Losing out on Compound Interest by not rolling over TSP?

Managing your TSP and alternate investment options after retirement or separation from service.

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Jersey1984
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Losing out on Compound Interest by not rolling over TSP?

Post by Jersey1984 »

I am 37 years old and I will be retiring from military service in a few years and have been looking at making the decision to roll over my TSP or not after I retire. I have been reading as much as I can about the benefits of leaving it in VS rolling it over to an IRA or 401K, however I have not been able to find any information or conversations about the compound interest perspective.

I plan to have around $250,000 in my TSP when I retire. From what I understand, I can leave the money in the TSP, where it will continue to grow, however I cannot contribute. Let's say I don't roll it over and start to contribute to an IRA with my new employer, where my account will essentially be starting from scratch. Let's say the market returns an average of 7% going forward.

Wouldn't I want to rollover all of my TSP into that 401K so I can maximize my gains with my monthly contributions plus the compound interest that would be earned on a quarter million VS what I would gain with those same contributions using the new IRA/401K account?

Am I looking at it wrong?

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Scarfinger
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by Scarfinger »

Your TSP would still be getting compound interest. If your new employer has higher fees, it may make sense to leave your money in the TSP. If you leave in all in the "G" fund, you won't make much compound interest.

https://www.investor.gov/financial-tool ... calculator

250,000 @7% x30 years (full retirement age 67?) will be close to 2 million dollars thanks to compound interest.
I am just an average Joe. I have no clue to what the market will do.
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dstancil
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by dstancil »

Rolling your tsp out to an IRA would only really change your investment options. If you are happy with the TSP funds then you aren’t hurting anything by leaving it. Look into the specifics though because I believe you can roll funds out of the tsp and if you keep a minimum of 200$ invested with TSP it will keep your account open which you could in theory roll funds over to when you hit retirement age. Double check on tsp site though.

As far as compound interest is concerned I think there may be some confusion. To clarify 7% is 7% is 7%. It doesn’t matter if that 7% is compounding a quarter million or 7,000$. You can leave the tsp funds as they are and keep your same investments and bank on your 7% and also start an IRA and max it out and bank on your 7%. At 37 your max on an IRA is 6000.

250,000 x 7% = 17,500
6000 x 7% = 420

If you reverse engineer that it looks like this.

17,500 / 250,000 = .07 or 7%
420 / 6000 = .07 or 7%

In the end your return per dollar is 7% then that is 7 cents per dollar no matter where it is invested. Psychologically though it looks like a more impressive number on the larger balance. Hope this helps and that I read your question correctly.

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mjedlin66
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by mjedlin66 »

These guys have it right. If your money makes the same rate of return, then it doesn't matter how many accounts it is split between. As long as every account is earning the same rate of return (less fees), then you will earn the same overall "interest" as one large account with the same overall balance and save rate of return.
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Chulke
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by Chulke »

Something else to consider, If you plan on or happen to come back to federal service at a later date post retirement (like I did), you can roll/ combine that money with money in your new civil service TSP account and continue to contribute and grow it more!


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Aitrus
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by Aitrus »

Agreed with all that's been shared above.

Just one caveat to add: going strictly by the numbers, it's best to have your money out of the TSP before both you and your spouse have passed. Anything left in your TSP is directly paid to your kids / designated beneficiaries in one lump sum. They're not allowed to roll it over into an IRA or eligible employer plan. The payment is considered income by the IRS, and so is taxed accordingly (meaning, at the top rate because the amount is likely to be large). As a result, it's not a bad idea to look at rolling over your TSP funds into a low-cost investment account (Vanguard or Fidelity are good choices) that can then go to the kids via an Inherited IRA. It's still fairly punishing in terms of taxes, but the blow is lessened because the payments to the kids are made over 10 years instead of a single massive hit.

Inherited IRA: https://www.investopedia.com/terms/i/inherited_ira.asp

If your spouse survives you, then they get a TSP account of their own with your money in it, called a "Beneficiary Account". After the spouse dies, the money is paid directly to the kids and/or other designated beneficiaries, and subject to the taxes I mentioned above.

If you have a Roth TSP account, then all of that money goes to the kids tax-free.

It's not something to be worried about right now, but something for you to keep in mind for the (hopefully) distant future event of your passing. However, I don't relish the idea of the government taking 37% of my TSP earnings - not including state taxes - before giving the rest to the kids just because I happen to die. I'm guessing that you don't either.
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Midway
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by Midway »

It can be transferred to an "Inherited IRA" according to the TSP website. #3 in the pdf
https://www.tsp.gov/publications/tsp-583.pdf
Also footnote 2 on the first page says that anything over $200 is setup in a beneficiary participant account instead of being sent out in a death benefit payment. I'm looking for more information on this but the new website is short of documentation.
Added: another pamphlet that is more detailed but still lacking. Notice the difference between spousal and non-spousal inherited TSP. https://www.tsp.gov/publications/tsp-583.pdf

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evilanne
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by evilanne »

Thank you Midway! Aitrus scared me...I think the important point is to make sure that your non-spouse beneficiary(s) know not to take a lump sum distribution but how to set up an inherited IRA so that it can be transferred directly without any taxes withheld.

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evilanne
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by evilanne »

Note: Compound Interest only really applies to the G Fund or an interest bearing bank/money market account.
Compound Interest
https://www.investopedia.com/terms/c/co ... terest.asp
Compound Return (The other funds - rates of return can be gains or losses)
https://www.investopedia.com/terms/c/compoundreturn.asp

I think the responses to the OP is making the assumption that the $250K is being invested in the market and not being left in the G Fund.

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Aitrus
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Re: Losing out on Compound Interest by not rolling over TSP?

Post by Aitrus »

Thanks for clearing that up for me, Midway. My wording wasn't coming through as clearly as I'd wanted in that post.
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