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A sailor recently wrote in to ask why he can’t take his money out of his Thrift Savings Plan account and invest it in another retirement account.
“I am not asking to withdraw this money to spend it in Vegas; I am asking to place it into a Roth IRA, which is providing me with a bigger return on investment than the TSP account has,” said Navy Hospital Corpsman 1st Class Steven Piedrahita. “They continue to inform me that I don’t have the ability to do this until I separate from the Navy. Why are they holding my money hostage?”
It’s simply the law. Until you leave the military or government service, you can’t take money out of a TSP account before age 59˝ — except under certain hardship circumstances or as a loan, said Kim Weaver, a TSP spokeswoman. That limitation applies to any withdrawal, including rolling it into another retirement account.
Similar rules apply to 401(k) plans offered by private companies, based on Internal Revenue Service regulations. You generally can’t withdraw money unless you reach age 59 1/2, die, become disabled, or otherwise leave your employment; or experience a financial hardship. Those hardships, which are specified by the IRS, include among other things, expenses for medical care, costs directly related to the purchase of a principal residence for the employee, post-secondary education expenses and funeral expenses.
Piedrahita, 28, said he wouldn’t mind paying a penalty on the withdrawal — generally a 10 percent penalty plus taxes based on your tax bracket. His account has less than $10,000, he said.
“Over time, I will be able to recoup those funds,” he said. “I’m not seeing the return [in the TSP G Fund] that I’m seeing with the mutual funds I have.”
That may or may not be a sure thing. “It’s very difficult to predict what those returns will be,” said Gerri Walsh, president of the Financial Industry Regulatory Authority’s Investor Education Foundation. A fund’s past performance is no guarantee of its future performance, she said.
That said, withdrawing money from a TSP account with penalties and taxes also is not an option for service members.
During the market downturn, Piedrahita moved his TSP funds into the G Fund, which are Treasury securities. But while he has complained about the G Fund’s performance of 1 percent to 3 percent return annually, he said he is not interested in moving any money back into other funds, some of which have had returns of more than 20 percent over the last year.
“I don’t want to bash the TSP. I just don’t see the value in it,” Piedrahita said. “It’s not the vehicle I choose.”
Piedrahita said he now invests in his Roth IRA and no longer contributes to his TSP. “The main reason is I have no control. I don’t have the ability to move it out until I get out of the military, which I don’t think is right,” he said.
A few things service members should consider when making retirement investment choices, according to Walsh:
■ In a 401(k) or TSP plan, you can invest up to $17,500 a year (an additional $5,500 a year if you are age 50 and older). For IRAs, the maximum annual contribution is $5,500 ($6,500 if you are 50 or older).
■ TSP has low expenses, traditionally much lower than other options. A 1 percent difference in fees could add up to tens of thousands of dollars over time. FINRA has a tool that allows you to check and compare actual expenses of different funds. Even if a fund says there are no fees, there may be other expenses associated with it.
■ Review your asset allocation periodically to determine if you need to change your investment mix within your plan.
■ When you leave the military or another job and roll over the money in your retirement account, don’t take the money yourself. Avoid penalties and taxes by letting your retirement plan provider roll it over to the custodian of your new retirement account.