Should I Go Ahead with a TSP Account?

[celtics33]

Hey Tom,

First of all, thank you so much for providing a forum for new federal employees and people with little experience when it comes to savings. It's a blessing for me to have your knowledge for me to tap into.

I'm faced with a dilemma. I am 23 years old and am starting my first real job with the federal government. I have a 2 year probation period for my internship (which will be non-competitively converted to an official position at the end of the trail period) but I am not quite sure if I would want to stay with my job after the end of the 2 years. I am seriously contemplating going back to graduate school and earning a master's degree in a program that would take about 2-3 years. I know there is the option of working and going to school part time but I am thinking about the possibility of leaving my work entirely though.

With that in mind, should I go ahead and open a TSP account? There is always the possibility of remaining with my current job after 2 years but would the risk of leaving be too great for me to start up a TSP account? I read something about being charged with taxes from the IRS for closing the account too early. Is it possible I leave the account inactive if I leave the job and then reactivate it when I come back? What if I choose to transfer to the private sector?

I'm not sure of the risks/rewards. Right now, I would say I am 50/50 on staying with my current job when the two years is up. What would you do? Is there something about the TSP that I don't know about?

Any guidance would be greatly appreciated.

Alexander

 

[JTH]

Do you already have an IRA if not have you considered one?

 

[celtics33]

What is the benefit of an IRA? I am really new at this stuff and my parents don't really know much about investing. Would I be able to hold on to my funds if I leave the civilian service if I allocate my retirement savings into the IRA?

 

[JTH]

What is the benefit of an IRA? I am really new at this stuff and my parents don't really know much about investing. Would I be able to hold on to my funds if I leave the civilian service if I allocate my retirement savings into the IRA?

Yes, your IRA stays with you no matter where you work.

In TSP they take the money from your paycheck, then tax what's left. Later on when you withdraw you will pay taxes on it.

In an IRA it's the opposite, you pay your taxes now and not later when you retire. If you have a bank, they might offer IRAs.

 

[KevinD]

Will you be getting the 5% match? If so I would start the TSP just to get the free money (5% match) and if you decide to not stay, then you could do a trustee to trustee roll over to an IRA.

 

[celtics33]

Are there any penalties for the rollover to the IRA? I would start getting the 5% matching contribution, I believe this December. And if I do return to federal employment, could I do a rollover of the funds from the IRA back to the TSP?

Would the reward be worth it if I do decide to stay with my employer after all, 2 years of investing into the TSP?

 

[KevinD]

If you start your TSP and leave service, you can leave the funds in the TSP. You don't have to roll them over. But if you do roll them over there are no taxes or penalties if you do a "trustee to trustee" transfer of the funds. Do a Google search on trustee to trustee.

I'm not sure but I think if you leave service and leave the money in the TSP and then come back you can just pick up where you left off and start contributing again.

 

[tsptalk]

Are there any penalties for the rollover to the IRA? I would start getting the 5% matching contribution, I believe this December. And if I do return to federal employment, could I do a rollover of the funds from the IRA back to the TSP?

Would the reward be worth it if I do decide to stay with my employer after all, 2 years of investing into the TSP?

Welcome celtics33 (or should I call you larry bird? ), and thanks everyone for helping Alexander.

There is no penalty for a rollover. From the TSP website...

You can have the TSP transfer all or part of any single payment or, in some cases, a series of monthly payments, to a traditional IRA or eligible employer plan. You may also be eligible to transfer to a Roth IRA; however, rules and restrictions apply. We strongly encourage you to consult a tax advisor regarding your eligibility for, and the tax consequences of, making a Roth transfer. If you submit a paper form to make your withdrawal request, payments to you can be deposited directly into your checking or savings account by means of electronic funds transfer (EFT).

And yes, you can roll the money into a TSP. From the TSP website...

The TSP can accept funds that were distributed from a traditional IRA or an eligible employer plan (or its designated financial institution). The money that you are transferring or rolling over must be considered an "eligible distribution" under the Internal Revenue Code. If you are considering a transfer, you should check with the administrator of the plan from which you wish to transfer the money (or your tax advisor) to ensure that the funds are eligible for transfer or rollover.

Note: The TSP can only accept transfers that consist of before-tax money. The money will be subject to income tax when it is eventually paid to you from your TSP account.

 

[Frixxxx]

Welcome celtics33 (or should I call you larry bird? ), and thanks everyone for helping Alexander.

Celtics,

Read the TSP booklet at tsp.gov. http://tsp.gov/forms/tspbk08.pdf

If you are in an internship, ask if they have a follow-on graduate offer. My internship has one and I get to earn my Master's for free, while doing my job and getting TSP matching. It's like a SERIOUS bonus.

So, read what you can, ask TONS of questions. And when you get SMART, which you will...Teach your parents a few things!!!!!

Good Luck, and Good Investing!

 

[peterson82]

I think you have to work 3 years in order to keep the 5% matching.

 

[KevinD]

I think you have to work 3 years in order to keep the 5% matching.

Something like that. It's called "being vested."

 

[Bearcat]

Like the previous posters stated, you usually are able to transfer funds between eligible retirement plans (such as TSP<-->401k) without incurring a penalty. I have personal experience transferring funds from a private employer's 401k plan into the TSP. You just have to make sure you do a trustee-to-trustee transfer, aka "direct rollover" to avoid paying taxes on the balance. For transferring funds into the TSP, a direct rollover meant checking the "Transfer" box on the TSP-60 form.

I did have to make a few phone calls, as the 401k plan administrator I was moving the funds out of didn't fill out paper transfer forms from other administrators, yet TSP wants them to fill out a portion of the TSP-60 form. Eventually got the 401k plan to send a letter with the check which I forwarded onto the TSP and made everyone happy. Otherwise, the process was pretty transparent and the funds showed up in the TSP shortly thereafter.

So my opinoin is, go ahead and open the TSP account, b/c the worst that can happen is that you're not vested and have to return some of the employer matching. However, anything you've put in is yours and so if anything else, you have a leg up with starting your tax-advantaged investing 2 years earlier (or however long you'd be with the gov't.) And if you select the right options if/when the time comes to rollover funds between plans, you should incur no tax penalty.

 

[celtics33]

You guys, thank you so much. You have no idea how much I appreciate your input and it's been invaluable to my decision. I'm going to go ahead with the TSP fund (10% of my paycheck) and then see where I end up in a couple years from now. If I'm still with the government, then great. My account will continue to build. If I move away, I'll definitely do the transfer to the IRA with the trustee-to-trustee transfer.

This gives me so much peace on my mind. I hope everybody else finds their way to this forum and get their questions answered. You rock!

 

[Frixxxx]

This gives me so much peace on my mind. I hope everybody else finds their way to this forum and get their questions answered. You rock!

Spread the word...tell your friends.....

We need everyone to actively participate in their retirement planning. Who knows....If we got everyone to start planning now...we'd retire earlier!