When you separate from military service or federal employment, your TSP account does not disappear — you own it. But many separating servicemembers and federal employees face the same question: should I leave my money in the TSP, or roll it into an IRA?

There is no universally right answer. But understanding your options is essential before making a decision that affects your retirement for decades.

Option 1: Leave Your Money in the TSP

You are not required to move your TSP money when you separate. You can leave your balance in the TSP indefinitely, as long as your vested account balance is at least $200. TSP.gov confirms that separated participants retain full investment flexibility — you can still change your fund allocations, make interfund transfers, and take loans (though no new contributions can be made after separation).

The TSP's primary advantage over most IRAs is its extremely low expense ratio — typically around 0.04%–0.06% per year, which is among the lowest in the industry. Over 30 years, this cost difference compounds significantly compared to higher-expense IRA investments.

You must begin taking Required Minimum Distributions (RMDs) at the IRS-designated age (currently 73, per SECURE 2.0), even if your money is in the TSP.

Option 2: Roll to a Traditional IRA

A direct rollover from your TSP traditional balance to a traditional IRA is tax-free and penalty-free when done as a direct trustee-to-trustee transfer. The IRS has published clear guidance on qualified rollovers: as long as the check is made payable to the receiving institution (not to you personally), no withholding occurs and no taxes are triggered.

Reasons to roll to a traditional IRA:

  • More investment options than the TSP's five funds
  • Ability to consolidate retirement accounts
  • Potential access to backdoor Roth IRA strategies
  • No RMDs if you convert to Roth (though conversion is a taxable event)

Reason to be careful: if you receive a check made out to you (an indirect rollover), the TSP is required to withhold 20% for federal taxes. You then have 60 days to deposit the full pre-withholding amount into an IRA — but you would need to make up the 20% withholding out of pocket. If you fail to complete the rollover within 60 days, the withheld amount is treated as a taxable distribution.

Option 3: Roll to a Roth IRA

If you want to convert your traditional (pre-tax) TSP balance to a Roth IRA, you can — but the converted amount is treated as taxable income in the year of conversion. This means you will owe federal (and potentially state) income taxes on the amount converted. Roth conversions should be evaluated with a tax professional because the tax impact depends heavily on your current income and tax bracket.

Roth TSP balances (if you have them) can be rolled to a Roth IRA without any tax consequences, as the contributions were already taxed.

Option 4: Roll to a New Employer's Plan

If you are taking a federal civilian job or an employer that offers a 401(k) or 403(b), you may be able to roll your TSP balance into the new employer's plan, subject to that plan's rollover acceptance rules.

Step-by-Step: How to Initiate a TSP Rollover

  1. Open an IRA at your chosen financial institution (Fidelity, Vanguard, Schwab, etc.) before initiating the rollover.
  2. Request a rollover from the TSP by logging into My Account at tsp.gov and selecting "Withdrawal & Payment Options."
  3. Choose "Direct Rollover" and provide the receiving institution's account details. Never choose a method where the check comes to you personally unless you fully understand the 60-day rule and the 20% withholding requirement.
  4. The TSP will send a check directly to the receiving institution, made payable to "FBO [Your Name]."
  5. The receiving institution deposits the funds into your IRA, typically within 7–10 business days.

KEY TAKEAWAYS:

  • You can leave TSP money in the plan after separation — it remains invested and accessible
  • Direct rollovers (check to institution, not to you) are tax-free for traditional-to-traditional transfers
  • Indirect rollovers trigger 20% withholding and a 60-day deadline — avoid unless you fully understand the process
  • Converting traditional TSP to Roth IRA triggers ordinary income taxes on the converted amount
  • TSP expense ratios are extremely low (0.04%–0.06%) — a significant advantage to staying in the TSP