TSP Versus IRA: Which is Better?

By:  Karen Schaeffer, Certified Financial Planner®

Published:  March 20, 2018


So, which is better, the Thrift Savings Plan (TSP) or an Individual Retirement Account (IRA)? Such a deceptively simple question can fill countless, “well, it depends” paragraphs without getting to an answer.  Rather than ramble on about endless variables, lets walk through some of the strengths of each, trying to keep in mind the correct answer might:

  • Be both instead of either/or;
  • Differ based on whether we’re in the accumulation phase or the spending phase of life; and
  • Be different for you than for someone else – its personal financial planning after all.

The Accumulation Phase of Life

During our working years when we’re trying to save enough for a comfortable retirement, the TSP has some strong advantages over the IRA and any other investment choice for that matter. It’s hard to beat the TSP with its:

  • Payroll deduction feature – doesn’t get more convenient than money automatically deducted from your paycheck and deposited for you into your own account.
  • Easy investment choices – to be a confident TSP investor, we need to understand five investment choices, spelled out thoroughly on www.tsp.gov, and then decide whether to create our own investment mix from those funds or use one of the professionally designed life cycle fund that moves slowly from stock to cash over time.
  • Higher contributions limits – the maximum contribution into TSP for 2018 is $18,500 compared to $5,500 for an IRA. For the 50-year-old and older crowd there is a “catch-up” election that allows an additional $6,000/year of contribution to TSP compared to only $1,000/year for IRAs.
  • Low Fees: Even do-it-yourselfers find it difficult to invest at lower costs than those of the TSP.

Ok, so these are excellent reasons to focus on TSP first when building wealth for retirement. But IRAs can still be a valuable part of the accumulation phase.  Wage earners and their spouses can make contributions to IRAs until the year they turn 70 ½ regardless of having made maximum contributions to TSP. And, a nice feature of the IRS’s laws regarding IRA contributions is the extended time window to make those contributions.  You can make contributions for a given tax year anytime before that years’ regular tax deadline in April.

The Spending Phase of Life

The transition from accumulating wealth to spending wealth requires another look. The TSP still gets high marks for having easy to understand investment choices and low fees, but the IRA starts to shine a little brighter because of its flexibility on withdrawals and investment choice.  With this flexibility we can:

  • Wait until we know how much we want to spend and then take a withdrawal. Currently the most practical TSP withdrawal election requires us to anticipate how much we want to spend in the coming year and doesn’t allow for mid-year changes.
  • Make changes to the amount withdrawn whenever we want, based on how our spending requirements or income tax situation develops throughout the year.
  • Take strategic withdrawals from our investments, for example all from the G Fund when the market is down, or equally from our stock funds when the market is up. TSP withdrawals are made prorated from each fund, regardless of how the market is performing at the time of the withdrawal.
  • Provide tax saving strategies for more than one generation. Non-spouse beneficiaries of IRAs have the option to stretch their withdrawals over their lifetime. If a spouse inherits a TSP account and leaves it with TSP, their eventual beneficiaries do not have this option.
  • Design a portfolio from a wider selection of investments. The TSP investment choices remain the same during the withdrawal phase. IRAs allow us to invest in whatever investment our IRA custodian offers, including less volatile investments than stock index funds and a wider variety of bonds than the F fund.

For now, the Individual Retirement Account, clearly offers more flexibility which becomes increasingly important in retirement. But before we decide what’s right for us we need to:

  • Stay tuned to learn how the TSP Board implements the TSP Modernization Act of 2017. The flexibility gap on withdrawals should narrow.
  • Learn how to keep IRA costs reasonable so the fees/commissions don’t negate the benefit of more choices.

Form our own opinions based on facts and the requirements of our personal financial plans.

Karen P. Schaeffer, CFP® is the Managing Member and Co-founder of Schaeffer Financial LLC, an SEC- registered investment advisory firm located in Rockville, Maryland.

This presentation is for informational and educational purposes only.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or products made reference to directly or indirectly in this presentation will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. The views and opinions expressed in this presentation are those of Karen P. Schaeffer.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Any hypotheticals or examples are for illustrative purposes only and not indicative of actual results.  Past performance may not be indicative of future results Moreover, you should not assume that any discussion or information contained in this presentation serves as the receipt of, or as a substitute for, personalized investment advice from Schaeffer Financial LLC.  To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing.  A copy of Schaeffer Financial LLC’s current disclosure brochure discussing its advisory services and fees is available for review upon request.