Where Should You Invest – TSP or IRA?

Investing for your retirement is one of the most important actions you can do for your financial health. Even if you receive a military pension, it will not likely be enough for you to retire in style. That is why it is important to invest for your retirement now. This should help federal government workers…
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Investing for your retirement is one of the most important actions you can do for your financial health. Even if you receive a military pension, it will not likely be enough for you to retire in style. That is why it is important to invest for your retirement now.

This should help federal government workers and military members who are eligible for the Thrift Savings Plan decide which investment vehicle is best for their situation – the TSP or an IRA?

Where Should You Invest – Thrift Savings Plan (TSP) or IRA?

Understanding IRA Investment Options

First, we should define the investment plans; then we’ll get into the question.

IRA: There are two main types of Individual Retirement Accounts: Traditional and Roth. (I have chosen not to focus on SEP IRAs, SIMPLE IRAs, or other forms of IRAs as they are not applicable to everyone).

  • Traditional IRA: The main benefit of a traditional IRA is that the money can be fully or partially deductible, depending on your situation. The money is invested before taxes are withdrawn, which can lower your adjusted gross income, and therefore give you a tax break now. The invested money will be taxed when withdrawn at retirement age, and there are stiff penalties for early withdrawal.
  • Roth IRA: Roth IRAs are non-deductible, which means you use post-tax money to fund your account. The distributions (including earnings and gains) withdrawn when you reach retirement age are tax-exempt because the money was taxed before you invested it. Many people recommend using a Roth IRA because of the tax-free withdrawals in retirement. As with the Traditional IRA, early withdrawals may incur stiff penalties.
  • For both IRAs: These are individual investments, meaning there are no company matches. The IRA contribution limits for 2020 are $6000 for those under age 50, and $6,500 if you are over age 50. There may be income limits based on your income, filing, and marital status. Always do your research before investing!

Understanding Thrift Savings Plan Investment Options

Thrift Savings Plan: The Thrift Savings Plan works on the same premise as a 401k plan and is similar to a Traditional IRA in that the money is contributed prior to taxes being withdrawn, and the money will be taxed when it is withdrawn at retirement age. The maximum annual TSP contribution limit is the same as a 401k and is set at $19,500 for 2020. Like the Traditional IRA, penalties may also be incurred for early withdrawal.

The TSP differs from IRAs though, because, in some circumstances, the money may be eligible for a government match. This is much more common for federal government employees, and less common for military members, with the exception of military members participating in the Blended Retirement System.

Note: Military members have a special situation that does not often apply to federal workers. Military members can make tax free TSP contributions with money earned while deployed to tax free zones and the funds can be tax free in retirement age. The earnings from the tax-exempt funds will be taxable, but the principle will not be taxable. Members also have the option of depositing any % of special or bonus pay, such as Hazardous Duty Pay, or Imminent Danger Pay. To determine if you have any tax-exempt funds in your TSP account, look under the balance and there will be a line that states: “Your tax-exempt balance.”

Which Investment Plan is Better?

Investing in an IRA: With IRAs, all responsibility lies completely with the individual. The individual must decide where to open an IRA, how much to invest, etc. There is a lot of flexibility as far as where to invest: funds, stocks, bonds, ETFs, etc. Investing can also be done via automatic deposit so it is easy to set up and manage. The downside is that all the responsibility lies with the individual to find investments that meet his/her needs which can be overwhelming for some people.

Where should you open an IRA? You can open an IRA at almost any financial institution. However, some may be better for your needs than others. Check out this for different IRA options.

Investing with the TSP: The TSP has a limited assortment of funds to choose from: 5 main funds that track major market indexes and 5 Lifecycle Funds which automatically allocate funds in different proportions based on your retirement date. As far as options, there are not many. But it is easy to manage, and the fees are very low. The downside is a lack of flexibility for those who desire it. Read more about the benefits of investing in the TSP, and the disadvantages of investing in the TSP.

Where Should You Invest – TSP or IRA?

Federal Employees (non-military): I would recommend first investing in the TSP to take advantage of the matching dollars from the government. This is free money! After you have put in enough money to get the match, I would recommend investing in a Roth IRA, because you will be able to withdraw this money tax-free in retirement. You are also diversifying your future tax liabilities by having a taxable and non-taxable retirement fund.

Military Members: Because there is not generally a match for the TSP, I would recommend first maxing out your Roth IRA. This gives you a tax-free retirement income. If you have maxed out your IRA and still have investment funds for your retirement, then I would recommend investing in the TSP. There are times when I would consider investing in the TSP first. These would be if you are one of the few people that are eligible for a TSP match (The Army has used this as a retention tool, but only in limited cases), and when you are deployed to a tax-free zone. Deployment money is non-taxable to begin with, and when you contribute it to your TSP, that amount will never be taxed! (the gains are taxed, however.)

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About Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Illinois Air National Guard.

Ryan started The Military Wallet in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about personal finance and investing at Cash Money Life.

Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free Personal Capital account here.

Featured In: Ryan's writing has been featured in the following publications: Forbes, Military.com, US News & World Report, Yahoo Finance, Reserve & National Guard Magazine (print and online editions), Military Influencer Magazine, Cash Money Life, The Military Guide, USAA, Go Banking Rates, and many other publications.

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  1. Andrew says


    So I just opened a Roth IRA with USAA. I’m not sure if that was a good idea, but it’s already a done deal. Maybe it would of been better to have kept contributing to my traditional & Roth TSP since I’ve been putting money in for 10 years now. Would you recommend maxing the Roth IRA first, then after that contribute to the roth tsp?

  2. bob jones says

    I am confused. If I am military and have maxed out my Roth IRA, why should I contribute to TSP instead of just contributing to a traditional IRA? It seems like TSP gives me a lot more limitation on investments and is run by the government, vs. a personal account that I can have linked to my other accounts all together. Am I missing some advantage of TSP?

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