Rollover your TSP or 401k to an IRA

What Should I do With My TSP or 401k?

Whether you’re winding down your working years or moving on to a better opportunity, there are additional decisions you need to make when leaving a job. One decision is extremely important for your future financial wellbeing. The decision of, what should I do with my TSP or 401(k)? In this blog post I’ll cover common distribution choices, and some advantages and disadvantages of each distribution.

What are my distribution choices?

You have several distribution choices for your retirement account (TSP, 401(k), etc.) when leaving a job. Most retirement plans allow you to choose one of the following.

  • Rollover your account balance to an Individual Retirement Account (IRA).
  • Leave your account balance in the plan.
  • Distribute your account balance directly to you.
  • Rollover your account balance to your new employer’s retirement plan.

Each choice has advantages and disadvantages. Your situation and circumstances will dictate the best option. Continue reading to learn more about these advantages and disadvantages.

Should I Rollover My TSP or 401k to an IRA?

A rollover IRA helps has many advantages compared to the other distribution choices discussed in this article. A major advantage is reducing the chance your retirement money will go missing. If you choose to work with a financial professional, they should contact you periodically and maintain an ongoing relationship. Another advantage, you’ll avoid paying a 10% early distribution penalty if you’re younger than 59 ½. Also, you’ll defer income tax until distribution in retirement. Lastly, you can work with a professional who can help select investments that are right for you.

Contact us now to learn more about a rollover of your TSP or 401(k).

Should I Leaving My TSP or 401k at My Old Job?

Leaving your retirement money with your former employer can be referred to as the do-nothing approach. Essentially, you avoid making a distribution choice and leave your retirement account balance in your former employer’s plan. This choice seems simple, happens often, and comes with disadvantages. Most often, this option is chosen because you’re unsure what to do.

The disadvantages to leaving your retirement account balance behind can hurt you over time. One way this happens is when the money in your account is lost. This may seem silly, but it happens frequently. When I was a federal employee, one of my duties was recovering missing retirement money. Over time, companies go out of business, merge, or lose track of account owners. For example, if you move and don’t update your former employer, they won’t know how to reach you. This can significantly delay the payment of your retirement benefits. Possibly when you need them most.

Should I Directly Distribute My TSP or 401k?

Directly distributing your TSP or 401(k) helps prevent your money from becoming lost. When you leave your job, simply ask for your account to be directly distributed. Once the paperwork is signed, the money can be deposited at your bank. You can then move the money into a checking, savings, or investment account.

Generally, there’s a major disadvantage to a direct distribution. You pay income tax on the entire distribution. This distribution may push you into a higher tax bracket depending on the account balance. Additionally, if you are younger than 59 ½ you face a 10% early withdrawal penalty. For example, let’s assume you’re in the 22% marginal tax bracket. With the additional penalty, 32% of your retirement money might go toward paying tax! Assume you had $100, $32 would be paid in tax, leaving you with $68. Imagine if the distribution was $100,000 or more.

Should I Rollover TSP or 401k to My New Employer 401k?

Transferring your TSP or 401(k) account to your new employer’s retirement plan might be a good choice. This will help you keep track of your retirement money so it won’t get lost. You also avoid paying penalties and premature tax associated with a direct distribution.

There are some disadvantages to this choice though. Not all employer retirement plans allow transfers from other employer plans. However, if your new employer’s retirement plan does allow inbound transfers, the investment options may not be the same. Few retirement plans offer the same investment menu. Additionally, the new retirement plan may not offer the investments best for your situation. Before making this choice, review the investment lineup.


If you’re thinking about retirement or switching jobs, have a plan for your retirement account. Making the wrong choice can impact your financial wellbeing. Not all distribution choices carry the same outcomes. Know what type of financial professional your working with, not all are the same. Make sure you understand what a financial professional is recommending and what the costs are. A good place to begin your search is by working with a fiduciary. Sentinel Financial Planning, LLC is a fiduciary, registered investment advisor. We help federal government employees, servicemembers, and business owners make wise financial decisions when planning for retirement.

About Mark

Mark Humphries, CFP® is the owner and financial advisor at Sentinel Financial Planning, a boutique, veteran-owned and operated investment management and financial planning firm. Mark focuses on helping federal government employees, military members, and business owners manage their investments and plan for retirement. As a former military service member and federal employee with over 10 years in the financial industry, he is familiar with the Federal Employee Retirement System (FERS) and the Thrift Savings Plan (TSP) and is uniquely qualified to serve his clientele.