TSP to IRA Rollover: Should Federal Employees Roll Over?

Federal employees face a rollover decision that's more nuanced than most guides admit. The Thrift Savings Plan has three features you genuinely can't replicate in an IRA — but IRAs have real advantages too. Here's how to think through it, including a major 2026 rule change that eliminates one of the primary reasons people roll out.

1. What makes the TSP uniquely valuable — and hard to replicate

The G Fund: the only risk-free intermediate yield in retirement savings

The G Fund invests in special non-marketable US Treasury securities that earn the weighted average yield of all outstanding Treasuries with maturities of four years or more — with no principal risk.² In 2024–2025 that yield ran approximately 4.5–5.0%.

There is no equivalent in an IRA. The nearest alternatives — money market funds, short-term Treasury ETFs, stable-value funds — all involve either principal risk, lower yields, or both. The G Fund's combination of intermediate-to-long Treasury yields with zero credit or duration risk is unique to the TSP.

For a federal retiree holding 30–40% of their portfolio in "safe" assets, the G Fund alone can be worth keeping TSP money in place.

Expense ratios: genuinely among the lowest anywhere

TSP's 2024 administrative expense ratio was approximately 0.040% ($0.40 per $1,000).² Vanguard institutional funds approach this, but most IRA mutual funds and ETFs — even index funds — charge 0.03%–0.20% or more. The difference on a $600,000 TSP balance compounds meaningfully over a 20-year retirement.

The age-55 separation exception

Under IRC § 72(t)(2)(A)(v), if you separate from federal service in or after the year you turn 55 (age 50 for public safety employees), TSP distributions are exempt from the 10% early withdrawal penalty — even before you reach 59½. This rule applies to the TSP directly and does not transfer to a traditional IRA if you roll over.³

Concrete scenario: You're 57, retiring from the VA. You need a bridge income of $40,000/year for two years before you elect Social Security. If your money is in a traditional IRA, you'll owe a 10% penalty on those withdrawals ($4,000/year). If it stays in the TSP, no penalty. The cost of rolling out too early: $8,000 — before state penalties.

Federal creditor protection under FERSA

TSP accounts are protected by the Federal Employees' Retirement System Act (FERSA) from most creditor claims, including bankruptcy. Traditional IRA creditor protection varies by state law, with some states offering full protection and others capping it or limiting it to the amount "reasonably necessary for support." If you are in a high-liability profession or a state with weak IRA protection, this is worth a conversation with an attorney before rolling out.

No RMDs on Roth TSP during your lifetime

SECURE 2.0 (§ 325) eliminated required minimum distributions from Roth accounts in employer plans during the owner's lifetime, effective 2024. Roth TSP balances are now on the same footing as Roth IRAs for RMD purposes — no distribution required until you choose to take one.⁴

2. Reasons to roll to an IRA

Investment options beyond the TSP's five core funds

The TSP offers five index funds: G (government), F (bonds), C (large-cap stock), S (small-cap), I (international), plus lifecycle L funds. That's sufficient for most strategies, but there is no access to sector ETFs, small-cap value tilts, dividend funds, REITs, individual bonds, alternative assets, or actively managed strategies. If your investment philosophy requires assets outside those categories, an IRA gives you the full menu.

Beneficiary and estate flexibility

The TSP's beneficiary withdrawal rules for non-spouse beneficiaries are more restrictive than IRA inherited-account rules. Non-spouse TSP beneficiaries must withdraw the entire account within the 10-year period (per SECURE Act rules), but they have fewer options for stretch distributions compared to an inherited IRA at a major custodian. If estate planning flexibility matters to your heirs, rolling to an IRA is often cleaner.

Consolidation and simplicity

Many retirees have TSP balances plus private-sector 401(k)s, IRAs, and taxable accounts. Consolidating into a single IRA simplifies administration, beneficiary designations, tax reporting, and RMD calculations once you reach the applicable age.

Roth conversion timing control

Even with the new in-plan conversion option (see below), IRA-based Roth conversions still allow more precision: you can convert to the penny, spread conversions across custodians, and time them against your marginal bracket and IRMAA thresholds without TSP's $500 minimum and 26-conversion-per-year cap.

3. New in 2026: Roth in-plan conversions inside the TSP

Starting January 28, 2026, TSP participants can convert Traditional (pre-tax) TSP balances to Roth TSP balances without leaving the plan.¹ Key mechanics:

• Who qualifies: Active employees, separated participants, and spousal beneficiaries with a vested Traditional TSP balance.
• Minimum: $500 per conversion transaction.
• Frequency: Up to 26 conversions per year.
• Tax treatment: The converted amount is ordinary income in the year of conversion — same as a traditional Roth conversion. TSP cannot withhold to cover the tax; you pay from outside funds.
• Conversion request: Through "My Account" at tsp.gov, either as a dollar amount or percentage of eligible balance.

4. How to execute a TSP to IRA rollover if you decide to proceed

Always use a direct trustee-to-trustee transfer

Request a direct rollover online at tsp.gov (or using Form TSP-99 for separated participants). The TSP wires the funds directly to your IRA custodian. You never touch the money, so no withholding is triggered and there is no 60-day clock.

The 20% withholding trap

If you request a distribution payable to you (not directly to an IRA), IRC § 3405(c) requires the TSP to withhold 20% for federal income taxes. On a $500,000 balance, that's $100,000 withheld. You then have 60 days to deposit the full $500,000 — including the $100,000 you don't have yet — into an IRA to avoid a taxable distribution. Most people don't have an extra $100,000 sitting around. Use the direct transfer exclusively.

Traditional TSP → Traditional IRA

Straightforward. Pre-tax TSP money goes to a pre-tax traditional IRA. No income tax owed at rollover. You'll owe ordinary income tax when you take withdrawals, at the rate applicable in each future year.

Roth TSP → Roth IRA

Roth TSP contributions and qualified earnings roll to a Roth IRA tax-free. One timing note: the five-year holding period for your Roth IRA is measured from the year your first Roth IRA contribution was made — not from your Roth TSP start date. If your Roth IRA is already 5+ years old, distributions from rolled-over Roth TSP money are immediately qualified if you are 59½ or older. If your Roth IRA is new, the IRA's own 5-year clock governs.³

5. The TSP annuity option — and why most advisors don't recommend it

The TSP offers a life annuity option through MetLife (the TSP's sole annuity provider since 1988).² You can choose single-life or joint-life coverage, with or without a 10-year certain period, and with or without an inflation-protection rider. The annuity payout rate is set by a monthly TSP annuity interest rate index tied to Treasury securities.

The primary objections from fee-only planners:

• The annuity is irrevocable once purchased — you can't reverse it if circumstances change.
• The rate is often less competitive than a commercial SPIA from the open market, where you can shop multiple insurers.
• You lose the G Fund's yield-with-no-risk benefit the moment you annuitize.
• The installment payment option (fixed monthly distributions from the TSP) achieves similar income certainty without giving up control of principal.

The annuity makes sense for people who have exhausted all other income sources, have no spouse to provide for, and want guaranteed income they absolutely cannot outlive. For most federal retirees with a FERS annuity, Social Security, and TSP assets, the TSP annuity option adds more constraint than value.

Decision framework: who should stay in the TSP vs. who should roll out

Many federal retirees end up doing a partial rollover: keeping a portion in the TSP (for G Fund access and the age-55 exception while it applies) and rolling a portion to an IRA (for Roth conversion flexibility and investment breadth). The TSP permits partial distributions for separated participants.