Is an IRA for you?

I've received a number of inquiries from readers asking whether it's a good idea to roll over the money in a Thrift Savings Plan account into an Individual Retirement Account once you retire or leave federal service. The answer is, it depends.

Once you retire or leave federal service, your choices are: (1) leave your TSP account alone and let it grow until you're required by law to make withdrawals, which is at age 70 1/2; (2) buy a TSP annuity with your account balance and receive a guaranteed monthly payment for the rest of your life; (3) take all of your money out in a lump sum; (4) request a series of systematic withdrawals; (5) roll your money over into your new employer's retirement plan; or (6) roll over all or part of your TSP account into an IRA.

One reason to consider option 6 is if you need some money right away but are under the age of 55. By rolling over your TSP account into an IRA, you may be able to withdraw some penalty-free income that would not have been possible with your TSP account. For example, you can make a penalty-free IRA withdrawal if you use the money for your child's college tuition. You can also withdraw up to $10,000 from an IRA to buy a first home.

Another reason for rolling over your TSP account into an IRA is to increase the investment options available to you. For example, you can put your money in a mutual fund; you can buy individual stocks; you can buy individual bonds; you can put your money in a Certificate of Deposit, etc. With the TSP, you're limited to the five available funds. Also, once you roll over money from your TSP account into an IRA, you can then convert your IRA to a Roth IRA if your gross income is less than $100,000 in the year of conversion.

If you decide to roll over your TSP account into an IRA, make sure the Thrift Savings Board handles the transfer. If you have the money sent to you directly and then invest it in an IRA, the Thrift Savings Board is required to withhold 20 percent for federal income tax purposes even though you immediately invest the money. To avoid an early withdrawal penalty, you've got to come up with the 20 percent withheld and invest that, plus what you received from the Thrift Savings Board, into an IRA. If you don't, you'll owe income tax on your TSP withdrawal and a 10 percent penalty tax if you're under age 59 1/2. You eventually will get back the 20 percent that was withheld when you file your next income tax return, but what a hassle.

Another trap to watch out for: If you are over age 55 but under age 59 1/2, you can make withdrawals from your TSP account as indicated above. But if you roll over your TSP account into an IRA, you can't touch the money until age 59 1/2 without incurring a 10 percent penalty tax. There are some exceptions, but for most people, it's either leave the money in the IRA until age 59 1/2 or pay the 10 percent penalty on top of ordinary income tax.

Zall is a retired federal employee who since 1987 has written the Bureaucratus column for Federal Computer Week. He can be reached at miltzall@starpower.net.