Here’s a great reader question on getting the most out of your Thrift Savings Plan:
I frequently read your website and find your advice very helpful, and I am looking to make some money moves that I’m not sure are possible. I have a Roth IRA with a lot of money in it, and a Roth TSP with a lot less money in it. I like the simplicity and low expenses of the TSP, and I would like to move the funds from my Roth IRA to my Roth TSP, if possible.
My search brought up the TSP-60-R form, but in bold at the top states “The TSP does not accept transfers from Roth IRAs.”
Are there any tricks or a way for me to accomplish this? Could I convert my Roth IRA to a Traditional IRA, and then use the TSP-60-R form?
Also, since using the Roth TSP, I can’t figure out how to send money directly into my account. In other words, I have my allocation set up to deduct a certain percentage from my pay, which is automatically invested in the funds I have picked. But let’s say I get a $1000 tax refund at the end of the year and want to put that in my TSP. I haven’t figured out a way to do that. Do you know if that’s possible?
First, congratulations on being way ahead of more than half of the military’s servicemembers who haven’t even signed up for the TSP. You’re also way ahead of your peers for asking advanced questions about moving your IRA into the TSP.
You’re right about not being able to move your Roth IRA into your Roth TSP. I’m not sure why that can’t be done (maybe that prohibition is in the legislation and the tax code) but perhaps it’s because the Roth TSP is known as a “designated Roth account” and a Roth IRA is not. The difference is important to the IRS (and to financial planners & advisers) because the Roth TSP is still subject to required minimum distributions while a Roth IRA is not.
I wouldn’t convert a Roth IRA to a traditional IRA to move it to the traditional TSP because there are better ways to achieve your goal. The other issue with that type of conversion is that when you eventually started to make withdrawals from your traditional account, the gains of your traditional IRA (and traditional TSP) would be taxable. You could avoid some of those taxes after you left the military if your taxable income is low enough to do annual incremental Roth IRA conversions in the 0% tax bracket. It’s a challenge to calculate whether you’d pay more taxes on the gains than you’d pay in expenses, and the tracking and conversion effort would be substantial. Luckily there’s a better choice which I’ll explain in a few paragraphs.
You’re also right about not being able to send your savings or investments directly to your TSP account. Again, federal law permits non-Roth after-tax contributions to designated Roth accounts but few employers offer this option. The TSP does not offer this because they’re not willing to pay the expenses (computer systems, tracking, audits, payroll) of this feature either. It’s part of the reason they’re able to keep their expense ratios so low.
The most practical way to contribute to the TSP is through your base pay. (You could also contribute special pays, incentive pays, and bonuses.) Raise your myPay deduction to the TSP for a few months (to maximize your contributions) and then live off your money in your non-TSP accounts. For example, you could live off your $1000 tax refund while raising your Roth TSP contribution by an extra $1000.* Once you reach $1500/month in deductions to the TSP you’ll meet the annual $18K limit (for 2016). If you happen to exceed $18K for some reason, the TSP’s computer systems will kick back anything over $18K. When you’re deployed to a combat zone, that limit is $53K (for 2016).
Another (not very effective) way to get some of your Roth IRA into the TSP would be to withdraw your Roth IRA contributions. The tax code allows withdrawing Roth IRA contributions at any time for any reason (you’ve already paid tax on them). You could raise your paycheck deductions to the TSP while living off the Roth IRA contributions. But I wouldn’t recommend this choice either, because there’s still a better way.
Let’s get back to your original goal: minimal expenses with simplicity.
Here’s the better way:
The easiest way to replicate the TSP’s simplicity and low expenses is to put your Roth IRA in similar funds that are available from large financial institutions. The TSP’s equity funds replicate indexes that include the stocks of large American companies (the S&P500 index), the stocks of medium and small American companies (the rest of the market, not in the S&P500), and the stocks of international companies. The TSP’s executive board pays a subcontractor financial firm named Blackrock to manage the funds.
You can find similar passively-managed equity index funds with low expense ratios at other large financial firms.
For example, the TSP’s C, S, and I funds have expense ratios of about 0.029%. (Read the footnotes at that link to learn the details of how the world’s largest index funds can have such low expenses.) Vanguard, Fidelity, and USAA offer similar funds that you can buy in your Roth IRA and your taxable accounts. (Check this fund comparison chart at the Bogleheads Wiki.) They don’t all have the rock-bottom expenses of the TSP but they’ll be lower than most other fund companies.
