Perusing through posts here I see it’s often recommended to put in just enough to TSP for matching, then max out an IRA and continue adding to TSP after. What is the reasoning for that?
To my understanding TSP has lower fees than IRAs. Is it just for fund diversity to access funds not available in TSP? Or is this just an advantage for people that have BRS vs High-3?
Why TSP and IRA at the same time?
byu/Lowskillbookreviews inMilitaryFinance
Posted by Lowskillbookreviews
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TSP does not have lower fees than IRAs. Plenty of index funds now beat it.
It’s for both legacy and BRS retirement systems. The more tax advantaged money you have, the better.
Anyone can contribute to the TSP, just High-3 won’t get a match.
TSP has low fees, but there are funds out there that beat it. It’s called “expense ratio” and can be easily looked up for any fund. That’s the percentage of your money you are charged every year for holding the fund.
Investing in an IRA (Roth is better for most people) will give you more flexibility because you can withdraw your contributions before you reach 59.5 penalty free. With the TSP there are more rules about when you can withdraw, especially in service, and the loan also has paperwork and restrictions.
The TSP is limited to $23,000 in contributions a year (from your own money, called elective deferral-so not counting the match) if you’re under 50. If you want to invest more than that in retirement accounts, IRAs have a separate limit of $6,000.
If you’re going to invest less than $23,000 and don’t plan on ever touching it, it’s fine to stick to the TSP for simplicity.
Roth IRA has more flexibility for withdrawals, and since you can open it with anyone, there’s a lot of flexibility
Flexibility of funds when withdrawing. IRAs have more control over the specific funds withdrawn, especially with Roth IRAs and contributions versus earnings if withdrawing before 59.5 years.
Greater variety of investments in IRA.
Larger amount in tax advantaged accounts than TSP alone.
Contribute to regular TSP as much as you can to lower your taxable income so you can keep contributing and hopefully maxing your Roth IRA contributions!
As far as retirement goes, it would be wise to be able to have a diversified portfolio. That diversity can be looked at it like having some money in a Roth, some in pre tax, maybe a pension, maybe some real estate etc. Start building that out by getting the TSP match, then maxing Roth, then what’s left over of your “15% recommended” yearly investment, go back to TSP. Over time, maybe you’ll accumulate a house and a rental etc.
Fund options, lower fees, and more options with funds.
You can withdraw direct Roth IRA contributions, without taxes or penalty, at any time. Roth TSP is not a Roth IRA.
TSP does not allow in-service distributions (limited exceptions like age based at 59 1/2 or hardship).
All Roth TSP distributions, once you can get them, are prorated between contributions and gains. If the gains are not qualified distributions (must be 59 1/2 AND at least five years since first Roth TSP contribution), then the gains portion is taxed and may be penalized as well.
Once separated, if gains are not qualified, then you can roll the Roth TSP into a Roth IRA, where you can then order the distributions (take only contributions and leave gains alone until qualified, etc.)
It’s not a major difference as there are extremely few instances where withdrawing from your retirement is advisable, cutting the fees in half however is worth it. The fees on the TSP are great when compared to a typical 401(k) but terrible compared to most IRA portfolios.