I am getting asked what you should do with your Thrift Savings Plan after exiting the military more and more frequently. While my default answer is “nothing, leave it alone and benefit from the compound interest, and knowing that your future is secure.” I understand there are several alternatives that could prove to be worth your time.
In this article I want to explain what some of these options are, and why it may (or may not) be beneficial for you to roll your TSP into these investment vessels.
Keep in mind that I am not a licensed financial advisor, just somebody who has done a lot of research. Also, these are just my opinions, be sure you do your own homework and come to your own conclusions as well.
On the other hand, keep in mind that I will not receive a commission of any type from you rolling your TSP over, but many people do. Always remember to ask yourself what filter somebody is using when selling you on the idea of rolling your TSP into a specific asset class. They just might be incentivized by a commission payout to recommend it to you.
Should You Roll Your TSP into a…
When you move funds out of your Thrift Savings Plan and into another asset class it is referred to as rolling your TSP over.
Should You Roll Your TSP Into A ROTH IRA?
It seems only natural that the first type of account you might consider rolling your TSP into is a ROTH IRA.
After all, the ROTH TSP, and ROTH IRA, are essentially the same asset class.
The main difference are the contribution limits are much smaller on the civilian ROTH IRA, than on the Thrift Savings Plan – like $6,000 instead of $19,500 – which is quite significant.
That being said, the reasons I’m not a fan of this idea are twofold:
- The Thrift Savings Plan has very low fees, and is a tough to beat program.
- The fees associated with rolling the TSP into a ROTH IRA will hurt your long-term return greatly over time.
Ultimately, the main reason people do this is because somebody is selling a new ROTH IRA product – and that person will receive a commission for doing so – or because you prefer to have all your money in one IRA account.
While I understand that having money consolidated feels good, paying fees to roll it over just for that reason is a poor financial decision.
Should You Roll Your TSP Into A SDIRA?
A self-directed IRA (SDIRA) is an individual retirement account that allows you to invest in all sorts of asset classes.
You can use an SDIRA to purchase art, precious metals, private lending, equipment, and many other things including real estate. More details on SDIRA investing can be found in this article I wrote!
Real estate is the most common reason that I see people wanting to open an SDIRA, and I’ll be honest, I can see the appeal here.
While all of your profits would need to be rolled back into the SDIRA, there is still an allure to investing in real estate from an SDIRA.
That being said, one of the reasons that I like the Thrift Savings Plan is that it is a diversification from my real estate investments. I don’t believe real estate is the only way to build wealth, and I think that it would be foolish to believe that.
Personally, if I ever do end up rolling my TSP into anything, it would most likely be a self-directed IRA. That being said, I don’t have any intention of rolling it over just yet for a couple of reasons.
- I don’t want to pay an unnecessary fee to roll my TSP into a SDIRA
- I like having some diversification in my portfolio
- You can take a loan (personally) from the Thrift Savings Plan, but not from an SDIRA. This could come in handy if you need the money for something briefly, but don’t want to pay taxes, fees, or other penalties for using your own money
The SDIRA is an alluring investment strategy, but you need to be a very savvy investor, and know how you plan to use the SDIRA before you even think of rolling your TSP into one.
Should You Roll Your TSP Into A Whole Life Insurance Policy (infinite banking concept)?
Whole Life Insurance has become a popular “investment strategy” over the last few years. I use quotation marks there because I would consider it more of a saving strategy than an investment strategy, but that isn’t how people are teaching about it.
If you want to understand more about my thoughts on whole life insurance, read this article, but suffice it to say that a lot of the people talking about how great these are, get paid a large commission to sell it to you.
Whole life insurance can be a great strategy, if you have the money to overfund it right off the bat, and have it setup properly.
There are many mediocre insurance reps out there, so make sure you do your homework, and ensure you are setting it up the right way.
Ultimately, this would probably be the second place I would roll my TSP, if it aligned with my long-term goals, and was setup properly. I don’t foresee that happening though, and I would caution you to really think about this before doing it.
Not to say that whole life insurance is a bad decision, but to say that the Thrift Savings Plan is a great investment strategy. Why give it up for a saving strategy?
I see many people talking about closing their TSP out to invest in real estate.
I love real estate as much as the next guy (if not more), but I don’t like the idea of paying exorbitant fees and taxes for closing down my TSP, just to buy real estate.
I think you would be much better off leaving the money alone, and saving another stack of cash to invest in real estate!
Thrift Savings Plan?
Maybe, just maybe, you should leave it in the Thrift Savings Plan to grow.
I view the Thrift Savings Plan as my super-duper emergency fund. When the pandemic hit in 2020 I was able to look at my TSP and know that I could cover 100% vacancy in all of my rentals for 18 months if I had to.
To me, the security of knowing that I can weather some really large storms because of my Thrift Savings Plan, is worth leaving it untouched unless I absolutely have to.
Also, that little nest egg will grow to over a million dollars by the time I’m 60 without any time or effort from me.
Hopefully, I won’t need the money at all when I reach retirement age, and I’ll be able to give it to my kids, or use it for whatever I want. However, it is better safe than sorry, and I plan to leave my TSP alone to let compound interest work its magic!
So, what should you do with your TSP after the military?
It depends on your long-term goals
It depends on your level of risk aversion
It depends on your investment strategy going forward
It depends on what asset class fits your personality
Make sure you understand the ramifications of any taxes, fees, and/or penalties you will have to pay when you utilize your TSP funds for anything other than the TSP.
Also, be sure that you’re cross-checking the advice you’re getting from unbiased sources, and people who aren’t getting paid based on what you do with the money.
Nobody will look after your interests better than you. Always remember that!
Personally, what I'm going to do with my TSP after the military is…leave it alone!