I love the TSP! It is an incredible wealth-building tool.
But it is not perfect, especially in retirement.
While the TSP has become much more flexible over the years it still has a long way to go.
Here are 5 things that the TSP doesn’t allow but IRAs do.
Note: IRAs are not perfect either! I’ll mention some of the pros and cons at the end of the article.
Don’t Touch the Losers
The TSP doesn’t let you choose where your withdrawals come from. For example, if 50% of your money is in the G and the other 50% is in the C, any withdrawals have to come out 50/50 from both funds.
This is often not a problem unless the market is down in which case that would be a terrible time to take money out of the C fund. You don’t want to sell low!
For example, let’s say your house is worth 500k today but tomorrow the housing market crashes and your home is now worth only 300k. Is that the time to sell your house to lock in your loss? No!
The same is true for your investments. Most people would prefer to withdraw only from their most stable investments (like the G fund) and give their long-term investments (like the C fund) time to recover.
IRAs, on the other hand, give you complete control over what funds your withdrawals come from.
To The Roth
Do you like paying less taxes? I know I do.
And a fantastic strategy that people use to pay less taxes over time is a Roth Conversion. If you aren’t familiar with Roth Conversions, they are simply a way to move money from a pre-tax account (like Traditional TSP or Traditional IRA) to a Roth IRA which is an after-tax account.
Using a Roth conversion doesn’t mean that you avoid taxes completely but it does mean you can pay them on your terms (i.e. in a year that you are in a lower tax bracket).
Unfortunately, this strategy can only be done in an IRA.
Where’s The Money?
If you have money both in the Traditional TSP and the Roth TSP, the TSP requires that you invest both sides exactly the same.
For example, if you have half your money conservative and half your money aggressive then your Roth and Traditional accounts both have to be 50/50.
However, if you could choose which account (Traditional or Roth) got more growth overtime wouldn’t you pick the Roth? All the growth in the Roth is tax-free growth!
Most end up with much more tax-free growth overtime when they are able to invest their Roth accounts differently from the traditional ones.
Fortunately, IRAs allow you to do this.
Disappearing RMDs
If you are not familiar with RMDs (Required Minimum Distributions), then here is the summary of how they work.
Starting in your 70’s (Age 73 or 75 for most people reading this), you will be required to take money out of pre-tax retirement accounts like traditional TSP and traditional IRAs whether you want to or not. And since those accounts are pre-tax that means you’ll have to pay taxes on your RMD withdrawals.
However, if instead of paying taxes on your withdrawals you’d like to support a charity instead then a QCD (Qualified Charitable Distribution) can save the day.
Simply put, if you send a piece or all of your RMD withdrawal directly to a charity then you don’t have to pay taxes on it at all! And it won’t affect your Medicare premiums either!
As of today, TSP doesn’t allow QCDs but IRAs do.
More Options
One of the more obvious advantages that IRAs have over the TSP is that they have many more investment options. Instead of 5 core funds, IRAs have thousands of options to choose from.
But this can actually be a blessing or cursing depending on who you are. If you know what you are looking for then having more options means that you find the options that are perfect for you.
However, if you don’t know what to look for then you may very well find options that will perform worse or have much higher fees than what is available in the TSP.
Bonus: Advisor
Here is one more thing that IRAs allow that the TSP doesn’t. If you want a financial advisor/planning to help manage your investments then that has to happen in an IRA as the TSP doesn’t have that ability.
Not everyone needs or wants to work with an advisor but if you do then an IRA allows you to do so.
Conclusion: No Perfect Solutions
But before you throw your money into an IRA, they aren’t perfect either.
They do have a lot more options for investments and tax strategies but whenever you add options you also add complexity.
And when you add complexity then the chance of making a mistake (especially if you don’t know what you are doing) goes up significantly.
The TSP has many limitations but that also means there are less ways to make mistakes.
There is no perfect solution for everyone in retirement. Every option has advantages and disadvantages and it is up to you to find the option that fits your life the best.
