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

The Thrift Savings Plan (TSP) and IRAs offer great retirement savings benefits. Which plan is better & where should you to invest your money?
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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 article should help federal government workers, and military members eligible for the Thrift Savings Plan decide which investment vehicle is best for their situation – the TSP or an IRA.

Table of Contents
  1. IRA vs. TSP – Finding the Best Retirement Plan for You
    1. Roth & Traditional Retirement Accounts
  2. What You Need to Know About IRAs
    1. IRA Eligibility Details and Contribution Limits:
    2. Understanding IRA Investment Options
  3. What You Need to Know About the TSP and Other Employer-Sponsored Retirement Plans
    1. Matching Contributions
    2. Understanding Thrift Savings Plan Investment Options
  4. Pros and Cons of TSP and IRAs
    1. Thrift Savings Plan & 401k Plans
    2. IRA
  5. Which Investment Plan is Better?
    1. Investing in an IRA:
    2. Investing with the TSP:
  6. Where Should You Invest – TSP or IRA?
    1. Federal Employees (non-military):
    2. Military Members:
  7. Final Thoughts

IRA vs. TSP – Finding the Best Retirement Plan for You

The most common retirement accounts are Individual Retirement Arrangements (IRAs) and employer-sponsored retirement plans such as the Thrift Savings Plan (TSP), 401(k), 403b, 457, and 401a Plans. We will use the term TSP for continuity, but many concepts will apply across all employer-sponsored plans. Please see the IRS page for more info on related retirement plans.

Let’s examine several retirement plan features that are common across all retirement plans, then we can compare the IRA and TSP.

Roth & Traditional Retirement Accounts

Roth and Traditional retirement accounts differ in how and when your contributions and earnings are taxed.

Traditional Retirement Accounts: Money is contributed to traditional retirement accounts before it has been taxed. This can lower your adjusted gross income and 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 The invested money will be taxed when withdrawn at retirement age, and there are stiff penalties for early withdrawal.

There are no income limits to participating in a traditional employer-sponsored retirement account. However, contributions to a traditional IRA may can be fully or partially deductible, depending on your income.

Roth Retirement Accounts: Roth IRAs are non-deductible, which means you fund your account with money that has already been taxed. 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 recommend using a Roth account because of the tax-free withdrawals in retirement.

There are no income limits to participating in a Roth employer-sponsored retirement account. However, contributions to a Roth IRA are subject to income limits. Depending on your income, you may not be eligible to contribute to a Roth IRA.

What You Need to Know About IRAs

There are two main types of Individual Retirement Accounts: Traditional and Roth.

IRA Eligibility Details and Contribution Limits:

IRAs are individual investments, meaning there are no employer-sponsored matching contributions. Certain tax or eligibility restrictions for Traditional or Roth IRAs may be based on your income, filing, and marital status. The IRA contribution limits can also vary based on age and other factors.

For the tax year 2024, the maximum contribution across all your IRA accounts is $7,000. The only exception is if you’re 50 or older, in which case you can contribute up to $8,000 total in what is known as a “catch-up contribution.”

Also, remember that the maximum contribution for both the IRA and Roth IRA is for both accounts. You can open both accounts and contribute to both, but your total contribution is limited to $7,000 (or $8,000 if you’re over 50) for 2024.

Understanding IRA Investment Options

IRAs are one of the most flexible investment vehicles, allowing investors to use an IRA for almost any investment, including stocks, bonds, real estate, and more.

This flexibility makes IRAs more attractive to some investors who want a more hands-on approach to their investments. However, there is something to be gained with the simplicity of having fewer investment choices.

What You Need to Know About the TSP and Other Employer-Sponsored Retirement Plans

Employer-sponsored retirement plans make it easy for employees to automatically invest a portion of their paycheck directly into a tax-advantaged retirement plan through payroll deductions.

The Thrift Savings Plan works on the same premise as a 401k plan. The maximum annual TSP contribution limit is the same as a 401k and is set at $23,000 for 2024. Like the Traditional IRA, penalties may also be incurred for early withdrawal.

Matching Contributions

A distinct benefit of the TSP and some 401(k) plans is the possibility of employer-matching contributions, which is essentially free money for employees.