Right now Vanguard’s version of the TSP’s C fund actually offers an expense ratio of 0.020%, even lower than the TSP C fund. The catch is that you’d have to deposit $200M (the “Warren Buffett” level!) to achieve that expense ratio, but Vanguard’s 500 Index Fund has an expense ratio of 0.05% for balances over $10K. Fidelity’s Spartan 500 Index Fund has the same expense ratio for the same minimum balance.
USAA’s S&P500 index fund also resembles the TSP’s C fund, but its expense ratio is 0.16%. USAA’s funds are generally smaller than the behemoths of Vanguard & Fidelity (with similar expenses), and USAA has a different corporate structure than the other two companies. Fidelity may subsidize the expenses of some of its funds with “soft dollar” compensation from partners and subcontractors, while USAA’s products and services are expected to pay for themselves. The biggest component of USAA’s expense ratio is member service: the financial side of the insurance company offers trust, more customer support, and the convenience of consolidated investing & insurance accounts. USAA is usually willing to take your call from Afghanistan at 3 AM, but don’t expect the same response from Vanguard or Fidelity.
Take a look at Morningstar’s latest report on mutual fund fees. Considering how the rest of the industry is “servicing” its customers, you’ll pay low fees with whichever of the above three makes you happiest.
Boost your TSP contributions to the maximum allowed (depending on your deployment situation), maximize your contributions to your Roth IRA in those other funds, and then invest even more in taxable accounts with those same index funds.
You can easily transfer your Roth IRA from your current company to Fidelity, Vanguard, or USAA. (Set up an account on their website and they’ll do the entire transfer for you, including contacting your current Roth IRA custodian to handle the details.) You would have no tax impact if you chose to replace your current funds in your Roth IRA with the Fidelity/Vanguard/USAA TSP equivalents. If you sold your current funds in your taxable accounts to buy those other funds then you might have to pay capital gains tax on the realized gains of your current funds. From then on, though, you’d be paying lower expenses in your new funds.
One more tweak: passively-managed index funds invested in international stocks tend to have higher expense ratios than index funds owning American stocks. If your asset allocation includes international equities (for diversification) then put your international allocation in the TSP’s I fund. You can make up your asset allocation to American stocks with equity index funds in your Roth IRAs and taxable accounts.
People are frequently reluctant to contribute “too much” to the TSP because they might want that money before they reach the age of 59.5 for penalty-free withdrawals. However, the federal tax law has several other penalty-free ways to tap the funds in the TSP before age 59.5, and they only require a little advance planning. (Before tapping the TSP, you’d also withdraw your contributions to your Roth IRAs.) The reality is that if you maximize your Roth TSP contributions every year, and maximize your Roth IRA contributions, and save even more in taxable accounts, then you’ll have plenty of funds to live on after the military while you’re getting ready to tap your TSP. Most of my older readers have reported that they won’t even need to touch it before age 70, let alone age 59.5. (They have income from bridge careers or military pensions, or they’re already financially independent.) I’d suggest that younger readers should maximize their TSP contributions every year before that opportunity is lost forever.
If these manipulations seem a little daunting– or if you just want a second opinion– then I recommend Rob Aeschbach at MilitaryFinancialPlanner.com. He’s retired military and a CFP, and he’s helped hundreds of servicemembers straighten out their finances. He’s extremely familiar with tweaking myPay and the TSP accounts. Rob’s services are fee-only, which means no products or commissions or upsells. He’ll give you a free consultation and then you can pay for his labor & experience on the parts you want help with.
For those readers with other types of
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- The Roth TSP will happily accept your transfer of your Roth 401(k) and your Roth 403(b).
- The traditional TSP will accept your transfer of your 401(k), your traditional IRA, your SIMPLE IRA, your 403(b), or your 457(b).
- See this two-minute video on the TSP’s YouTube channel.
* (You could also adjust your W-4 withholding to receive smaller income-tax refunds, but right now you’re “close enough” with a $1000 refund on your current salary. Optimizing your tax withholding (and minimizing your refund) is always a good idea if you have the time to project your annual income and estimate the tax bill. However, you’d rather get a small refund than a large bill, especially if that bill has late-payment penalties and interest.)
How (And Why) To Transfer Your TSP To An IRA
TSP Tax-exempt Rollovers and Withdrawals
Early Withdrawals From Your TSP and IRA After The Military
Maximizing TSP contributions from a combat zone