to get advice, then get advice from somebody who’s not incentivized by helping you make your choice. ⁓ Get advice from somebody who is very familiar with all the pros and cons, very familiar with for savings plans, but just specifically and is not necessarily incentivized by telling you to roll it out. And make sure that they’re doing it in context of your big picture plan as well.

Mike Hunsberger (23:52)

Yeah, I think that’s great. ⁓ You know, the question that you just throw on that is ⁓ what’s the benefit to you? If somebody’s telling you to roll it, yes, you should definitely roll it out. What’s the benefit to you or how much more do you make ⁓ if I do that versus keeping it in the TSP, which we’ve already talked about is, you know, very low, low cost type thing. So that is.

That is definitely a good thing to consider when you’re getting advice on this.

Amy (24:25)

Yeah, yeah. Yeah, so, you know, there are definitely other reasons that are on the table that might be, you know, cogent to your specific situation, but these are sort of the big picture highlights. In general, Savings is a great plan, even with the limited five ETF options or five fund options, kind of ignoring the mutual fund. That’s a great, very…

diversified portfolio. ⁓ You know, there’s there’s no rule that says that you have to in order to be a successful investor, you have to hold the sub asset classes that I was throwing out there. ⁓ Some people feel strongly about it. Some people don’t. But if if in doubt, ⁓ I think that, you know, I don’t know about you, Mike, but if you’re in doubt, keep it in TSP. ⁓ You know that that I would suggest that if you don’t know what to do and you don’t want to talk to somebody about it, then the default might be to just keep it in TSP. unless you’re facing, ⁓ you know, especially the beneficiary question, unless you’re facing that issue there.

Mike Hunsberger (25:33)

Yeah, I think that’s a good wrap up and a good summary. ⁓ yeah, thanks everybody for listening. especially the person that left the comment and the question, hope this answered it for you and at least give you some things to think about. And just want to say again, happy Thanksgiving to everybody. ⁓ Some of you will probably listen to this well after, but ⁓ again, ⁓ thanks for listening.