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Navigating the TSP Rollover for Employees in the Federal Government

Alpha Pointe Capital TSP Rollover Kit Helping Federal Employees Transition Their Retirement Savings Safely and Securely

We’ve received numerous inquiries from our federal government clients who are increasingly concerned about their career paths and retirement planning. In response, we’ve been actively developing contingency plans and expanding our knowledge on managing transitions.

If you’re a federal employee preparing to exit government service, deciding how to roll over your Thrift Savings Plan (TSP) is a crucial financial step. This guide will walk you through your rollover alternatives and highlight key considerations to help you make an informed decision.

Alpha Pointe Capital offers various wealth management services on which federal employees can depend. You will feel comforted knowing that Alpha Pointe Capital’s 26 years of service to federal employees can help guide them through the TSP rollover process. We will discuss and help you evaluate your options, giving you peace of mind in this important decision. Here are the most frequently asked questions to help you understand Rolling over your TSP.

Can TSP accounts be rolled over? 

Yes. Participants may roll over eligible rollover distributions from their TSP accounts to a qualified trust or eligible retirement plan. It is not dissimilar to a rollover from company 401(k); you should be clear as long as you are rolling over qualified funds to a qualified account. 

There are two things to consider: First, check with your new employer to make sure they can receive funds from the TSP. Second, make sure you don’t roll over traditional, qualified contributions to a Roth IRA; this is a taxable situation.

What are Qualified Versus Non-Qualified Accounts?

Qualified contributions are:

  • Tax-advantaged
  • Must adhere to ERISA guidelines
  • Must be made available to all company employees

Non-qualified contributions are:

  • Not tax-deductible to the employer until they become taxable to the employee
  • Offered only to some employees as a bonus
  • Funded with after-tax dollars
  • Earnings are subject to ordinary income tax

When can I roll out of my TSP?

If you’re 59 1/2 or older, you can make withdrawals from your TSP account while you’re still employed. You must pay income tax on the taxable portion of your withdrawal unless you roll it over to an IRA or other eligible employer plan. The important distinction is to know the difference between a rollover and a withdrawal. We intentionally left this question as is because people are mixing the terms.

Rollover: A rollover is a transfer of funds from one retirement account to another, usually without paying taxes or penalties. It is generally better for long-term retirement savings.

Withdrawal: A withdrawal is taking money out of a retirement account, which can result in taxes and penalties if done before age 59 ½. It is less favorable for retirement savings.

Is there a penalty for a TSP Rollover?

No penalty. Again, going back to the difference between a rollover and a withdrawal. If rolling over your TSP to a qualified account, there is no penalty.

If you’re taking a withdrawal and are under 59½, the IRS generally will consider your payout an early distribution. This means you could owe a 10 percent early withdrawal penalty on top of federal and applicable state and local taxes. However, you won’t pay a penalty over the age of 59 1/2, just the taxes.

What is the 55-year rule for TSP?

While we’re discussing penalties or no penalties, if you leave the federal government at age 55 or older, you can withdraw from your TSP without fear of a penalty—as long as you retire immediately.

How can I transfer my TSP without penalty?

IRA Transfers and Rollovers. One often-mentioned mechanism to avoid the TSP early withdrawal penalty is a transfer or rollover of your TSP savings into an IRA or another eligible employer plan. That does allow you to move funds out of the account without penalty.

As you can tell, even the most basic questions have nuances you will want to understand. If you don’t, you might wind up making a mistake and paying a penalty.

The following are 5 key points we will discuss with you.

Where to Rollover Your TSP
  1. Individual Retirement Account (IRA)
    • Traditional IRA (maintains tax-deferred status)
    • Roth IRA (if you’re not rolling over Roth funds, it requires paying taxes on rollover amount but allows tax-free withdrawals in retirement)
  2. New Employer’s 401(k) or 403(b) Plan
    • If your new employer offers a retirement plan, you may be able to roll your TSP funds into it.
  3. Leave Funds in the TSP
    • TSP allows former employees to keep their funds invested, but options may be limited compared to IRAs.
  4. Cash Out (Not Recommended)
    • Withdrawing your TSP funds outright can result in tax penalties and loss of future growth.
Why Rollover Your TSP
  • Greater Investment Choices – IRAs and employer-sponsored plans often offer a wider selection of investments than TSP.
  • More Withdrawal Flexibility – IRAs provide more options for taking distributions compared to TSP’s structured withdrawal rules.
  • Better Estate Planning Options – IRAs provide better inheritance options for beneficiaries.
  • Consolidation of Retirement Accounts – Rolling over TSP into an IRA or employer plan simplifies portfolio management.
Risks of Rolling Over Your TSP
  • Higher Fees – Some IRA and 401(k) plans have higher fees than the low-cost TSP funds.
  • Loss of TSP Loan Option – Once you roll over, you no longer have access to TSP loans.
  • Possible Tax Implications – A Roth conversion requires paying taxes on the rollover amount.
  • Creditor Protection Differences – TSP accounts have strong federal protections against creditors that may differ from IRAs.
Considerations Before Initiating a Rollover
  1. Regulation B Considerations
    • Financial institutions must ensure non-discriminatory advisement.
    • Spousal consent may be required before transferring certain funds.
    • Ensure you receive a full breakdown of fees and investment choices before proceeding.
  2. Tax Implications
    • Traditional TSP to Traditional IRA: No immediate tax consequences.
    • Traditional TSP to Roth IRA: Taxes due on the rollover amount.
  3. Withdrawal Rules
    • Required Minimum Distributions (RMDs) begin at age 73 for Traditional IRAs.
    • Roth IRAs do not have RMDs, providing more flexibility.
  4. Employer Plan Rules
    • If rolling into a 401(k), check the plan’s investment options and fees.
Steps to Roll Over Your TSP
  1. Decide Where to Roll Over
    • Choose between an IRA, a new employer’s plan, or keeping funds in TSP. Alpha Pointe Capital offers IRAs and can advise employees regarding the process. We can also evaluate your options, giving you peace of mind on this important decision.
  2. Open the Receiving Account
    • Ensure the IRA or 401(k) is set up to receive your TSP funds.
  3. Submit TSP Rollover Request
    • Complete TSP Form TSP-70 (full withdrawal) or TSP-77 (partial withdrawal).
  4. Verify Direct Rollover vs. Indirect Rollover
    • Direct Rollover: Funds go straight to the new account (avoids tax withholding).
    • Indirect Rollover: TSP sends you a check (must be deposited within 60 days, subject to 20% withholding).
  5. Confirm Transfer Completion
    • Verify that funds are properly deposited into your new account.

Let Alpha Pointe Capital’s, experienced team of advisors help you make an informed decision about this important asset, the TSP, which you spent years building. As an independent wealth management firm, we offer many options and services for your clients so you can feel confident your money is secure and available when you need it most.

Contact Us To Get Started