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401k or Traditional IRA
Old 08-11-2017, 10:16 AM   #1
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401k or Traditional IRA

I have a friend that recently attended a retirement workshop for federal employees. His wife works for the FDA and they plan to retire in 2018. She has a TSP (401k). The presentation recommended rolling the TSP 401k into an IRA. His main concerns for converting are the tax deferred transfer to spouse upon death and the tax reduction strategies for children and grandchildren.
My understanding is that a surviving spouse can either leave the 401k in place upon the death of their spouse or roll it into an IRA without tax consequences similar to inheriting an IRA.
As far as children/grandchildren strategies, they also seem similar to an inherited IRA ( cash out and be taxed, 5-year distribution and taxed or stretch the distributions (72t rules) and be taxed. The last option may be dependent on the rules of the individual 401k plan.
DH has a TSP (retired post office). We both have IRAs as well, so I just want to make sure we are being prudent in leaving his TSP in place rather then transferring to an IRA.

Thoughts?
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Old 08-11-2017, 08:30 PM   #2
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So, the basic question is how do an IRA and a TSP differ. A surviving spouse can treat the IRA of the deceased spouse as if it were his or her own, which depending on their ages, can change when the RMDs must be taken. I'm not sure if the same can be done with a TSP/401k, but I suspect not.
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Old 08-12-2017, 09:22 AM   #3
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There have been some news items about TSP to IRA in the media lately. It seems these retirement workshops are often run by people who want to collect fees from Federal retirees and they cannot do so if their retirement money is in the TSP, so they almost always recommend rolling it out into an IRA.

The TSP has slightly different rules than 401(k)s. Some retirement plan workshops are legit.

https://www.nytimes.com/2017/08/04/y...ood-thing.html
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Old 08-13-2017, 07:10 PM   #4
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In my state(MD), distributions from qualified retirement plans are eligible for a limited state income tax exclusion for those who are 65 or older. IRAs do not qualify. So rolling a 401(k) into an IRA can potentially wipe out a state income tax advantage. I am fairly sure that TSP is considered a qualified plan.
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Old 08-21-2017, 11:04 AM   #5
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Thanks folks. I think we will leave it in the TSP for now.
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