TSPs and IRAs are great, play-it-safe options for retirement planning. But as many seniors are finding out, the amount of money you think you need for retirement is less than what you actually require.

One way to retire on time or even earlier is to double your income with passive income. However, the only account that lets you generate passive income with real estate, cryptocurrency, lending, and more, is a self-directed IRA.

These little-known retirement accounts have been around for 40 years and helped guys like Peter Thiel transform a tiny little IRA (contributing only a few thousand a year) into a multi-million dollar savings account.

Whether you’ve recently switched jobs and have lost out on matching contributions to your TSP or want to build compound interest by putting your money to work, there is no better retirement plan than a self-directed IRA.

Rolling over your existing account to an SDIRA is easy, and you’ll enjoy the flexibility and diversity that a self-directed IRA provides.

Pros and Cons of a Self-Directed IRA for Veterans

A self-directed IRA (SDIRA) is an individual retirement account with the ability to invest your retirement savings in a wider range of assets.

Unlike TSPs and traditional IRAs, which limit investments to traditional stocks and bonds, SDIRAs allow you to invest in alternative assets like real estate, gold, Bitcoin, private lending, and more.

Thus, the flexibility of an SDIRA allows you to explore passive income options, such as rental property investing or wholesaling and using funds you’ve built up in your TSP over time.

For veterans with enough financial insight to grow their money through these investments, SDIRAs present an incredible opportunity to compound their nest egg and make up for lost matching contributions.

We should note that SDIRAs require a custodian and typically come with higher fees than a TSP. However, all IRA accounts allow for tax-free withdrawals after the age of 59½, and Roth IRAs allow for tax-free withdrawals of contributions–” not earnings”–at any time.

Most importantly, rolling over funds from a TSP to an SDIRA is easy and tax-free. Simply follow the steps below if you are interested.

Step 1: Evaluate Your Retirement Options

Veterans and federal employees have more retirement options than most ordinary people, so it’s important to research the right plan for you.

Some employers feature matching-contribution plans for retirement, which include:

• 401(k)s
• 457(b)s
• 403(b)s–specific to tax-exempt employers
• Profit-sharing plans
• Defined-benefit plans

For those who are self-employed or not offered a retirement plan from their employer, an SDIRA offers a safe and affordable option.

We should note that veterans are not limited to one retirement plan and can maximize contributions to a self-directed IRA ($6,500 annually for people under 50) while also enrolling in any of the above plans.

Additionally, you do not need to roll over all of your TSP funds and can maintain a TSP account with an SDIRA and even cash out some of your savings or invest in other financial vehicles.

With that said, no retirement plan listed above offers the flexibility to invest in alternative assets like an SDIRA.

Step 2: Evaluate Your Rollover Options

If you determine that an SDIRA is right for you, you generally have two rollover options available:

1. Direct Rollover: All funds are transferred directly to your new SDIRA via your custodian.
2. Indirect Rollover: You receive a lump sum from your TSP and are responsible for depositing it into your account within 60 days.

Most people choose a direct rollover because it is the easiest option, and an indirect rollover comes with a 20% tax if not deposited within 60 days. (Usually, 20% is the mandated FED withholding at the time of distribution to you personally out of a 401(k), but it may not represent your full taxable liability; .

That’s determined at the time you file your 1040. So, for example, if I did an indirect rollover out of a 401K and placed all the funds in another account in 60 days, that 20% was already withheld before I received the net amount, and it was sent to the FEDs.

So, in that situation, you would have to contribute to the new account to get the money closer to what that gross amount was before the 20% withholding was to reduce the tax liability in the same tax year the distribution occurred. If you miss the 60-day window, the total amount distributed becomes taxable income.)

However, if you are only transferring some of your funds from a TSP to your SDIRA, an indirect rollover might be right for you.

Learn more about the difference between a Transfer and a Rollover.

Step 3: Choose Between a Traditional or Roth IRA

Similar to your TSP, you can structure your self-directed retirement account to invest with pre-tax (traditional) or post-tax (Roth) dollars.

Both come with different tax implications, and Roths are advisable if you estimate yourself to climb into a higher tax bracket. On the other hand, traditional IRAs can be deducted from your taxes.

Step 4: Research a Self-Directed IRA Custodian Diligently

This step is arguably the most important because finding a trusted IRA custodian is key to your financial success and peace of mind.

Be wary of companies claiming to “waive fees,” as most companies charge hidden fees for transactions, rollovers, and other simple processes, which add up.

In addition, look for a custodian with good reviews and great customer service. Since you will communicate with your custodian more than you would a traditional depository, you should seek to build a positive relationship with your custodian.

Lastly, look for a custodian that specializes in the assets you seek to invest in. This will simplify procedures and make life easier around tax season.

Step 5: Open a Self-Directed IRA Account and Start Investing

Finally comes the fun part, which is actually investing with your account. Thanks to the diverse options you can hold in an SDIRA, you can start investing in assets that actually produce wealth, like real estate, cryptocurrency, promissory notes, tax liens, and more.

Familiarize yourself with prohibited transactions since there are strict rules that govern how you can invest your funds. For example, real estate purchased with an SDIRA can only be used for investing and not living in; otherwise, you’d be able to purchase a house with no tax implications.

The flexibility of an SDIRA makes it an appealing financial vehicle for retirement, especially for veterans who are missing out on matching contributions from their employers.

Takeaways

• SDIRAsprovide opportunities to generate passive income not available to other retirement accounts.
• These opportunities can help bridge the financial gap lost when you lose out on matching contributions from your TSP.
• The process to rollover a TSP to an SDIRA is simple and affordable.
• Perform your due diligence when choosing an IRA custodian because they can make your life easier or harder.
• You have many retirement options; take your time to find the right retirement plan for you and your family.