In a recent article, Don’t Forget About an IRA as Another Way to Save, we looked at differences between the TSP and IRAs (and you can absolutely have both as part of your retirement strategy). Here are some more things to keep in mind.
First, you cannot utilize a “bucket strategy” in withdrawing from the TSP, while most IRA custodians allow you to do so. 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”. According to Investopedia, 38% of financial advisers suggest that their clients utilize the bucket strategy.
The first bucket would be invested in safe (presumably lower yielding) investments from which you will make monthly withdrawals for income during retirement. Ideally this bucket should have enough in it to last several years.
A second bucket would be invested in riskier (presumably higher yielding) investments that will not be needed for some time. You would periodically replenish bucket one from bucket two.
You also could have more than two buckets. For example, you could set up a bucket for “now”, another one for “soon” and a third for “later.”
A bucket strategy would keep you from having to withdraw funds from more volatile investments during a market downturn and would allow time for those funds to recover their value over time.
The TSP requires that withdrawals be taken proportionately between your TSP investments based on your account allocation. Let’s say that I am withdrawing $1,000 each month and that my account is evenly allocated between the five basic funds. $200 of each withdrawal would come from the G Fund, $200 from the F Fund, $200 from the C Fund, $200 from the S Fund and $200 from the I Fund. I cannot utilize a bucket strategy if I leave my money in the TSP.
The second difference we will cover here is the difference in how monthly payments can be set up to follow the IRS life expectancy table. There’s actually more than one life expectancy table, but the TSP restricts us to using only one – the Uniform table. This generally works well for those of us who are relatively close in age to our spouses.
However, if you are ten or more years older than your spouse, there is another table that the IRS would allow you to use if the TSP were willing to let you. It’s the Joint and Survivor life expectancy table. This table allows smaller withdrawals because, presumably, your younger spouse will need money for a longer period after your death than would a spouse who is closer to your age. Despite the fact that this choice may be more advantageous to many retired feds, the TSP will not allow it. You can, however, follow this strategy in an IRA.
What if you want to use a bucket strategy, or use the Joint and Survivor life expectancy table? Well, you’ll just have to move your money out of the TSP into a vehicle that gives you more flexibility.
Even when the TSP Modernization Act is implemented (in or around November 2019) the above restrictions are likely to remain in place. It’s a general fact that employer plans (including the TSP) are more restrictive that are individual plans like IRAs.