Dave Ramsey, the ever popular radio show host and financial guru recently received a call from a Thrift Savings Plan participant who was curious on his thoughts regarding rolling the TSP to an IRA.
Every once in awhile Dave Ramsey will speak on the TSP and it’s always interesting to hear his thoughts.
I’m going to share what Dave Ramsey had to say, and then provide some of my thoughts on the matter.
Dave Ramsey Says:
“I’d roll it to an IRA outside [of the TSP] – you can do better with open market mutual funds than the Thrift options give you. I recommend you spread your IRA and all long term investing that you have control over the options across four types of mutual funds: growth, aggressive growth, growth and income, and international; that’s what my personal IRAs and 401(k)s are in.
“The Thrift is not a bad plan, it’s just that when you are in the open market you’ve got more options, and more options usually mean that you can get a better rate of return if you do your research.”
As I’ve said before, Dave Ramsey has some great ideas, but I never like seeing blanket statements on issues that can have such a large impact as this. However, due to the nature of Dave’s show, the advice he gives can’t always be very specific due to him not knowing very much about the callers.
Should everyone roll their TSP to an IRA?
Probably not, but there certainly are some advantages to an IRA vs. the TSP.
What are the advantages of an IRA?
I don’t plan to go over all of them in this article, but I will speak on a couple.
The first advantage is the one that Dave Ramsey brings up. Options.
Within the TSP you have 5 different funds available for investment along with a series of L-Funds that are a combination of the C, S, I, G, and F Funds. That’s it.
When you move beyond the TSP into IRA territory, your options suddenly go from 5 to thousands or more.
Dave Ramsey suggests splitting up your funds into growth, aggressive growth, growth and income, and international mutual funds. This is certainly a debatable suggestion, especially since some people want no risk at all. If you’re curious how to choose an investment strategy, I wrote an article on the 7 stesp here that will be of help.
The second advantage is more freedom for withdrawals in many cases.
With the TSP, you have two options for withdrawals once you’ve met the age and work requirements.
The options are one partial withdrawal or one full withdrawal.
You are only allowed ONE partial withdrawal and ONE full withdrawal over the lifetime of the account. Choosing a full withdrawal opens up different options for the withdrawal that can be found here.
With an IRA, most of the time you do not have these restrictions. The withdrawal restrictions will vary based on what you invest in and should be a consideration before deciding to rollover your TSP.
There are other advantages/differences that I plan to save for a future, more detailed article.
Now, why would Dave Ramsey give this advice?
Dave has taken thousands of questions over the years and has a very large knowledge base to pull from.
Although the TSP is part of a very unique and complex retirement program known as the Federal Employee Retirement System, Dave has most likely dealt with many federal employees over the years.
My suggestions would be the same I give for any decision. First, do your research. There’s simply too much information available online to only take one person’s opinion.
Second, reach out to experts. If you seek, you shall find.
Does anybody reading this have experience rolling their TSP to an IRA? What do you think of the differences?
– Cooper Mitchell