TSP to IRA Rollover: Should You Transfer Your Military Retirement Savings?

Rolling your TSP into an IRA after military separation is one of the most common financial decisions veterans make — and one of the most frequently made without a clear understanding of what's actually changing.

Here's an honest look at what you gain and lose.

Why People Roll Over

The most common reason: more investment choices. The TSP has approximately 15 investment options (5 individual funds and 10 lifecycle L funds). An IRA at a major brokerage can access thousands of ETFs, mutual funds, stocks, bonds, and alternative investments.

For most service members with straightforward investment goals — low-cost index fund investing — this is largely irrelevant. The TSP's C, S, and I funds are institutional-grade index funds that track the S&P 500, small-cap stocks, and international stocks respectively. These cover the core of what most retirement investors need.

Other reasons people roll over:

• Consolidation with other retirement accounts
• Desire for Roth conversion strategies (e.g., converting traditional TSP to Roth IRA)
• Access to alternative asset classes
• Preference for a specific brokerage's platform

Why You Might Not Roll Over

Expenses. The TSP's administrative expense ratio is among the lowest in the investment world — approximately 0.048% as of recent reporting (tsp.gov). A Vanguard or Fidelity IRA using index funds can get close to this, but most actively managed mutual funds in IRAs charge 0.5% to 1.5% or more annually. On a $200,000 balance, a 1% fee difference costs $2,000 per year.

Creditor protection. TSP accounts have strong federal creditor protection — they cannot be seized in bankruptcy proceedings (with narrow exceptions). IRA protections vary by state. If you're starting a business or in a profession with liability exposure, this matters.

Loan provision. While still employed by the federal government or on active duty, TSP participants can take loans from their accounts. IRAs have no loan provision. If you return to federal civilian employment, you'd want your funds in the TSP to access this.

Simplicity. More investment options mean more decisions. Many separating service members underestimate how much cognitive overhead active portfolio management requires when they're also building a new career.

The Rollover Mechanics: Direct vs. Indirect

If you decide to roll over, do it as a direct rollover — TSP sends funds directly to the receiving IRA, you never touch the money. This avoids any withholding or tax consequences.

An indirect rollover means the TSP cuts you a check for the balance (minus 20% withholding). You have 60 days to deposit the full original amount (including the withheld 20% from your own funds) into an IRA. If you deposit less, the difference is treated as a taxable distribution. This is the rollover method that trips people up.

Traditional vs. Roth: Don't Mix Them

Traditional TSP (pre-tax contributions) must roll into a Traditional IRA or a new employer's 401(k). Rolling into a Roth IRA is a Roth conversion — a taxable event that adds the converted amount to your gross income for the year. This may or may not be strategic depending on your tax situation. It's not a "free" way to move money to a Roth.

Roth TSP rolls cleanly into a Roth IRA with no tax event.

The Decision Framework

Leave in TSP if: You're satisfied with index fund investing, you're concerned about creditor protection, you might return to federal employment, or you want simplicity.

Roll into an IRA if: You have a specific tax strategy requiring the move (e.g., Roth conversion), you want access to specific investment types the TSP doesn't offer, or you're consolidating multiple retirement accounts at a brokerage you already use.

Get advice before moving: The IRS rules around rollovers, Roth conversions, and IRA contribution limits are specific and can produce unexpected tax consequences. A tax professional or fee-only financial planner who specializes in military financial planning is worth the consultation fee.

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Sources: tsp.gov (Withdrawals), IRS Publication 590-A (Contributions to Individual Retirement Arrangements), IRS Publication 590-B (Distributions from Individual Retirement Arrangements), ERISA creditor protection provisions