Transitioning From Military Service: TSP Alternatives

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The Thrift Savings Plan (TSP) affords military members an investment package that is convenient and, under certain conditions, tax-exempt, too. But unfortunately, veterans and civil service employees are not allowed to contribute once their military employment ends; TSP eligibility is only available for active military members.

And while veterans can leave their assets in a TSP account, there are several additional options that are worth considering. In order for you to make an informed decision, here are the five possible TSP options available after leaving service.

Sometimes, doing nothing is an option

Essentially, your first option is to leave all of your retirement savings in your TSP account.

While you can no longer make additional deposits, the fees are among the lowest you will find, even when compared to the lower more popular index funds.

However, there is a downside. Besides being unable to withdrawal funds without a penalty, the TSP provides limited investment opportunities. There are a total of five funds available, but if you’re looking for further alternatives, this may not be the right path for you.

Consider switching over to an IRA

Fortunately, after your service ends you are allowed to convert your TSP account into a Traditional Individual Retirement Account. This allows you to avoid paying a ten percent early withdrawal penalty, while maintaining certain tax benefits and providing control over your investments.

Additionally, if your employer provides you with a 401(k) plan, your IRA can be rolled over at a later date.

Rollover to a 401(k) plan

Besides offering you a job, your employer may provide a 401(k) plan, too. If your company’s retirement plans includes strong retirement options and low maintenance fees, then rolling your TSP account into a 401(k) makes sense. This would allow you to maintain your tax advantages, while avoiding penalties or fees to transfer your money.

The lump sum option

Withdrawing your money from a TSP account in one lump sum is always an option, too. Although since you will be hit by taxes, usually twenty percent, and early withdrawal penalties of ten percent, this option isn’t advised.

This option is most useful during a period of instability, such as immediately after withdrawal from the military. Having cash available can ease the transition back into civilian life. But remember, by withdrawing your assets early, you lose all tax deferral benefits, potential future earning and lock in any market losses.

After the withdrawal you can roll your money into an IRA within sixty days and recoup the twenty percent that was taxed. At the time of withdrawal, you’ll have to pay the twenty percent fee, but you’ll be reimbursed after you file taxes the following year.

An annuity is a viable alternative

Normally, investing in an annuity isn’t a popular option. But by transferring your TSP assets to an annuity, you can avoid a withdrawal penalty and your money remains tax deferred.

Unfortunately, unlike other options, transferring your funds to an annuity is final. And in some cases can include higher fees than an IRA or 401 (k). Some states even charge high tax premiums for an annuity plan.

Before making any final decisions, you should consider speaking with a tax or retirement professional to avoid long-term complications.

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