Assessing your options for what to do with your retirement fund when you change jobs.
There is no question that today’s federal workforce is more flexible and less likely to stay with the government for 30 years or more. According to Office of Personnel Management statistics, the average length of federal service is slightly over 13 years, with 25 percent of the workforce having fewer than 6 years of service and another 25 percent having 20 or more years. According to the Bureau of Labor Statistics, 410,000 federal employees separated from federal service in 2018.
Two common questions I get from federal employees are “What should I do with my Thrift Savings Plan when I leave government?” and, “What should I do with a retirement account from a former employer when I enter federal service?”
According to Ted Benna, known as the father of the 401(k), it’s very important to consider the impact on your retirement savings plan when you change jobs. The options for your 401(k) plan or your TSP account are to leave it with your old employer, roll it over to your new employer’s 401(k) or TSP, roll it over into an individual retirement account or simply cash it out. Let’s look at each potential choice.
Option 1: Leave Your Funds With Your Old Employer
If you’re leaving federal service, you can keep your money in the TSP if your account balance is $200 or more. You'll be able to:
- Enjoy the TSP's low administrative expenses. If your old plan has a higher fee, this move will allow you to keep more of your money.
- Move money into your account from an IRA or eligible employer plan.
- Change your investment mix with interfund transfers.
- Leave your money in the TSP until you reach age 70½.
- Avoid paying current federal income taxes on any taxable amounts (and possibly penalties).
If you’re leaving a private sector job to join a federal agency, you usually have the option of leaving your money with your old employer’s plan. Here’s why you might want to do that:
- If you left your last employer at age 55 or later, you can take penalty-free withdrawals from that plan before you’re 59 ½. Once you reach that age, you can still take penalty-free withdrawals from the TSP while you are employed.
- Certain investment options in your old plan may not be available in the TSP.
- Your previous employer’s plan might offer professional investment guidance at a competitive fee. The TSP does not offer advice, just general financial education.
Option 2: Roll Over Your Funds to Your New Employer’s Plan
If you’re leaving government for the private sector, it’s generally not recommended that you move your TSP funds to a new account. After all, you can keep your money in the TSP (as long as your balance is at least $200), and you can transfer money from traditional IRAs and retirement plans into the TSP even after you have separated from federal service.
You can continue to make interfund transfers after you have left government, but you won’t be able to make new contributions to the plan.
If you’re leaving the non-federal sector for a job with government, it frequently pays off to transfer the money from your old employer plan into the TSP. The benefits of this move include:
- Simplification by having fewer accounts to keep track of.
- Low administrative expenses.
- Easier money management via interfund transfers to invest in any of the TSP funds.
Option 3: Move Your Money to an IRA
At retirement, many feds consider moving their TSP into their own IRA. But before you make this move, beware of the potential for higher fees. According to this Forbes article, the average equity fund charges 1.3% in fees, and even low cost, do-it-yourself firms such as Vanguard and Fidelity charge .09% on some funds, which is still higher than the .03% per year administrative fees of the TSP.
One of the advantages of an IRA over the TSP is the fact that there are about 13,000 investment options available at most discount brokers compared to the five core funds of the TSP. According to a CNBC report, the average 401(k) plan now offers 25 investment choices. If you want more options, that may be the way to go.
Another consideration is that Roth IRAs don’t involve required minimum distributions. But with a Roth TSP account, you must begin taking withdrawals when you turn 70½. (Starting in September, you’ll be able to move only your Roth TSP money while leaving your traditional TSP balance untouched.)
Also, the option of taking qualified charitable distributions to avoid paying taxes on your retirement savings withdrawals is available through an IRA, but not through the TSP directly.
Option 4: Cash It Out
According to personal finance website The Balance, there are many more reasons to keep your money in a retirement savings plan rather than cashing out your investments when you leave a job.
Money in the TSP or a 401(k) plan is creditor-protected, and protected from bankruptcy. Your TSP account cannot be garnished to pay debts.
If you cash in your TSP or a 401(k) plan and you have not yet reached age 59 1/2, then the dollar amount you withdraw will be subject to ordinary income taxes and a 10% tax penalty. However, if you separate from your employment in the year you reach age 55 (or 50 if you’re a retired public safety officer), you can avoid the penalty.
There are pros and cons with each option, so it’s important to do your homework. By considering all the implications of each choice, you can wisely evaluate the impact that changing jobs will have on your retirement savings.