TSP to IRA rollover rules: should federal employees roll over?

The mechanics of the rollover

A TSP-to-IRA rollover is straightforward. After separation from federal service, you complete the TSP withdrawal request specifying a direct rollover to your IRA custodian. TSP sends the funds directly — no check passes through your hands, no tax is withheld, and the rollover is non-taxable as long as pretax goes to a traditional IRA and Roth goes to a Roth IRA.

If you do a 60-day indirect rollover instead (the funds come to you and you then deposit them into the IRA), TSP withholds 20% for taxes and you have to come up with that 20% from other money to complete the rollover. Always do direct.

Reasons to roll out of TSP

More investment options. TSP has 5 core funds (G, F, C, S, I) plus L Funds and the limited mutual fund window. An IRA at Vanguard, Fidelity, or Schwab gives you thousands of mutual funds, ETFs, individual stocks, and bonds.

More withdrawal flexibility. TSP withdrawal options have improved significantly but still trail IRA flexibility. With an IRA you can take exactly what you want, when you want, with no schedule rules.

Roth conversion access. You cannot do Roth conversions inside TSP. Money has to be in a traditional IRA to convert. If your retirement plan calls for multi-year Roth conversions, you need an IRA.

Consolidation. If you have multiple retirement accounts from multiple employers, rolling everything into one IRA simplifies management, RMD calculation, and beneficiary updates.

Reasons to keep money in TSP

Lower fees. TSP expenses are extremely low. If you'll only ever hold index funds anyway, TSP at a few basis points beats most retail IRA fee structures.

The G Fund. Nothing else like it exists. Retirees often keep their bond allocation in TSP just to hold G Fund.

Federal creditor protection. TSP enjoys strong federal creditor protection under ERISA-equivalent rules. IRA creditor protection varies by state and is generally weaker.

Age-55 rule. If you separate from federal service in or after the year you turn 55 (or 50 for special category employees), you can withdraw from TSP without the 10% early-withdrawal penalty. This rule does NOT apply to IRAs.

The most common mistake

Rolling 100% out of TSP to a single IRA right at separation, without thinking about it. You can split — keep some in TSP, roll some to a traditional IRA, and even split some to a Roth IRA. There's no rule that says you have to do all-or-nothing.

A common smart structure: roll the bulk to an IRA for flexibility and Roth conversion runway, but keep $50,000-$200,000 in TSP for G Fund access and as an emergency fund with the age-55 rule in case you separated in your mid-50s.

Bottom line

TSP-to-IRA is tax-free if done as a direct rollover. The decision is not "yes or no" — it's "how much, where, and when." Most federal retirees benefit from rolling some out for flexibility while keeping a meaningful balance in TSP for G Fund access and creditor protection.