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Ask USAA: What should I do with my TSP when I retire?

This content is provided courtesy of USAA.

Whether it's a Thrift Savings Plan or other type of retirement plan, most people are going to select from one of four alternatives. Scott Halliwell tells you about these options.

Scott Halliwell: Hello and welcome to Ask USAA. My name is Scott Halliwell. We have a question today from Derek in Louisiana. And he says, "What should I do with my TSP when I retire?" He also told me that he has about $50,000 in the account.

Well, Derek, this is a common question that we get and the reality is there's no right answer to it; it really depends on your situation and circumstances. With that said, whether it's a TSP or some other type of retirement plan, most people are going to select from one of four alternatives that are available to them. Let's take a look at what those are.

So Derek, when you retire you're going to have this $50,000 thrift savings plan and your options are: leave the funds in the old plan, roll the money to the traditional IRA, roll the money to a Roth IRA, which could have tax implications, or finally, if you're still working and the new plan allows, you could roll the money into the new plan. Of course you always have the option of cashing it out and doing what you want with it, but I rarely ever recommend that simply because the taxes and penalties as well as the retirement funding damage that could cause, really aren't worth it in most cases.

Now let's go back to the graphic. You'll notice on the graphic that three of the four items that we've talked about here involve doing a rollover. But simply because the majority of the alternatives are about rollovers doesn't necessarily make that the better choice. To help you decide what's best in your situation, I think we should take a look at some of the most popular reasons why people would roll the money over to a new plan or why they might leave it where it is.

On the subject of rolling it over, the first thing you'll see here is investment flexibility. Whether you've got great options in your retirement plan or you think that they're not living up to what you'd like them to do, the reality is they're the only options that you have available. Sometimes folks want more options or different options, so they'll roll the plan over into another plan or an IRA to give them more flexibility.

Next thing we want to think about is investment consolidation and coordination. The reality is when you have money spread across multiple different plans, it could be very difficult to manage the asset allocation to monitor things going forward. Simplifying it and bringing it all together actually makes that an awful lot easier in a lot of cases.

The final main reason why people will roll it over is recordkeeping simplification. You know, just like having your money in multiple places makes it difficult to manage the overall mix; also makes it very difficult to manage the records or the paperwork that goes along with it. Pulling it all together can really streamline that process.

So those are the reasons why someone might choose to roll the money over into a new plan; let's take a look at why somebody might choose to leave the money where it is. First would be investment choices. As we had —  as I mentioned before — sometimes investment choices are a reason to roll money out of a plan; sometimes, though, it's a reason to leave it there.

The reality is occasionally there are certain accounts or types of accounts or things that are really good for someone's situation that are in that plan and not available elsewhere, so they'll say, "Let's leave it in there because that's the better choice."

The next reason why it might make sense to leave it behind is creditor protection. Most retirement plans cannot be attached by creditors in the event of a lawsuit; that's not always the same situation, though, for an IRA. It's going to vary by state and it depends on the dollar amount; the reality is this might not be a very big issue for most people, but you should know that there is a difference in creditor protection afforded to company retirement plans versus IRAs.

The final reason why a lot of people would decide to leave the money where it is, is accessibility. So with retirement plans — company retirement plans — if you separated from service in or after the year that you turned 55 you can actually access those funds without the 10% penalty for premature withdrawal. If you instead rolled it to an IRA, you'd have to pay penalties if you took it out before 59 1/2.

So as I said earlier, Derek, the best approach to this really comes down to your specific situation and circumstances. It may make sense to roll it over; frankly, it may make sense to leave it where it is.

If you'd like to discuss this further, I encourage you to contact our team of salaried financial advisors here at USAA. You can call them at the number on the screen; that's 800-771-9960. Thanks so much for the question and best of luck to you in your upcoming retirement.

 

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