The Thrift Savings Plan (TSP) is generally more restrictive than an Individual Retirement Arrangement (IRA). This fact shouldn’t come as a surprise to federal employees. Legislation passed in 1978 authorized company retirement plans like the TSP, 401(k)s and others. The first 401(k), named after the section of the Internal Revenue Code (IRC) that allowed it, was created in 1980 and, in 1981, a change to the IRC allowed these plans to be funded by means of payroll deduction. The TSP came around in 1987.

IRAs, on the other hand, pre-date 401(k)s, having been created in 1974. The 401(k) shared many similarities with the IRA: Both were funded with pre-tax dollars; were fully taxable as ordinary income when withdrawn; had penalties for early withdrawals (prior to age 59 ½ for IRAs and prior to the year one turns 55 for 401(k)s); and had penalties for failing to take required distributions at and after 70 ½. Subsequent legislation created Roth IRAs and plans and placed income limits on some IRA actions.


But there were, and still are, many differences between an IRA and the TSP.

The TSP must be funded by payroll deduction, while an IRA can be funded from any source as long as you have enough earned income to cover the contribution. You can contribute from your earned income to an IRA for a non-working spouse; not so with the TSP.

You can take money out of an IRA any way, and at any time, you want. Even after the implementation of the TSP Modernization act this past September, TSP withdrawals are more restricted than those taken from IRAs.

In an IRA you can choose where your distribution comes from; even the specific investment within the IRA. In the TSP withdrawals must made proportionally between funds. In addition, unless you specify otherwise, distributions are made proportionally between traditional and Roth balances within your TSP. You cannot have traditional and Roth money within the same IRA; traditional and Roth IRAs are separate accounts.

The TSP’s proportionality requirement also precludes individuals from using a “bucket strategy” when making withdrawals. The bucket strategy, sometimes referred to as a time-based segmentation approach, has you allocating your money in two, or more, different accounts/funds, or “buckets”.

The first bucket would be invested in safe (presumably lower yielding) investments from which you will make monthly withdrawals for income during retirement. A second bucket would be invested in riskier (presumably higher yielding) investments which will not be needed for some time. You would periodically replenish bucket one from bucket two. According to Investopedia, 38% of financial advisers suggest that their clients utilize the bucket strategy.

See also, Understanding TSP Withdrawals

Though you can participate in both the TSP and an IRA, don’t think that they are the same. Similar – yes; identical – no.

TSP Investors Handbook, New 6th Edition