Should I Roll Over IRAs into TSP?

[britri3650]

I've got a TSP account. My wife and I also have Roth IRAs, Rollover IRAs, and SEP IRAs from previous non-government jobs. Given the really low expense rate of TSP funds ($0.27 per $1,000 invested) and to help simplify asset allocation, should I roll over my outside IRAs into my TSP? I'm just concerned that, for asset allocation purposes, the TSP does not include funds that invest in commodities or real estate.

[Ryan Dagg]

There are pros and cons to both options and the ultimate answer comes down to your overall financial situation & preferences.

Some questions to help you answer your own question:
Can you withdraw rolled-in funds from the TSP?
Why this matters: While certainly not something you should plan on, a Roth IRA is a great backup savings account in the case of a financial EMERGENCY (you're about to lose your house for instance). You can withdraw contributions (but not earnings) tax & penalty free before the age of 59.5. You likely won't be able to do this in the TSP until termination or age 59.5.

How set are you on your investing strategy? Are you disciplined?
-While 27 bps is certainly lower than the average mutual fund, you can do better with index mutual funds and commission free ETFs through Vanguard, Schwab & Fidelity (to name a few). However, a 27 bps target-date (sometimes called lifecycle) mutual fund is a pretty sweet deal and you never have to monitor your portfolio again.

How important is it to you to simplify down to one account?

How important is it that you will not be able to maximize tax effectiveness in the TSP?
-It is often better to invest your more aggressive assets in a Roth and the less risky stuff in pretax accounts.  Aggressive assets are more likely grow over long time periods and being able to withdraw them tax free later is a big incentive. Every employer plan I have ever encountered pools your pre-tax & Roth assets and has them grow according to the total growth of the portfolio instead of assigning specific investments to the different tax-deferred sources in the account. Maybe your plan is different, but I highly doubt it.

I hope this helps.

[britri3650]

Thanks Ryan. This is helpful. I found out that I cannot even roll over my Roth IRAs into my TSP. I can roll my traditional IRAs, but I cannot withdrawals those funds easily of course. Regarding your point about tax effectiveness, do you mean that Roth IRAs are better for investments like REITs and commodities?

[Ryan Dagg]

Thanks Ryan. This is helpful. I found out that I cannot even roll over my Roth IRAs into my TSP. I can roll my traditional IRAs, but I cannot withdrawals those funds easily of course. Regarding your point about tax effectiveness, do you mean that Roth IRAs are better for investments like REITs and commodities?

You are welcome britri3650.

My point, which I should have explained better, is that having the option to choose which type of investment gets which type of tax deferred growth (pretax-Traditional vs tax free-Roth) is better than not having this option.

Which type of investment is better in which type of tax deferred growth largely depends on your time until you need to start taking major withdrawals from your retirement accounts. It is often best to have high-potential growth investments (stocks, REITs, etc) in Roth accounts for someone far away (10+ years) from withdrawing from the Roth.

I personally would not consider an ETF composed of a broad-basket of commodities as high growth potential, but you might get some who disagree with me on this topic.

EDIT: I just found this amazing post that covers the asset class in which type of account far better than I did: https://forum.mrmoneymustache.com/investor-alley/asset-location-between-taxable-and-tax-exempt-accounts/

[ManyMountains]

britri3650 - You are off by a factor of 10 for your TSP expense fees. The actual amount is 0.027 (or, $0.027 for every $1000 invested). Please refer to https://www.tsp.gov/investmentfunds/fundsoverview/comparisonMatrix.shtml.

This is a big difference from what you earlier stated, as the reality is that TSP is far cheaper than any other low-cost option that Brian discussed above. I was about to close out my wives old TSP account in an effort to consolidate, but was luckily saved from this error by a forum post here. https://forum.mrmoneymustache.com/ask-a-mustachian/us-govt-employee-how-to-best-use-the-tsp-401k-plan/msg80482/#msg80482 

My plan is to roll her old 401ks into the TSP account.

[simonsez]

britri3650 - You are off by a factor of 10 for your TSP expense fees. The actual amount is 0.027 (or, $0.027 for every $1000 invested). Please refer to https://www.tsp.gov/investmentfunds/fundsoverview/comparisonMatrix.shtml.

-While 27 bps is certainly lower than the average mutual fund, you can do better with index mutual funds and commission free ETFs through Vanguard, Schwab & Fidelity (to name a few). However, a 27 bps target-date (sometimes called lifecycle) mutual fund is a pretty sweet deal and you never have to monitor your portfolio again.

No, the original was correct and Ryan Dagg was off by a factor 10. An expense ratio of .027% is 2.7 basis points or 27 cents for every $1000 invested. https://www.tsp.gov/investmentfunds/fundsoverview/expenseRatio.shtml

...option that Brian discussed above.

Who is Brian?

[ManyMountains]

simonsez - You are right! Thanks for the correction. I blended the two posts in my mind. Also, I should have typed Ryan, not Brian. My apologies. It was written at the end of the long day . . .

The main point remains true, though, that the TSP has the lowest expense fees that I know of.

[dan23]

If you plan on living in certain states (NY included, and there is good documentation for NY) you currently don't pay tax on TSP withdrawals (states basically can't tax TSP if they don't tax their own pensions).  In NYC this would equal about 10% tax you avoid by moving IRA to TSP provided the laws don't change.

[hoppy08520]

I hope it's not bad form to link to other sites, but I wrote some on this topic here on this post, in a thread with a lot of other good insights on this question:

http://www.bogleheads.org/forum/viewtopic.php?f=1&t=111620#p1622457

Also see this post for more links on this theme:

http://www.bogleheads.org/forum/viewtopic.php?f=1&t=111399#p1619660

Short answer:

There are very good reasons to transfer some of your assets into the TSP, in particular the G Fund and the low expense ratios, but you might want to consider keeping some money outside the TSP so you can do the following:

• Hold money in certain asset classes in your favorite flavors that are not in the TSP.
• If you retire early, and find yourself in a low income tax bracket, then you might want to keep some Traditional IRA money outside the TSP you can do Roth conversions while paying little or no income taxes on the conversion. You cannot currently do Roth conversions inside the TSP, although this could change in the future and the TSP is evaluating that change.
• But even if in the future you can do Roth conversions inside the TSP, the TSP withdrawal rules currently require you to withdraw money proportionally from Roth and Traditional (e.g. if you have 75% of your account in Traditional and 25% in Roth, then when you begin RMD, the RMD must come out 75% Traditional and 25% Roth), which might not be what you prefer. You'll have more varied withdrawal options outside the TSP, enabling you to withdraw strategically so as to minimize taxes. Again, these rules could change in the future.

Bottom line, as much as I like the TSP, there are some good reasons to keep some money outside.

Note that if you are in backdoor Roth IRA territory, and to make backdoor contributions advantageous, then your only option might be to NOT hold any money in traditional IRAs. In that case, you should transfer your traditional IRA into a 401(k) or the TSP so that you can make backdoor Roth IRA contributions.