The TSP (Thrift Saving Plan) is one of the biggest employer retirement plans in the world.
But despite its size, is it really the best place for you to grow your money?
Or are there better options to get more bang for your buck?
Two Big Phases
All of us have 2 main phases to our adult life: when we are working and then when we are retired.
And the TSP has major pros/cons depending on which stage you are in.
While You’re Working
While working most people have the following goals for their retirement investments
Put money away in a simple/easy way
Invest in high-quality low-fee investments to prepare for retirement
While working the TSP is incredible at hitting these two goals.
Putting money away into the TSP is as easy/simply as it gets. The money goes straight from your paychecks and it takes very little management once you’ve got it started.
Also, unlike IRAs, the TSP doesn’t have any income limits. This means that you can still put money in the TSP (or Roth TSP) regardless of how high your income is.
Take my word, the TSP is as simple/easy as it gets.
Good Investment Options?
The TSP is easy to use but are the investment options good options?
Yes! The TSP funds are high quality with very low fees.
Overall, while working the TSP is a no brainer. The only reason I’d invest anywhere other than the TSP is if I was already maxing out the TSP and I wanted to save more.
While Retired
But the game does change once you retire.
Most people have the following goals for their investments in retirement:
Withdraw money easily
Continue investing during retirement
Save taxes
In retirement, the main advantages of the TSP is simplicity/familiarity.
However, the main downside is lack of flexibility.
For example, here are some things that the TSP doesn’t let you do in retirement that an IRA does.
You can’t do Roth Conversions within the TSP. This is one of the most popular tax-saving strategies used in retirement.
You can’t initiate withdrawals/transfers from your TSP without your spouse signing off on it. And while this isn’t a big deal for most it is just an example of some of the red tape that the TSP comes with.
When you pull money out of the TSP you can’t pick which investment fund the withdrawal comes from. It comes out proportional to how you are invested.
You can’t (normally) change how much tax they withhold from your withdrawals. They will normally withhold 20% even if you are only in the 12% tax bracket. You can ask them to withhold more than 20% but not less.
You aren’t allowed to do QCD (qualified charitable distributions) from your TSP. And for those that don’t know, QCDs are one of the best ways to give to charity while also reducing your taxes. IRAs, however, do allow QCDs.
Final Thoughts
While working the TSP is a no-brainer.
In retirement, however, it gets more complicated.
An IRA has way more options and flexibility which go a long way in giving you more control over your investments and taxes.
However, whenever there are more options there are more ways to mess things up.
For most, it comes down to what they value: Simplicity with some red tape, or flexibility with the extra complexity that comes with it.
