Thrift Savings Plan (TSP) converted into Enhanced Qualified Retirement Plan (eQRP) can be a starting point to become an investor!
Hello military investors! Trying to figure out how to get into the next deal but not sure how to resource it? Do you wish that there was a way that you could leverage your retirement savings and enjoy all the tax benefits? Well look no further, we’ve got a solution for you.
In this blog we will discuss how you can take your Thrift Savings Plan (TSP) and convert it into Enhanced Qualified Retirement Plan (eQRP) and get into your next deal. While taking your TSP and converting it to an eQRP might seem like a high-stakes game of alphabet soup, we’re here to demystify the process and keep your retirement plan on track. Just a disclaimer upfront, our team is made up of many levels of investors in which have become successful utilizing many different mechanisms but no one contributing to this blog or any others is able to guarantee success. Instead we can educate you one ways to leverage the education we provide to be well on your way to become an investor or continue your journey as an investor.
What is a Thrift Savings Plan?
Thrift Savings Plan (TSP) is the federal government’s version of a 401(k) for its employees. In general, it’s a traditional retirement account that allows tax-deferred contributions and it’s been the retirement plan of choice for many federal employees due to its simplicity and tax benefits. However, when the stock market has experienced a downturn like we’ve seen over the past couple years, diversification and a desire for more control over one’s retirement fund has driven some individuals to explore other asset classes, like precious metals, or even private businesses, and of course real estate.
What is an eQRP?
The Enhanced Qualified Retirement Plan (eQRP) is like the sophisticated and versatile counterpart to traditional retirement plans, providing a more expansive selection of investment opportunities. This self-directed retirement vehicle grants you the freedom to invest in a multitude of assets, including those typically not permitted in conventional retirement accounts, such as real estate or private equity. Picture this: you purchase real estate using pre-tax funds from your eQRP. Your retirement savings then have the potential to grow, in a tax-deferred manner, from the rental income, potential flips, or increased property value. It’s not just about storing away money for retirement—it’s about actively growing your wealth in creative ways. That’s the remarkable flexibility and power offered by eQRP!
Why convert a TSP to eQRP?
Converting a Thrift Savings Plan (TSP) to an Enhanced Qualified Retirement Plan (eQRP) can be an attractive proposition for a variety of reasons:
- Expanded Investment Options: eQRPs offer a wider range of investment options compared to TSPs. While TSPs limit investment choices primarily to index funds, eQRPs open up the possibility to invest in real estate, precious metals, private businesses, and other alternative assets.
- Control and Flexibility: With an eQRP, individuals have more control over their investment decisions. They can respond to market changes more swiftly, giving them the ability to potentially maximize their returns.
- Checkbook Control: eQRPs also provide “checkbook control,” meaning the account holder can make investment decisions and transactions more directly and quickly, without waiting for custodian approval.
- Higher Contribution Limits: eQRPs have higher annual contribution limits compared to TSPs. For those who are self-employed or own their own businesses, this can allow for a rapid acceleration of retirement savings.
Converting TSP to eQRP
Step 1: Research & Understand the Options
TSP vs eQRP Comparison: Picture the Thrift Savings Plan (TSP) and the Enhanced Qualified Retirement Plan (eQRP) as two distinct financial vehicles. The TSP is akin to the dependable sedan, providing a secure and steady path toward retirement, largely through traditional investment avenues. In contrast, the eQRP is more like a sporty, off-road vehicle. It’s versatile, offering the flexibility to venture into varied investment landscapes, including real estate and Roth IRAs, providing you with a broader range of strategies to grow your retirement funds.
Rules and Regulations of Making a Conversion: Just like any financial maneuver, converting your TSP to an eQRP comes with a set of rules set forth by the Internal Revenue Service (IRS). They have guidelines about the eligible circumstances under which you can convert your TSP, the amount you’re allowed to transfer, and the repercussions of conducting prohibited transactions. Before attempting any sophisticated moves with your retirement funds, always consult with a tax advisor to avoid any tax penalties or unforeseen hiccups.
