TSP to IRA rollover: what you gain and lose

It’s moving money out of the TSP into an account you own directly, and there are two ways to do it. A direct rollover sends the money straight to the receiving account. A traditional balance moved this way to a traditional IRA is not taxed in the current year, and nothing is withheld.

An indirect rollover pays you first, and that changes everything. Because the payment goes to you rather than to another plan, the TSP must withhold 20% for federal income tax.

The TSP's own example shows why that hurts. On a $10,000 distribution, $2,000 is withheld, and $8,000 reaches you. To roll the whole $10,000, you’d have to find the missing $2,000 from your own savings. Figures are the TSP's illustration; see our assumptions for the values our calculator uses.

Then the clock runs. Anything not rolled over within 60 days is taxed, and it may carry the 10% early withdrawal penalty if you’re under 59½. A direct rollover avoids the withholding and the deadline together.

This is the fact most likely to cost a federal retiree real money. The TSP says the 10% additional tax generally does not apply to payments made after you separate from service during or after the year you reach age 55.

That exception belongs to the plan, not to you. The IRS is explicit that the exceptions in this group apply to distributions from a qualified plan other than an IRA, and the age-55 separation exception sits in that list.

So the money changes character when it moves. Roll a balance into an IRA at 56 and withdrawals from it are governed by the IRA rules, where 59½ is the threshold rather than 55.

Public-safety retirees have even more to lose. Their version of the exception reaches back to the year they turn 50, or to 25 years of service under the TSP, which is a far longer stretch of penalty-free access to give up.

The G Fund has no equivalent outside the plan. It’s a government-backed fund available only to TSP participants, and no IRA offers the same thing, which matters most to anyone who uses it as their stability anchor.

Cost is the other thing you can’t buy back. The TSP argues its own case here, noting that low fund fees can add up to many tens of thousands of dollars over a long horizon. It makes that point even about its own mutual fund window.

You also leave the TSP's own withdrawal machinery behind, including its life annuity option. TSP withdrawal strategies covers what’s available while the money stays.

None of this makes an IRA wrong. It means the things the TSP gives you for free are the things you should be sure you don’t need.

Choice is the honest headline. An IRA reaches the whole market rather than five core funds and a set of lifecycle funds, which matters if you want something specific the TSP doesn’t carry.

Consolidation is the practical one. Someone with a TSP, an old employer plan, and two IRAs has four statements and four beneficiary forms (and four passwords), and combining them reduces the chance of missing something later.

A Roth IRA has no required distributions during the owner’s lifetime, so money can stay invested indefinitely. That used to set it apart from the TSP, but Roth TSP balances lost their lifetime RMDs in 2024, so on this point the two now match.

Estate flexibility is the quieter gain. IRAs generally offer more options for how beneficiaries take distributions than an employer plan does, which is worth weighing if leaving the balance to someone is part of the plan.

The start age is the same wherever the money sits, and your birth year sets it. SECURE 2.0 sets it at 73 for those born from 1951 through 1959, and 75 for those born in 1960 or later, for TSP balances and traditional IRAs alike.

What changed recently is which balances count. Roth balances in the TSP are no longer subject to required distributions during your lifetime, so the calculation now covers only your traditional money.

That removes what used to be a common reason to roll a Roth TSP into a Roth IRA. The RMD difference between them has largely closed, though a Roth IRA still has no lifetime distribution requirement at all.

The penalty for missing one has eased too. The excise tax on an RMD you fail to take fell from 50% to 25%, and to 10% if you correct it within two years.

The decision usually turns on two questions rather than a long list. Do you need something the TSP doesn’t offer, and will you need penalty-free access before 59½?

A reader who answers no to both has little to gain from moving. A reader who answers yes to the first and no to the second has a genuine case, and a partial rollover often serves them better than moving everything.

Timing can change the answer on its own. Rolling after 59½ removes the penalty question entirely, so the same decision can be straightforward at 60 and expensive at 56.

Your age, your holdings, and what you’d actually buy settle it, and only you can weigh those. To see how your TSP fits the rest of your plan, run your free readiness score.