Retirement plan rollovers are an important part of a federal employee’s overall retirement savings. This is especially true for a federal employee or retiree who owns multiple retirement accounts, including the Thrift Savings Plan (TSP) (traditional TSP and Roth TSP), traditional IRAs, Roth IRAs, and qualified retirement accounts such as 401(k), 403(b) and 457 qualified retirement plans, SEP IRAs and SIMPLE IRAs that the employee had previously participated in.
Whether a federal employee or retiree is consolidating accounts or optimizing their tax strategy, an understanding of how rollovers work can help a federal employee or retiree make more informed decisions about their financial future.
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What is a rollover?
A rollover is the process of transferring funds from one retirement account to another retirement account. There are two types of rollovers: (1) Trustee-to-trustee (direct) rollover; and an (2) Indirect rollover. Using a direct rollover ensures that the retirement account owner’s funds are moved directly from one retirement account to another. A direct rollover also helps to avoid any tax penalties or missed deadlines and can also maintain tax-deferred growth without interruption. On the other hand, with an indirect rollover (also known as a “rollover”), the retirement account owner receives a check or distribution from the old retirement account which must be deposited into the new retirement account within 60 days in order to avoid income taxes and penalties.
Rollover rules for federal employees and retirees
Each type of retirement account has specific rules regarding rollovers, as explained:
• Traditional TSP to traditional IRA. This type of rollover typically gives a retired federal employee access to a wider range of investment options. However, associated with many IRAs are higher fees compared to traditional TSP fees. Another downside to rolling over the traditional TSP to a traditional IRA is that the retired federal employee will lose certain protections from creditors. This is because the TSP has specific protection from claims from creditors.
• Traditional TSP account to an employer-sponsored traditional qualified retirement plan. When a federal employee retires from or leaves federal service, the employee has the option of rolling over his or her traditional TSP to another employer-sponsored qualified traditional qualified retirement plan. These qualified retirement plans include 401(k), 403(b), and 457 retirement plans.
• Roth TSP account to an employer-sponsored Roth qualified retirement plan. When a federal employee retires from or leaves federal service, the employee has the option of rolling over hir or her Roth TSP account to another employer-sponsored Roth qualified retirement plan including a Roth 401(k), Roth 403(b) and Roth 457 retirement plan.
• Roth TSP account to a Roth IRA. A retired federal employee with a Roth TSP account has the option of rolling over all or a portion of his or her Roth TSP account to a Roth IRA. Just like with traditional IRAs, the Roth TSP participant has access to a wider range of investment choices by rolling the money to a Roth IRA. The Roth TSP participant should be aware of the higher fees associated with many Roth IRAs.
• Traditional IRA to another traditional IRA. This type of rollover ensures that the tax-deferred status is retained. Also, these rollovers do not count against an individual’s annual IRA contribution limit.
• Roth IRA to another Roth IRA. This type of rollover ensures that the tax-free status is retained. These rollovers do not count against an individual’s annual IRA contribution limit.
Note that the IRS limits indirect rollovers for IRAs (traditional and Roth) to one indirect rollover per 365-day period. This means one traditional IRA indirect rollover or one Roth IRA indirect rollover per 365-day period (not necessarily the calendar year, January 1 through December 31). The IRS does not limit the number of direct rollovers during a 365-day period.
Locating lost retirement accounts
Federal employees who changed jobs during their working carers could have inadvertently left behind qualified retirement accounts held in their name. The US Department of Labor Employee Benefits Security Administration (EBSA) maintains the Retirement Savings Lost and Found Database (https://lostandfound.dol.gov). This database can be searched for lost or forgotten retirement accounts. Federal employees and retirees can also check the database when attempting to locate employer-sponsored retirement accounts from employers that went out of business. The website also provides guidance on how to claim lost and now found retirement accounts. The EBSA database cannot be used to locate IRA accounts.
Some suggestions for a smooth rollover
The following are some suggestions to ensure that a federal employee’s or a retiree’s rollover is managed in the proper way:
• Choose a direct rollover. Sending funds directly from one retirement account to another retirement account minimizes the risk of missing the 60-day deadline.
• Do not miss the 60-day window for indirect rollovers. If an employee or retiree receives a distribution from his or her retirement account and intends to roll it over, the employee/retiree must deposit the full amount into another qualified account withing 60 days to avoid taxes and penalties.
• Review investment options. Before rolling over their TSP account (traditional and/or Roth – to an IRA or to another retirement account) a federal employee/retiree should review the investment options available. In particular, a federal employee/retiree should make sure that the new retirement account aligns with the employee’s or retiree’s retirement goals and risk tolerance.
• Promptly reinvest rollover proceeds. Avoid keeping rollover funds in a cash account such as a money market account. Cash accounts tend to have low investment returns.
• Keep detailed records. Employees and retirees should keep a record of all of their rollover transactions, including confirmation documents. Among the reasons for keeping detailed records is that it will guarantee that the retirement account owner can verify the transactions for income tax purposes.