Re: Losing out on Compound Interest by not rolling over TSP?
Mike,
You can move the TSP assets to your new employers 401(k) or to a Traditional IRA (Self Directed) or just leave it there. Money is money. All of them will give you the option of reinvesting dividends and gains. All of them are tax advantaged...
However, both Bullitt and James bring up valuable points:
- You will NOT beat the fee structure of TSP. I should never say never. Maybe if you put it in a very low fee Vanguard self directed IRA you might beat the TSP fee structure. Maybe. What will destroy your long term balance are taxes and fees. You have the tax issue beat (till someone raises the income tax after you retire), but fees will eat into your return. Even a 2% fee will have a dramatic affect on your balance. It will not look like much quarter over quarter or year over year, but over time it will be huge. Do whatever you can to keep the fees low.
- And, as James mentioned, you may have some very nice options in TSP in a year or two. Since there is no benefit to moving the money (excepting that you will have LOTS of investing options in a self directed IRA) why not wait.
Finally, to be absolutely clear on the compound interest thing. C/S/I assets do not have interest. They have growth and dividends. TSP flips the switch and reinvests the dividends which is probably what you mean by compounding. Maybe you mean growth on growth. If that is the case, it simply doesn't matter where the assets are - all that matters is how they are invested. If you are 100% in the TSP C Fund with $200K and you are 100% in an S&P500 ETF with $200K inside a new 401(k) or self directed IRA than they will compound and grow equally - given that the fees are the same and you check the box to reinvest gains and dividends with the IRA. I'm kinda anal about the 'interest' thang. Interest implies highly reliable, safe interest payments over a specified time - think mortgages and bank interest. Unless the rug is completely pulled out you WILL earn that 3.25% interest if you hold a mortgage bond. You WILL earn that 0.1% interest on the $2 million in your bank account. However, you are entitled and guaranteed exactly nothing in equities. In fact, you often lose money. It is not interest. It is compounding growth - which is what equites do over long periods of time.
On the other hand, the G Fund growth IS interest. Some slugs in Congress determine the interest rate and they WILL give it to you - guaranteed by their promise.
The F Fund return is largely interest, but if the interest rates change than the current value of previously purchased bonds change. So, it is a mix. If you held the bonds in your grubby little hands it WOULD be guaranteed interest.
Lookin' up at the 'G Fund'!!!
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