A 0.55 percent cost gap on $410,000 is $2,255 a year, which is why Edgepoint Wealth Management prices fund costs and Roth handling first when weighing the TSP or an IRA after retirement. This applies to anyone who has left uniformed service with a TSP balance. Separated members can keep the account as long as they like, and required minimum distributions (the forced yearly income draws) don't begin until age 73 (age 75 for people born in 1960 or later).
Most separating members face this choice within weeks of leaving. A contractor's benefits orientation hands over a 401(k) form, a brokerage mailer arrives, and a coworker says 'just roll it over.' It comes back the next tax season, when the first Form 1099-R or Form 8606 question lands on the kitchen table.
At Edgepoint Wealth Management, the household's income draws come first and the account comes second. We look at what the TSP, an IRA or a workplace plan would cost and tax before anyone signs a transfer form. Below, one hypothetical household walks through it, and each rule is explained when he runs into it.
By Sarah Chen, CFP — Senior Financial Planner | Reviewed by Marcus Thompson, CFASarah has guided families through retirement transitions for over fifteen years, specializing in tax-efficient withdrawal strategies.
On $410,000, a 0.55 percent cost gap is $2,255 a year. Price that before you sign any transfer form.
Senior Financial Planner, Edgepoint Wealth Management
A traditional IRA of $410,000 makes about 98 percent of a $7,500 backdoor Roth taxable. Leave pre-tax money in the TSP or a 401(k) and that problem goes away.
CPA and Tax Director, Edgepoint Wealth Management
Rollovers between the same tax type save nothing by themselves. If the tax bill doesn't drop, we ask what the move is for.
CFP® and Lead Advisor, Edgepoint Wealth Management
Curtis at age 44 with $410,000 in the TSP and no deadline to move it
Curtis (hypothetical) separates from the Air Force as an E-8 after 22 years. He has about $3,300 a month of High-3 pension and $410,000 of traditional TSP money, and he's starting a job with a defense contractor. The contractor's benefits orientation and a brokerage mailer will probably raise the 'roll it over' idea before he does. At home, his wife Joanne asks the more useful question: what does it cost to just leave it? The TSP lets separated members keep their accounts indefinitely, so Curtis can take a few months, gather fee and tax numbers, and decide with his first contractor pay stubs in hand.
What age unlocks the money in the TSP, an IRA or the contractor's 401(k)?
Penalty-free access in both the TSP and an IRA starts at age 59½. Curtis left the military at age 44, so until then a 10 percent early-distribution penalty applies to draws from either one. A contractor's 401(k) is the exception. If he leaves that employer during the calendar year he turns 55, or later, that plan's money comes out penalty-free.
The IRS allows exceptions to the penalty, such as substantially equal periodic payments, a fixed schedule of draws you commit to for years. They work in the TSP and an IRA alike, and they lock you in, so treat them as a last resort.
On cost, the TSP's index funds are low (check the TSP's current expense ratios). An IRA costs whatever you buy: index ETFs can match the TSP, while managed funds plus an advisory fee won't. A 401(k) depends on its menu.
Early access, and the one age that changes
Roth handling in each account
| Criterion | TSP | IRA | Contractor 401(k) |
|---|---|---|---|
| Cost | Low index funds | Depends what you buy | Depends on its menu |
| Penalty-free age | Age 59½ | Age 59½ | Age 55 if he leaves then |
| Who picks the draw source | Plan splits it pro rata | You pick the account | Check the plan |
| Roth lifetime RMDs | None | None in Roth IRA | Check the plan |
| RMD age for Curtis | Age 75 | Age 75 | Age 75 |
How much would moving $410,000 cost Curtis in fees and in tax?
Moving $410,000 from the TSP to an IRA of managed funds would cost Curtis about $2,255 more a year in fees, at assumed costs of 0.05 percent versus 0.60 percent. The rollover itself adds no tax when both accounts are traditional. Those are assumptions for illustration, so check the real numbers.
Start with the fees. At 0.05 percent, $410,000 costs $205 a year. At 0.60 percent it costs $2,460, a gap of $2,255. On a $600,000 balance the same 0.55 percent gap is $3,300 a year, or $66,000 over 20 years before any growth. Our calculator runs your own balance and cost.
A direct rollover between accounts of the same tax type neither saves nor shifts tax. So any tax case for moving has to come from something Curtis does after the move.
Now the tax side. Say household income passes the $252,000 top of the joint Roth IRA phase-out, so Curtis uses a $7,500 backdoor Roth, meaning he contributes to a traditional IRA and converts it to Roth. With no pre-tax IRA, the conversion is essentially tax-free. With $410,000 in a traditional IRA, $410,000 divided by $417,500 is about 98 percent, so roughly $7,365 is taxable every year, reported on Form 8606. TSP and 401(k) balances don't count in that math, which is a real reason to stay put.
