An IRA should be a supplement to your TSP, not a replacement for it. Image: g0d4ather/Shutterstock.com
By: John GrobeI’m a crossword puzzle fan. It started when I was commuting to the Loop five days a week. The period of enforced inactivity was perfect for doing a crossword puzzle in the Chicago Tribune.
I still do crosswords daily, and I do them in ink. I use ink not because I’m so certain of my answers, but because my aging eyes can see it more clearly than in pencil.
A recent puzzle had the clue “401(k) alternative”, and the three-letter answer was “IRA”. The Thrift Savings Plan is an employer sponsored defined contribution plan just like a 401(k).
One definition of alternative is “one of two or more available possibilities.” This definition implies that there is a choice available. An IRA is an alternative to a 401(k), but only if you have a 401(k) in which you can participate. That leaves 30% of the workforce without an alternative to an Individual Retirement Arrangement. We federal employees are allowed to participate in the TSP, so an IRA is really an alternative – isn’t it?
Another definition of alternative is “replacement” or “substitute.” I don’t think it would be wise for a federal employee to replace their TSP with an IRA. An IRA should be a supplement to your TSP, not a replacement for it.
Look at the advantages you get in the TSP that you don’t in an IRA:
- Your agency contributes to the TSP on your behalf. If you contribute enough, you’ll have your agency putting 5% of your salary in.
- You get 1% of your salary automatically deposited in your TSP, even if you don’t contribute at all
- For the first 3% of your salary that you contribute, you get a dollar-for-dollar match
- For the next 2% of your salary that you contribute, you get a fifty-cent on a dollar match
There are other TSP advantages such as lower expenses, saving by means of payroll deduction, and a higher contribution limit ($23,500 for the TSP versus $7,000 for an IRA).
As a federal employee saving for retirement, don’t think of an IRA as an alternative to your TSP, but do consider it as a supplement if you have extra retirement funds that you want to save in a tax advantaged account.
See also: TSP and IRAs: Similarities and Key Differences
Workers have had access to Individual Retirement Arrangements since 1974, and federal employees have been able to contribute to the Thrift Savings Plan since 1987. When employer sponsored defined contribution plans, such as the TSP, were introduced, they were patterned after the already existing IRA. However, they were not carbon copies – there are differences between them and lack of understanding these differences will often cause confusion and can sometimes have unpleasant consequences.
John Grobe is a retired federal employee and retired retirement educator with over 30 years of experience in helping federal employees understand their retirement.
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