When you leave federal service, your Thrift Savings Plan gives you three primary options: leave the money in TSP, roll it over to an IRA, or use it to purchase an annuity. Most federal employees default to whatever feels familiar — and that default costs them. Here's the clear-eyed comparison.
Your TSP Options at Separation
At retirement or separation from federal service, you can:
- Leave funds in TSP — continue investing in TSP's low-cost funds
- Roll over to a traditional IRA — more investment flexibility, same tax-deferred status
- Roll over to a Roth IRA — pay taxes now, tax-free growth forever (if eligible)
- Purchase a TSP Life Annuity — convert your balance to guaranteed monthly income via MetLife
- Take a lump-sum withdrawal — pay all taxes immediately, generally not recommended
- Installment payments — set up monthly/quarterly/annual distributions from TSP
Most retirees end up choosing between staying in TSP, rolling to an IRA, or annuitizing a portion. The right answer depends on your income needs, tax situation, and how much you value flexibility vs. certainty.
TSP vs. IRA: The Core Tradeoffs
Keeping Your Money in TSP
Advantages:
- Lowest expense ratios in existence — TSP funds average 0.042% annually, compared to 0.5–1.5% at most IRA providers
- Simple investment menu (5 core funds + L funds)
- Penalty-free withdrawals starting at age 55 if you separate in the year you turn 55 or later (age 50 for public safety)
- Strong creditor protection under federal law
- No required distribution complications from inherited accounts
Disadvantages:
- Limited investment options (no individual stocks, bonds, REITs, alternatives)
- No ability to add beneficiary-specific distribution strategies
- Traditional balances still subject to Required Minimum Distributions at age 73
- Roth TSP has RMD requirements (unlike Roth IRA)
Rolling Over to a Traditional IRA
Advantages:
- Unlimited investment options (stocks, ETFs, funds, CDs, REITs)
- Access to specialized advisors and managed portfolios
- Multiple beneficiary flexibility and stretch strategies
- Can consolidate multiple retirement accounts
- No RMDs for Roth IRA (if you roll Roth TSP to Roth IRA)
Disadvantages:
- Higher fees unless you choose low-cost index funds (Fidelity, Vanguard, Schwab)
- Lose the 55-rule (must wait to 59½ for penalty-free distributions, with exceptions)
- Creditor protection varies by state
- More decisions = more opportunities for behavioral mistakes
The Fee Reality Check
The TSP fee advantage is real and significant. A $400,000 TSP balance at the C Fund's 0.042% costs you $168 per year. The same $400,000 at a typical actively managed mutual fund charging 0.75% costs $3,000 per year. Over 20 years, at 7% growth, that fee difference compounds to over $120,000 in lost wealth.
If you roll to an IRA and choose low-cost index funds at Fidelity or Vanguard (expense ratios of 0.03–0.15%), you largely eliminate this disadvantage. The fee argument for staying in TSP weakens significantly if you're disciplined about fund selection.
TSP Annuity vs. Commercial Annuity
The TSP offers one life annuity option: a contract with MetLife. You call TSP, request an annuity quote, and MetLife provides a single monthly income amount based on your balance, age, and annuity type.
The problem: One quote is not a market.
The commercial annuity market has 50+ A-rated carriers offering Single Premium Immediate Annuities (SPIAs). Rates vary by 10–20% between carriers for identical inputs. A $300,000 balance could generate $1,650/month from one carrier and $1,900/month from another — a $250/month difference for life.
When TSP annuity makes sense:
- You want maximum simplicity
- Your balance is small enough that the payout difference is minimal
- You have no interest in shopping alternatives
When commercial annuity shopping makes more sense:
- You have $200,000+ to annuitize
- You want to compare multiple carriers
- You're combining the annuity with other strategies
See the full comparison: TSP vs. Commercial Annuity Analysis →
Tax Implications of TSP Rollovers
Traditional TSP → Traditional IRA: No taxes due at rollover. All future distributions taxed as ordinary income. Recommended to do a direct rollover (trustee-to-trustee) to avoid mandatory 20% withholding on indirect rollovers.
Roth TSP → Roth IRA: No taxes due. All future qualified distributions tax-free. Importantly, rolling to Roth IRA eliminates Roth TSP's Required Minimum Distribution requirement — this is often worth doing.
Traditional TSP → Roth IRA (Roth conversion): Full balance is taxable income in the year of conversion. Only makes sense in specific low-income years or when you have a plan to manage the tax hit.
Never take a direct distribution (check payable to you) if your plan is to roll over. TSP withholds 20% for taxes, and you have 60 days to deposit the full amount (including the withheld 20% from other funds) into an IRA to avoid the distribution being taxable.
When to Use the TSP Rollover Analyzer
The answer for your situation depends on:
- Your specific TSP balance and expected investment horizon
- Whether you need income now or in the future
- Your marginal tax bracket in retirement
- Whether you have a spouse or beneficiary considerations
- Your state's IRA creditor protections
Run the numbers on your actual situation with the TSP Rollover Analyzer → — it models stay-in-TSP vs. rollover vs. partial annuity under your specific inputs and shows the 20-year projected difference.
The Framework: Which Option Fits You?
| Situation | Likely Best Path |
|---|---|
| Want simplicity + lowest fees | Stay in TSP, use L Fund |
| Want investment flexibility | Roll to IRA (low-cost index funds) |
| Need guaranteed monthly income | Partial SPIA + remainder in IRA or TSP |
| Roth TSP balance | Roll to Roth IRA (eliminate RMD) |
| Separated before 59½, may need access | Stay in TSP (55-rule applies) |
| Large balance, comparing annuity options | Shop commercial SPIA before choosing MetLife |
Most federal retirees end up with a combination: some portion annuitized for guaranteed income to cover essential expenses, the rest in TSP or IRA for growth and flexibility.
Frequently Asked Questions
Should I roll over my TSP to an IRA when I retire? It depends on your goals. TSP has the lowest fees of any retirement account, which is a significant advantage. Rolling to an IRA makes sense if you need investment flexibility, want to consolidate accounts, or are rolling Roth TSP to eliminate RMDs. If you're disciplined about choosing low-cost index funds, the rollover tradeoff is manageable.
What is the TSP 55-rule for withdrawals? If you separate from federal service in the calendar year you turn 55 or later (age 50 for public safety employees), you can withdraw from TSP without the 10% early withdrawal penalty. This rule does NOT transfer to an IRA — once you roll over to an IRA, you must wait until 59½ for penalty-free withdrawals (with limited exceptions).
How does the TSP annuity compare to commercial annuities? The TSP annuity uses a single carrier (MetLife) and provides one quote. The commercial annuity market offers 50+ carriers with rates that can vary 10–20%. For balances over $200,000, comparing commercial SPIA quotes before accepting the TSP annuity can add meaningful lifetime income.
Can I roll over only part of my TSP? Yes. Partial rollovers are allowed. You can roll a portion to an IRA and leave the remainder in TSP, or annuitize a portion and keep the rest invested. A partial annuity strategy — enough to cover essential expenses, the rest for growth — is a common approach for federal retirees.
RetireStack provides retirement planning tools for federal employees. This article is for informational purposes only and does not constitute financial or tax advice. Consult a tax advisor or financial planner before making TSP rollover decisions.