Income draws matter too. Traditional draws from either account are ordinary income and count in modified adjusted gross income (MAGI). Draws at age 63 set his Medicare IRMAA tier at age 65, because Medicare looks back 2 years. Qualified Roth draws don't count. Moving the account doesn't protect the money from a market drop either: the same fund can lose value in the TSP or an IRA, sometimes for years. Before Edgepoint Wealth Management suggests moving any balance, it maps the income draws and the tax on them, and only then picks the account.
One paperwork slip is worth knowing. If Curtis checks 'pay to me' on the TSP request when he meant to ask for a direct rollover, the TSP withholds 20 percent: $82,000 on $410,000. He would then have 60 days to deposit the full $410,000 and would have to find the $82,000 from other cash. Any part he doesn't replace is taxed as income, plus a 10 percent penalty at age 44 ($8,200 on $82,000). The $82,000 withheld isn't returned right away. He recovers it on his tax return the following spring.
The fee gap on $410,000 and $600,000
The backdoor Roth and the pro-rata trap
If you move TSP money, ask for a direct rollover. 'Pay to me' triggers 20 percent withholding, $82,000 on $410,000, and a penalty on anything you can't replace within 60 days.
4 sets of questions for the TSP, a CPA and the contractor's plan
Curtis writes these down before calling anyone, and the who-does-what table below shows how the tasks divide. Nobody should sign a transfer form until the answers are in hand.
What to ask, and who answers
| Task | Who does it | When |
|---|---|---|
| Pull fund costs and Roth split | Curtis | Before first contractor paycheck |
| Confirm 401(k) accepts TSP money | 401(k) plan administrator | During benefits enrollment |
| Check income vs Roth phase-out | CPA | Before any backdoor Roth |
| Compare all-in IRA cost | Curtis and an advisor | Before signing any transfer form |
| Request direct rollover, separate Roth destination | Curtis and the TSP | Only if moving |
- TSP: what does each fund cost now, how do income draws split between the traditional and Roth balances, and does the plan accept money rolled in later?
- CPA: is household MAGI near the $242,000 to $252,000 joint Roth IRA phase-out, and how would a traditional IRA balance change the taxable share of a backdoor Roth on Form 8606?
- Contractor's 401(k) plan administrator: does the plan accept TSP rollovers, including the Roth portion, what do its funds cost, and how does its age 55 separation rule work?
- Any advisor: what is the all-in yearly cost of the IRA you propose, in dollars on $410,000?
Curtis keeps the TSP for now: his 5 steps, in order
First, Curtis pulls the fund costs and the traditional and Roth split from his TSP statement. Second, he asks the contractor's plan whether it takes TSP money. Third, he has the CPA check household income against the Roth phase-out. Fourth, he compares the all-in IRA cost with the TSP. Fifth, he decides to stay in the TSP while he's working and using the backdoor Roth. He'll revisit it when the contractor job ends, because low-income years before Social Security could make Roth conversions from an IRA worth it. The rule he's using: if household income is near or above $242,000, or an IRA would cost more than the TSP funds, stay put.
The TSP or IRA after retirement question to bring to Edgepoint Wealth Management
Bring one question: once the contractor paycheck stops, which account should pay each income draw, and would moving the TSP lower the tax on those draws or only move it to another year? Edgepoint Wealth Management can work through it with your TSP statement and last year's Form 8606, if you filed one. If you want someone to manage the money, an advisory fee applies wherever it sits.
A direct rollover between the same tax type neither saves tax nor shifts it, so the case for moving has to come from what you do afterward.
Common questions on TSP vs IRA after retirement
Can I take TSP money at age 50 without the 10 percent penalty if I left the military at age 44?
Generally no. Leaving service at age 44 means the IRS applies the 10 percent early-distribution penalty to TSP draws until age 59½. Exceptions exist, such as substantially equal periodic payments, but they lock you into a fixed schedule. The age 55 separation rule only helps if you leave a job in or after the year you turn 55.
What age do required minimum distributions start on a TSP for someone born in 1982?
Age 75. The IRS sets required minimum distributions at age 75 for anyone born in 1960 or later, so a person born in 1982 starts then. Roth balances in the TSP have no lifetime requirement. Traditional balances must start paying out, and those draws are taxed as ordinary income.
My new employer's 401(k) accepts rollovers. Should I move my TSP there instead of to an IRA?
Only if the plan's funds cost about what the TSP's do and it accepts the Roth portion separately. A 401(k) can make money penalty-free at age 55 if you leave that employer then, and it keeps your IRA empty for backdoor Roth purposes. Ask the plan administrator for fund costs and rollover rules first.
Primary sources
This material is general information only and does not constitute individual investment, tax, or legal advice. Investing involves risk, including the possible loss of principal. Before making any decision, talk to a financial professional, tax advisor, or attorney about your specific situation.