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If you can participate in a Thrift Savings Plan (TSP) or you can have an IRA, generally speaking is there an obvious preference?

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Ideally, one would contribute the maximum amount you're allowed to both the TSP and an IRA. For the 2015 tax year, that would be $18,000 for the TSP and $5,500 for the IRA (if you're 50 or older, then you can add an additional catch up amount of $6,000 to the TSP and $1,000 to the IRA).

If, like most people, you cannot contribute the maximum to both, then I would recommend the TSP over an IRA, until you've maximized your TSP. Unquestionably, you should contribute at least enough to the TSP to get the maximum agency match. Beyond that, there is a case to be made to contribute to an IRA for certain investors.

Benefits of TSP, compared to IRA:

  • Cheaper expenses
  • Convenient to have just one retirement account
  • ERISA plans like the TSP have better asset protection provisions than IRAs do
  • It's harder to mess up with the TSP; by contrast, IRAs have more flexibility and more opportunity to make unwise investing decisions.
  • Unlike an IRA, you can take a loan from the TSP. That being said, you should avoid doing so.

Benefits of IRA, compared to TSP:

  • More investment options. For example, an investor can hold more diverse international stock funds in an IRA, compared to the TSP which has only the I Fund which, while perfectly good, excludes much of the investable international stock market (emerging markets, small-caps, Canada).

So, for an investor who wants simplicity, I would recommend just doing the TSP (unless you can invest more, in which case an IRA is a smart choice). For a knowledgeable and motivated investor, it can make sense to also have an IRA to gain access to asset classes not in the TSP's basic index funds.

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The TSP is similar to a 401K.

If you were hired as a federal employee on or after 1 January 1987 you are under the FERS retirement program. That means that you are eligible for matching.

If they will match your deposits then the TSP, up to the matching limit, is a better choice. Skipping the TSP will mean that you you are leaving money on the table.

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    In addition, the cost the TSP is probably lower than most of the other options you could find, so your money does more in the TSP. The Roth TSP is going to be announced in the next couple of months too. – MrChrister May 10 '12 at 19:46
  • So basically as long as you are employed by fed gov you'd better put most (or all) of your retirement money in TSP? (and or Roth TSP when it is available) – Ali May 11 '12 at 13:02
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    The general rule, if you have an employer that matches, then put in at least as much as is needed to maximize the match. Some put $ for $ up to a specific amount. Others put half as much. See the TSP or 401K rules from your employer. Roth or not is a separate discussion. – mhoran_psprep May 11 '12 at 13:20

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