Advantages and Disadvantages of Making a Conversion: Transitioning from a TSP to an eQRP can open a treasure chest of investment opportunities. It might be the perfect option if you’re aiming to capitalize on real estate or other unconventional investments within your retirement plan. However, remember the wise words of Uncle Ben (not the rice guy, the other one): “With great power comes great responsibility.” Diversifying your investments means more active management on your part, so ensure you’re ready for the commitment before venturing into these alternative territories.
Fees Associated with a Conversion process: While the prospects of an eQRP might seem like a financial utopia, don’t forget the toll charge at the gate. There are costs associated with this transition. Typically, you’ll encounter an initial set-up fee for your new eQRP, and potentially a transfer fee associated with moving your funds from the TSP from both the TSP account to process the transfer as well as the eQRP provider for accepting the transfer. Just remember, when it comes to finances, always read the fine print and be prepared for the costs associated with your decisions.
Step 2: Complete Necessary Paperwork & Submit Requests
Required Forms for Making a Conversion: While the specific forms required for a Thrift Savings Plan (TSP) to Enhanced Qualified Retirement Plan (eQRP) transfer can vary depending on individual circumstances and the chosen eQRP provider, here is a list of some commonly used forms:
- TSP-70 Form: This is the primary form for withdrawing funds from the TSP. It is typically used for transferring TSP funds to an eQRP. The TSP-70 form provides instructions on how to request a transfer and includes information about tax withholding and rollover options.
- eQRP Provider Forms: The specific eQRP provider you choose may have their own forms and paperwork required to establish the new eQRP account. These forms typically include account opening documents, beneficiary designation forms, and any additional paperwork necessary for compliance with their particular processes.
- Employer Documentation (if applicable): If you are converting your TSP to an eQRP as an employee, your employer may require specific documentation or forms related to their retirement plan offerings. This could include employer-sponsored plan enrollment forms or any necessary employer authorizations for the transfer.
- Communicate directly with your chosen eQRP provider to understand the specific forms and paperwork they require for the transfer process. They can provide you with the necessary documentation and guide you through the steps involved in moving your TSP funds to the eQRP.
- To Submit Request for Conversion of Funds from TSP to eQRP: Once you’ve accurately filled out the necessary forms, you’ll need to submit the TSP-70 form to the TSP office. This initiates the fund transfer from your TSP to the financial institution that will manage your eQRP. Please note that fund transfers aren’t instantaneous, and a measure of patience is required during this process.
Step 3: Monitor Your Investments & Make Adjustments as Needed
Tracking Your Investment Performance in an eQRP Account: Following the successful conversion from TSP to eQRP, it’s imperative to actively track the performance of your investments. This isn’t a one-time event but rather an ongoing process that ensures your investments are yielding the expected results.
Rebalancing Your Portfolio as Needed: Over time, it may be necessary to rebalance your investment portfolio. This involves adjusting your asset distribution to ensure that it aligns with your risk tolerance and investment objectives. The principle of diversification – spreading your investments across different asset classes – is vital to mitigate potential financial risks and ensure consistent returns.
At the end of the day, the journey from TSP to eQRP might initially seem as clear as a bowl of alphabet soup, it doesn’t have to be a daunting endeavor. The road to financial independence is full of twists and turns, but with the right knowledge, network, and proactive approach, you can successfully navigate this transition. So, here’s to your financial health and a retirement plan that’s working for you! Cheers to the eQRP journey!
ADPI Pro Tips
- Build a Support Network: While an eQRP offers greater control and flexibility, it also demands more responsibility from you, the investor. Surround yourself with a network of trusted professionals who can help navigate this new terrain. This might include a financial advisor, tax professional, and real estate experts. Investing in relationships is as important as investing in real estate!
- Continual Learning: The world of investments, especially alternative assets like real estate, is always evolving. Make a commitment to continual learning. Stay abreast of changes in tax laws, market trends, and best practices in real estate investing. This will help you make the most of your eQRP and ensure your investments are working as hard as possible for your retirement.
- Get the right structure set up: As an employee to an eQRP there is a contribution limit of $22,500. However, if you are organized as a business owner and claim yourself as an employee that contribution limit jumps up significantly up to $66,000 in 2023.
This blog was written in collaboration with our absolutely amazing DoD SkillBridge employee: Seneca
