By Jay Shareef and Chris Rhoads
The Thrift Savings Plan (TSP) is the federal government’s version of an employee 401(k) plan. For most government employees, it’s a pretty sweet deal. The TSP has lower-than-average fees and administrative expenses. It also offers 5 well-diversified investment funds—one of which is an unbeatable bond fund—which simplifies the investment process for many novice investors.
It’s when you reach retirement that the TSP starts to lose some of its appeal for investors. Because the TSP has more participants than any privately sponsored employee retirement plan, paperwork and processing times can take quite a while (the current backlog is resulting in an average processing time of 95 days[1]), which is cumbersome for retirees. Additionally, your options to withdraw from your TSP in retirement aren’t very flexible, leaving little room for adjustments if your circumstances change or you experience unexpected costs.
With these drawbacks in mind, it’s often a good idea to create options for yourself beyond the TSP. Having more investment options further diversifies your retirement assets, allows you to save more, and can result in more tax-efficient retirement withdrawal strategies. Read on to find out how investing outside of your TSP can improve your bottom line for a successful retirement.
Options to Consider While Working
Due to IRS regulations regarding maximum contributions, your TSP only allows you to save so much each year. In 2021, you can contribute up to $19,500 to your TSP ($20,500 in 2022) with a $6,500 catch-up contribution if you’re over 50. There is also a $58,000 total annual limit (for 2022, it is $61,000, and $67,500 for those over 50) which includes your 5% employer match, 1% automatic agency contribution, and any extra after-tax contributions made by you.[2]
But you usually need to save more than the maximum to live the retirement you dream of, so it can make sense to open an IRA and contribute more of your income to retirement savings while you’re still working. When you open an IRA, you also gain access to a much wider array of investment options that can diversify your asset classes beyond what’s offered in the TSP.
Additionally, there are tax implications to consider. The TSP allows you to contribute pre-tax dollars, which lowers your taxable income during your working years. You’ll then pay income taxes on the money you withdraw for income during retirement.
No one can predict the future, but some experts believe that income tax rates are only going to increase in the next few decades.[3] In that case, it makes sense to pay taxes on some of your retirement contributions today by saving some of your investments in a Roth IRA. Investing outside a pre-tax retirement account can allow for more tax-efficient withdrawal strategies in the future.
Options to Consider When Retiring
Many retirees are perfectly happy with the TSP and plan to keep their investments in the TSP for life. Others desire more flexibility to withdraw when and how they want and to engage in more tax-efficient income planning. So you have to decide: Is it better to keep your nest egg in your TSP or move the funds to an IRA?
If you’re itching to invest in a greater mix of assets beyond what’s offered in the TSP, it may be best to move your retirement savings into an IRA. Moving your retirement savings into an IRA gives you greater freedom to work with a financial advisor who may be able to help create more in-depth, custom investment strategies based on your goals and risk tolerance.
Additionally, you need to consider your income needs and access to other income sources in retirement. Although the withdrawal options for the TSP have improved since 2019, they are still more restrictive than withdrawal options for an IRA.[4] If you don’t have other reliable income sources, your withdrawal options will improve with an IRA.
And keep in mind that even if you’ve converted some of your TSP contributions to Roth contributions (meaning you’ve already paid income taxes on that money), Roth money in a TSP is subject to required minimum distribution (RMD) rules. Money in a Roth IRA is not subject to RMD rules, so you have greater freedom to allow your investments to grow indefinitely in a Roth IRA if you wish.
Partner With an Advisor Who Can Help
At WealthFlow Financial, we specialize in serving government employees to help them make the right decisions with their TSP and other retirement opportunities. We know you have many options to consider, and the decisions you make should be based on your unique circumstances and goals for your future. If you don’t already have an advisor helping you with that, reach out to us at (301) 798-5250 or schedule a phone call now.
About Jay
Jay Shareef is vice president, financial advisor, federal benefits consultant, and co-founder at Wealthflow Financial. As a U.S. Army veteran, Jay is passionate about helping federal employees create a bulletproof plan for retirement and navigate the often confusing and complicated federal benefits landscape. He spends his days educating and providing clients with unbiased insurance benefits and retirement strategies to help his clients create guaranteed income for life. As a problem-solver and trustworthy resource, Jay always puts his clients and their needs first so they can find financial peace of mind. To learn more about Jay, connect with him on LinkedIn.
About Chris
Chris Rhoads is a co-founder and vice president of Wealthflow Financial. As a registered investment advisor and independent financial professional, Chris is committed to helping his clients in retirement and he takes a holistic approach to financial planning that includes insurance and risk management, investments and wealth management, retirement income planning, and estate and tax planning. Chris has been married to his wife, Tia, since 2009 and they live in Frederick, MD, together with their two young daughters. In his free time, Chris enjoys traveling, watching sports, and being active in causes about which he cares passionately. To learn more about Chris, connect with him on LinkedIn.
[1] https://www.opm.gov/about-us/budget-performance/strategic-plans/retirement-processing-status.pdf
[2] https://themilitarywallet.com/thrift-savings-plan-contribution-limits/
[3] https://www.thesimpledollar.com/taxes/the-future-of-taxes/
[4] https://www.tsp.gov/publications/tspbk02.pdf