Top 3 TSP and IRA Rollover Mistakes You Need to Avoid

ladies and gentlemen federal employees welcome back to this episode with me your hosts my name is dallin and this is the haas federal advisors youtube channel or podcast welcome back if you are listening to this close to when it came out on a tuesday i hope your week is going incredibly well incredibly strong start and that you are a little better today than you were yesterday that is always the goal and today the topic the topic of today's video and podcast is about moving money around before retirement are in retirement from different types of retirement accounts and in the past we've talked about lots of different reasons why you may want to stay in the tsp may you may want to move your money to an ira do some roth convergence to a roth ira using the roth dsp there's all these different types of accounts maybe your spouse has a 403b a 401k there's lots of reasons to move money around especially once you retire okay now with that being said i have seen some big mistakes some big boo-boos okay that people make that really can cost them a lot of time frustration and money right and so my goal is to save you all that trouble by going through three of the most common mistakes that i see when people start moving money around the different types of accounts in retirement that really really could be very stressful and can cost you thousands and thousands of dollars that you would not have to spend if you just know the rules and how they work and so we're gonna dive into that today so one of the biggest things that i see all the time that can be really confusing for federal employees is the difference at least for the tsp between a rollover and a transfer okay when it comes to those two words if let's say you're browsing on the internet or even talking to let's say a vanguard a fidelity these other investment groups right if you give them a call and you use the words rollover or transfer they're gonna mean a little different depending on who you talk to but when you're talking to the tsp there is a vast vast difference right those two words rollover and transfer cannot be used or should not be used interchangeably with the tsp because they interpret those words very differently from one another so you want to make sure that you understand what what which what what each of those means okay number one a transfer if you tell the tsp i want to transfer my traditional tsp over to a traditional ira they're going to take that as meaning they're going to send a direct transfer from the tsp to your ira account so let's say your ira is at vanguard they're going to call it vanguard say hey we're moving this money over for you know this person let's send it right to you that's how they do it that is the transfer and 99 of the time that is what you want to do right because when it goes directly to your ira there's way fewer things that can get messed up in the process now a common mistake and this is a mistake that i see all the time is people say hey i want to do a rollover to my traditional ira and in most circumstances not counting the tsp that makes perfect sense and they know exactly what you're talking about but guess what when you tell the tsp i want to do a rollover what they interpret that is they're going to send you the check they're going to send it personally to you and they're also going to withhold 20 percent okay they say hey this is a rollover we're going to send it directly to you we're going to withhold 20 for taxes we're going to send that to the irs so as an example let's say you have a hundred dollars in your tsp simple example let's say you call up the tsp and say hey i want to do a rollover of this hundred dollars over to my traditional ira they're they're gonna say no problem we'll do that they're gonna send you personally to your house right a check for eighty dollars right or sometimes they can send it to different accounts but they're gonna send you the money personally for eighty dollars because they're gonna withhold twenty percent okay it is then your responsibility to take that eighty dollars and get it over to your traditional ira within sixty days okay that is a rollover in their mind now what happened to that 20 that is not in your account anymore well if you don't want to pay taxes or potentially a penalty on that 20 you actually have to fund that 20 with other money that you have and get that into the ira and so come when you fire your taxes you can get that money back that they withheld okay plus you won't have to pay penalties if you're under 59 and a half or the different rules that come into play there right so long story short is you want to do a transfer that if you're trying to get money from the tsp over to a traditional ira you want to do a direct transfer you don't want the money to touch your hands okay that is a long story short you want it to go directly so make sure as you're talking with the rep you're talking with or however you're doing it whatever forms you're filling out that is what you want because the moment you touch it it gets messy taxes and penalties are a lot more probable when it gets into your hands right and if you're talking about thousands of thousands of dollars it can be a lot more difficult let's say you're trying to move a hundred grand from the csp over to a traditional night or more right they're gonna withhold twenty thousand dollars and you may not have twenty thousand dollars laying around to fund the difference to get that into your ira so you don't pay any taxes or penalties right you want to do a transfer not a rollover okay so that's number one that's one big mistake and one this big misconception that i see all the time that you want to make sure you understand when talking to the tsp and even talking with others you want to make sure that you're using the same definitions for the lingo that we use for different things okay so mistake number two and this is a big one mistake number two is when people want to move money around in retirement sometimes they do it too soon okay one big difference between an ira and let's say your tsp or even let's say you have a spouse that has a 401k a 403b something like that one big advantage of these employer-sponsored plans that that they have above and beyond what an ira has is you can generally