Since news of the deferred resignation program first emerged, many federal employees have wondered if negative changes could also be coming to the Thrift Savings Plan and how they could be impacted. In this article, we will examine the advantages and disadvantages of the TSP and compare them to Individual Retirement Accounts (IRAs).
Similarities
Both the TSP and IRAs are considered “qualified accounts” under the United States tax code. This means that contributions are on a pre-tax basis, with earnings also growing tax-free. Taxes are only due when withdrawals are made, and withdrawals are not required until reaching the age for Required Minimum Distributions or RMDs (generally age 72 or later.)
TSP Benefits
The main advantages are higher contribution limits, agency matching, and relatively low fees.
Contribution Limits
| Age | TSP | IRA |
| Under 50 | $23,500 | $7,000 |
| Over 50 | $31,000 | $8,000 |
| 60-63 | $34,750 | $8,000 |
Employees also receive an Agency match of up to 5% for every dollar contributed. So even if you decide to roll money over to an IRA, you would still want to keep your TSP open while you are working to continue to receive matching contributions.
“Lower Fees” but at what cost?
TSP boasts about some of the lowest fees compared to outside 401(k)s, but are participants really “saving” money? While it’s true that the expense ratios for the Individual Funds inside the TSP are very low, that hasn’t always led to higher account balances for participants. The primary reasons are:
- Lower comparative average rates of return for some funds (particularly the I, F, and some LifeCycle funds)
- Lack of guidance to TSP account holders
Managed IRA Accounts
An IRA account professionally managed by a registered fiduciary is a great alternative for many people. They pay a fixed fee as a percentage of assets and receive investment guidance, portfolio management, and advice on all areas of their financial lives. Recent studies have shown that these account holders often get 3-4% higher rates of return than regular TSP participants even net of fees. (Past performance is not always indicative of future results, of course, but the rationale is clear.)
Other advantages of IRAs:
- Greater flexibility and access to your funds
- More investment choices
- Ability to create multiple income streams
If you want to meet with a registered fiduciary, United Benefits has a Wealth Management division that offers free consultations for all NTEU members. Click here to schedule your appointment.
Disclosure: the preceding information was produced for informational purposes only and should not be considered investment advice. Past performance does not guarantee future results. Please consult with a registered professional before taking any action. Investment advisory services offered through Alphastar Capital Management, LLC, a SEC-registered investment adviser. SEC registration does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Fixed insurance products are offered through UB Wealth Management, and Alphastar Capital Management is not involved in the offer, recommendation, sale or management of commission-based fixed Insurance products. Alphastar Capital Management and UB Wealth Management are separate and independent entities. This is for informational purposes only and is not intended as legal, tax or investment advice or a recommendation of any particular security, investment product or investment strategy.