For example, federal employees and some military members are eligible for matching TSP contributions. This is much more common for federal government employees and less common for military members, except for military members participating in the Blended Retirement System.

Understanding Thrift Savings Plan Investment Options

The TSP has a limited number of investment options, featuring index funds focused on general investment categories:

  • G Fund – Short-term U.S. Treasuries
  • F Fund – U.S. Corporate Bonds
  • C Fund – Large U.S. Companies (S&P 500)
  • S Fund – Small U.S. Companies (Wilshire 4500 Index)
  • I Fund – International Fund
  • L Fund – Lifecycle Funds (Target Date Funds)

While this appears to be a limited number of funds, it provides investors the opportunity for a fully-diversified investment portfolio. The L Fund comprises a balanced mixture of the G, F, C, S, and I Funds based on your target retirement date.

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 at retirement age.

The earnings from the tax-exempt funds will be taxable, but the principle will not be taxable. Members can also deposit 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.”

Pros and Cons of TSP and IRAs

Thrift Savings Plan & 401k Plans

The biggest benefit of the TSP is the possibility of having your company match a portion of your contributions. You shouldn’t pass up free money, especially when it will compound over time.

On the downside, the TSP and some company 401(k) plans may have a limited selection of funds to choose from or may have higher investment fees than you would have if you invested on your own. Your investment options will be limited to whichever funds are in the employer-sponsored plan, which can be detrimental if your plan consists primarily of funds with high expenses (the TSP has a solid selection of low-cost funds, so this generally only applies to other employer-sponsored plans).

If your employer-sponsored retirement plan has limited options to choose from, you should still contribute enough to get your employer-matching contribution. After that, you can look for other, less-expensive ways to invest your retirement dollars.

If you’re worried your work-sponsored retirement plan charges higher fees than average, it can also pay off to open a free account with Personal Capital. With Personal Capital’s fee analyzer, you can determine how your retirement account fees compare to the benchmark.


With IRAs, all investment responsibility lies with the individual. He or she must decide where to invest, how much to invest, and which firm to use. This can be overwhelming for some people, but paying someone to manage your funds is always possible.

The benefit of controlling your investment is the flexibility of deciding where to invest: funds, stocks, bonds, ETFs, etc. are limitless possibilities. The other benefits of IRAs include controlling your tax diversification options by investing in a Roth IRA for tax-free withdrawals or investing in a Traditional IRA to lower your AGI and current tax obligations.

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 regarding where to invest: funds, stocks, bonds, ETFs, etc.

Investing can also be done via automatic deposit, making it 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.

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?

Only one of these retirement plans involves the possibility of free money – the TSP. If you are eligible for employer-matching contributions, it is probably in your best interest to invest in the TSP to receive the maximum matching contribution. It is hard to pass up free money!

After you have put in enough money to get the match, I would consider investing in a Roth IRA if you are eligible. Roth IRAs are beneficial because you can withdraw this money tax-free in retirement. This diversifies your future tax liabilities by having taxable and non-taxable retirement funds.

If you have enough money to invest for the full company match and max your Roth IRA, you should consider investing more in your TSP. This will ensure you maximize your retirement contributions and diversify your tax obligations both now and in retirement.

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 contributed enough money to get the match, I recommend investing in a Roth IRA because you can withdraw this money tax-free in retirement. You diversify your future tax liabilities by having a taxable and non-taxable retirement fund.

Military Members:

If you are in the Blended Retirement System, then follow the recommendation for federal employees and contribute enough to the TSP to get the matching contributions. Then max 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, I recommend investing in the TSP.

If you are in the legacy retirement plan and do not have matching TSP contributions, you may consider mixing out your Roth IRA first, then investing in the TSP if you have available funds.

Sometimes I would consider investing in the TSP first, even if you are not in the BRS. This includes when you are deployed to a tax-free zone. Deployment money is non-taxable; when you contribute it to your TSP, that amount will never be taxed! (the gains are taxed, however.)

Final Thoughts

These recommendations are based on common situations. You should always ensure your investment decisions are based on your needs and the amount of risk you are willing to take. The most important thing is to get started and keep investing. Your future is worth it!

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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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