access them earlier right because for an ira you have to be 59 and a half to access it without a 10 penalty okay there are some there are some exceptions and things like that but as a general rule you have to be 59 and a half okay with your tsp if you retire in the year that you turn 55 or later you can access the tsp without that 10 penalty right so if let's say you're 56 you retire you say hey i want the flexibility that an ira has i want to move my tsp over to an ira well that's great but now instead of being able to access your funds right away in the tsp because you're you're retired after 55 you move that over to an ira well now the new deadline is 59 and a half right or you pay that 10 penalty you don't want that to happen and the same applies for a 401k you can access that money um if you retire at age 55 or later okay now if you retire 54 it doesn't apply the same rules don't apply you then have to wait until 59 and a half that's just how the rules are set up okay now there's one nuance if you're a special provisions employee that is air traffic controllers law enforcement firefighters you folks you know who you are you can access your tsp as early as 50. if you retire in the in the year you turn 50 or later then you can actually access your tsp then so for you it makes even a bigger difference because that's nine and a half year difference if you roll your money over to an ira right away so one option that you can do if you say hey i want the flexibility that an ira has but also i want to make sure i don't pay this penalty keep whatever money you're going to use before 59 and a half in the tsp and then maybe potentially roll out anything you're not going to use and so you kind of have the best of both worlds right so that's one thing to think about or you can just wait till 59 and a half right just know the rules so you don't get hit with that 10 penalty because i've seen it happen even with financial advisors right where especially i've had stories where federal employees come to me and say hey my advisor told me to roll my money out and then i'm starting to use it but what's this 10 penalty i'm like oh man rookie move right that's just a common mistake that i see so definitely understand when you can touch the money where what accounts it's in and the rules that come with it okay so mistake number three and i've talked about rmds required minimum distribution quite a bit and for many of you you're probably going to be younger than 72 because at age 72 that is when rmds come into play and if you're not familiar with those basically the government starts requiring you to take money out of your retirement accounts all retirement accounts basically accept a roth ira that's the only one that isn't subject to rmds right it's basically the government saying hey you've had your money in these accounts long enough tax deferred tax-free whatever it is it's time to start taking it out right and in response to that there's a couple things you can do first you can try to get as much money over to a roth ira before age 72 as possible but one thing that i've heard one misconception that i've heard is hey no problem i'll take money out of my tsp or my traditional ira i'll just then roll it right over to a uh roth ira i'll just convert it over yeah i'll pay taxes on it but i'll convert it over to a roth ira so it can grow tax free from that on and that is just not allowed okay basically the rules are whatever you're required to take out for an rmd of required minimum distribution at age 72 starting at 72 for the rest of your life um that money cannot be rolled into another retirement account they can't be rolled into a roth ira traditional it can't you can't do that right um so for example let's say you have to take 100 out um in the year you turn 72 because of rmb's it's probably gonna be a lot more than that but just as an example that hundred dollars you cannot put over to a roth ira you can't do that now if you want to take more out of your tsp or your traditional ira can you convert that over to something yeah you definitely could right if you took out 200 but you were only required to take out 100 the excess 100 you could do some whatever you want with that with the normal rules right so those are the top three misconceptions mistakes that i have seen as people start moving money around where there can be major advantages to getting in different types of accounts and retirements you definitely want to potentially move your money to the best places for you in retirement just make sure that when you start moving money around it makes sense for you you're not gonna be paying any penalties you're paying taxes when and how you wanna pay taxes and not surprise you you know a big dollar amount to uncle sam you don't want surprises you wanna know exactly what you're getting into when you start moving money around in retirement so i hope that was helpful if you have any comments put in the comments below that definitely helps if you have any topics that you say hey that this is a topic that i have a lot of questions on please cover this put in the comments below i'll do my best to answer your questions and thank you for being a valued member of this community right the videos and the podcasts i produced would be not it would not be valuable at all unless you guys were here engaging helping each other to get the most of your benefits your retirement your investments your taxes to get the most out of your life right that's what we're here to do are we talking about taxes and money yes we are but it all comes back to how are we going to use the rules and the things that we learn to make sure that you can have the life that you want that's what money is for to create a life not to create just financial security well that's important it's to create a life that you want money is useless if it's not used for your life right for something whether it's even helping your kids or giving a charity those are valuable that bring value to you and your life and that's what we're all about here so i hope that was helpful have an incredible rest your day and your week and we'll see you next time

Channel: Haws Federal Advisors

Views: 13,306

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Id: 3SMXp0ztVIQ

Length: 12min 25sec (745 seconds)

Published: Tue Sep 28 2021