Where Should You Invest – TSP or IRA?

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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…

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 The money is invested before taxes are withdrawn, which can lower your adjusted gross income, and therefore give you a tax break now. The invested money will be taxed when withdrawn at retirement age, and there are stiff penalties for early withdrawal.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 The distributions (including earnings and gains) withdrawn when you reach retirement age are tax-exempt because the money was taxed before you invested it.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 founder and editor of The Military Wallet. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL 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?

  3. T. says

    I am a retired military member who currently works for the federal government. I contribute to the TSP. My agency will match up to 3% of my pay each month. It is April 2012. Is it too late for me to start and contribute to an IRA to reduce my taxable income for 2011?

    • Ryan Guina says

      T., Yes, it is too late for the 2011 tax year. TSP contributions can only be made during the calendar year. However, you may still be able to make a Traditional IRA contribution to reduce your taxable income if you meet the income requirements to qualify for a Traditional IRA. If you don’t meet the tax deduction income requirements, then consider contributing to a Roth IRA. You won’t get a tax deduction, but you will still be able to contribute for the 2011 tax year. You can contribute to an IRA until the tax deadline, which is normally April 15th (this year it is April 17th).

  4. Paul May says

    I am retired Navy E6, now working in civil service (not the same job though!) and have been (almost) maxing out my TSP contributions each year since I had almost nothing to begin with when I retired, to the tune of $600 per check for $15,600 for the last year, just shy of the $16,500 allowed.

    I had started a traditional (mutual fund based) IRA a little while before retiring, but only $100 per month. There’s not much in there, but I feel better doing it!

    This year, my tax lady told me I have been wrong all this time, I CAN’T contribute to my TSP and the IRA both. This seems wrong to me. I’m really PO’ed that the gov’t is telling me how much I can legally save for my own retirement, but now they’re restricting me even further?? How do rich people do it then??

    I could understand if we can put in ANY amount into our retirement savings that we want, but only get the tax benefit up to a certain amount, but she is telling me that it’s illegal to do what I’ve been doing.

    Is this right??


  5. William McArthur says

    Every article I see touts how great it is to put tax-free money into the TSP while deployed. I don’t see much benefit to it. In the TSP or in a taxable mutual fund, you will never pay taxes on the principal and in both will pay capital gains tax when it’s withdrawn. The only benefit to the TSP would be avoiding earnings income tax along the way, which can be minimized by investing in the right mutual funds. Even so, that’s a small price to pay for the flexibility of not having it tied up till age 59.5. The articles I’ve read tout how great it is to be able to remove that tax-free money during retirement, but you could do that in either case. Am I off the mark?

    • Ryan Guina says

      William, you have great points, and for the right kind of investors, the added flexibility might be worth it. But many people don’t have the knowledge or discipline to invest outside of a structure retirement account and still maintain a low cost and low tax investment portfolio. The early withdrawal penalties also act as a deterrent to some investors and prevents them from making withdrawals that would otherwise hurt their chances at a fully funded retirement. In the end it comes down to personal preference and investing abilities.

  6. Robert Carroll says

    I am retired active duty and now in the Civil Service. I am contributing now to my TSP account. Taxes hit me hard this year and I wanted to contribute to a Traditional IRA to lower my taxable income. The IRA has a max contribution on $5K per year. Does my contributions into TSP count against this limit?

  7. Patrick Long says

    Question about TSP: I’m a Guardsman deployed through September. I will not be able to put in the full $49k that I’m allowed for the year prior to that time, but will be able to put in more than $16,500. When I go home, can I keep putting my drill pay in, or am I cut off for the year? What about GI Bill money?

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