What to do with all of this wealth?
Part 2 of a 4-part Series

This is part two of a 4-part series on TSP withdrawal options.

Should You Leave Your Money in the TSP, or Transfer the Balance to an IRA? Some of you will not have an immediate need for the funds in your TSP account when you separate from federal service. Maybe you'll be going on to other employment or perhaps you'll have enough income from your retirement benefit and Social Security that you won't immediately need the income that you could produce from your TSP. As long as you are under age 70 1/2, you may postpone making a withdrawal election. After you are separated and over age 70 1/2, you will be required to withdraw and pay taxes on an amount that will meet the annual IRS minimum distribution requirement. If you are fortunate enough to not need the TSP funds right away, then where is the best place to leave them for safekeeping?

There are advantages to keeping your money right where it is, in the TSP. First of all, it's virtually a breeze. The TSP is relatively easy to manage, access and understand.

There is a limited number of options available to manage your TSP account as an investment. Having limited choices makes it easier to focus on making the right choice for your circumstances. Maintaining your TSP account after you separate is basically the same as it was while you were employed. The only things you won't be permitted to do after you separate from federal service are to add more funds or to borrow money from your TSP account. You will be permitted to make interfund transfers to rebalance your account among the TSP's investment options and to meet your financial planning goals.

Accessing your account is as easy as logging on to www.tsp.gov, calling the Thriftline (504-255-8777), or mailing in form TSP-50, Investment Allocation. The most efficient method is the Website and it's safe. On the secure section of the TSP Web site, you must identify yourself with your Social Security number as well as your TSP Personal Identification Number (PIN). With a few clicks, you can find out the balance in your account or transfer your funds among the available investment options.

Understanding the TSP is as easy as knowing the differences among the C, F, G, S, and I Funds. These choices are explained in the booklet entitled, Guide to TSP Investments (TSP Book 03) and it is available on the Website. When you are ready to make a withdrawal election, you will need to review the booklet, "Withdrawing Your TSP Account After Leaving Federal Service" that will explain the various options and how to make an election.

Another reason you may choose to maintain your investment in the TSP is cost. The TSP is able to maintain very low administrative expenses due to the sheer size of the accounts and the TSP's conservative management style. The development and operating costs are funded by forfeited agency automatic contributions (1%) of non-vested FERS employees who separate within three years of service, as well as from the earnings on participant and agency contributions. As a result, the administrative expenses reduce your earnings in the C, F, and G funds by no more than 70 cents per $1,000 per year. The new S and I funds have higher expenses since they currently hold smaller balances than the other three funds. You will also "spend" less time managing your TSP investment since you have limited investment and withdrawal choices.

There is a tax consideration to leaving your account in the TSP. If you separate during or after the year in which you reach age 55, you will not be subject to the IRS early withdrawal penalty when you withdraw your account in a single payment or a series of monthly payments. If you separate before the year you turn 55 or if you transfer your TSP account to an IRA, you will be subject to a 10% penalty tax on all amounts you receive before age 59 1/2.

OK . . . if the TSP is so wonderful, why would you consider moving your funds to an IRA? The answer: Control! It will be more expensive, more complicated and you will need to learn more about investment strategies. But an IRA will offer you unlimited choices for investment and will be more flexible when the time comes to begin withdrawals.

The only stock funds to choose from within the TSP are Index funds. Index funds are managed by looking back at the past performance of the companies to determine which companies are included in the fund. In contrast, mutual fund managers look ahead to determine which companies might perform well in the future. This active management style requires fund managers to study the company's balance sheet, future plans for growth and expansion, and many other factors to make intelligent choices. When choosing a mutual fund, it is a good idea to learn about the fund manager. Pay attention to their style and past successes they've had. If you are afraid of too much risk, find a mutual fund that is managed with more conservative strategies. On the other hand, if you are a maverick, there are plenty of fund managers who will be willing to offer a wild ride!

Another way to invest in an IRA is to hire a professional financial planner to help you determine the appropriate investments that will meet your goals. This will be even more expensive than choosing your own mutual funds, but may be a good choice if you are not willing to spend the time it takes to develop an investment strategy and to choose appropriate funds for your portfolio. A good way to find a financial planner is to ask for a referral from friends who use the services of a professional planner. Also read books that will explain the way financial planners are paid. Some good authors for beginning investors are Ric Edelman and Suze Orman. The bottom line for making this decision is to consider how much time you are willing to invest to maintain your investment and how much control do you really want.

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