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Shift my TSP to an IRA?

December 02, 2013

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

IRA

Q: I have $250,000 in a federal TSP. I retire in May of 2014 at age 50, and plan to work for about five years after I retire making approximately $16,000 a year. I can't get money out of the TSP or an IRA without a tax penalty until age 59 1/2, but I plan to buy property outside the United States and want to make sure I have the money available when I find the right property -- for which I am willing to pay taxes and penalties, which I figure will leave me with about $175,000. Am I better off keeping it in a savings or money market account within the TSP, or shifting it to an IRA?

A: To address first the pros and cons of staying in your federal Thrift Savings Plan (TSP) or shifting to an IRA, that depends largely on how the savings and money market account options within the TSP compare to similar accounts on the open market. You could start an IRA at a wide variety of banks, which would give you more choice when looking for a savings or money market account. If you see a clear interest rate advantage outside the TSP, it might be worth shifting to an IRA.

There are a couple of concerns about your plan that bear raising. First, have you carefully examined your cash flow needs to determine if you can really live on $16,000 a year in semi-retirement, and on potentially less than that when you stop working? Real estate is not a very liquid investment, so unless you plan on investing in a thriving rental property that will provide you with immediate income (after subtracting expenses like taxes and upkeep), you should be concerned about tying up a large portion of your retirement assets in an illiquid asset.

The other concern is with taking the 10 percent tax penalty for early withdrawal. That would amount to throwing away $25,000. Is there really a property investment so compelling that you feel it could make up for that $25,000 between now and when you turn 59 1/2, at which point you could make the withdrawal without the penalty? Have you thought about trying to get a mortgage to buy the property, which would require less cash flow now and allow you to pay it off once you are able to withdraw from the TSP without penalty at age 59 1/2? You may even be able borrow some of the money you need from the TSP, rather than withdrawing it.

The above may seem like answering your question with more questions, but these it is important you ask yourself these things before moving ahead with the plan you describe.

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