TSP vs. IRA? Revisiting this classic question in light of the TSP modernization act

Stephen Zelcer, a financial advisor for federal employees, explains how the changes to the TSP in 2019 will impact you and what you should keep in mind.

Editor’s Note: This column has been updated with new data from the Thrift Savings Plan to reflect the new authorities in the TSP Modernization Act.

The TSP Modernization Act is anticipated to expand the withdrawal options for TSP participants in the following ways:

  1. Allow multiple age-based withdrawals. Currently only one age-based withdrawal (age 59½) is allowed.
  2. Allow multiple post- separation partial withdrawals. Currently only one post-separation withdrawal is allowed.
  3. Allow flexible withdrawal options such as:
    • Quarterly or annual withdrawal payments. Currently, monthly is the only periodic payment option.
    • Ability to change payment amounts anytime. Currently you can only change the monthly payment amount once per year.
    • Ability to stop of periodic payments without forcing the remaining balance out of the TSP.  Currently you would need to withdraw the remaining amount if you wanted to stop your periodic monthly payments.
    • Ability to select a partial withdrawal or annuity purchase while in periodic payment status.  Currently this is not an option.
  4. Eliminate the age 70½ TSP withdrawal election deadline. Currently, the TSP requires people to either make a “full withdrawal election” by age 70 ½ (which most people assumed to mean a full liquidation of TSP) or forfeit their TSP account!
  5. Allow withdrawals to come specifically from Roth, or Traditional, or both.  Currently, any withdrawal comes from BOTH Roth and Traditional pro-rata.

The most recent details and FAQ on the TSP Modernization Act can be found here:

If you read the list above, you may be shocked (outraged?) that such flexibility wasn’t there before. In fact, a TSP participant survey showed that such lack of withdrawal flexibility motivates federal employees to roll their money out of the TSP.

The above changes are anticipated to go into effect by September of 2019. And now is the time to consider the classic question:  Are you better off keeping your money in the TSP, or are you better off rolling your TSP into an IRA?

Both options have their pros and cons.  Here are some key differences to consider:

  • Fees and Commissions: The TSP doesn’t charge sales commissions and their management fees are tiny. The average TSP expense for 2017 was .033 percent, or $0.33 per $1,000 invested. This is of the lowest expenses in the investment industry. In an IRA, you typically will have commissions and, if you use an asset manager, you will likely have higher management fees which can diminish your investment’s earning power.

However, if you don’t use an asset manager and instead invest in unmanaged index funds like ETFs (exchange traded funds), those fund fees are about the same as the TSP, some as low as .04 percent, or $0.40 per $1,000 invested.

  • Investment Options: The TSP offers only five investment vehicles, namely the G, F, C, S and I funds. (The L funds are merely different allocations of the 5 funds.) In an IRA, you have access to all of the TSP investment funds indices (all of the TSP funds track broad market indices – for example C fund = S&P 500) except the G fund.  An IRA also gives you access to almost every other possible investment vehicle, such as individual stocks, individual bonds, real estate, emerging markets, commodities, options, etc.

What does this mean to an investor?

  • Because different assets classes carry different risk/reward ratios, you can actually expose yourself to funds that carry less risk and target more reward than what’s available in the TSP.
  • You can elect to invest in specific assets, like specific stocks or specific sectors. Thus when 1 stock or sector of the S&P 500 is poised for tremendous growth, you capture the upside potential of that stock/sector, without having to invest in the entire S&P 500. And vis-versa – if one stock/sector was being threatened, you can drop that specific asset without needing to drop your entire position in the S&P 500.
  • You can simply benefit from further diversification, which usually decreases the overall risk of your portfolio.

Strategizing your withdrawals: An IRA will allow you to strategize your withdrawals.

For example:

Specify Investments: With an IRA you can specify whether you want your withdrawals to come from your stocks or bonds or whatever you’re invested in. This will allow you to:

    • Cash in on specific investments that have gains, or
    • Get out of investments that have become riskier, or deliberately avoid selling assets that have declined in value, allowing the asset time to recover.

You cannot make such specifications from your TSP.  Any money you withdraw from TSP will come from ALL FUNDS pro-rata, even the funds that have declined in value.

  • Required Minimum Distributions (RMDs) if still at work: In an IRA, RMDs are required even if you still are working. However, in the TSP, the RMD requirement and penalty does not apply if you are still working for the federal government, in which case it may be wise to roll your IRA into your TSP to avoid RMDs even on your IRA!  If you are working outside the federal government, you will need to take your RMDs even from your TSP.
  • Speed of Accessing your money: If you request a distribution of money from your TSP, it will take a few weeks before you get the check in the mail. With an IRA, you can get a check within 3-to-5 days, and sometimes access your money the same day if your IRA provides you with check-writing privileges or ATM card.
  • Preserving tax-deferral for beneficiaries: This is not so well known but TSP beneficiaries may have trouble stretching tax deferral to later generations.

Let me illustrate:

If a spouse is named as beneficiary of your TSP, they may remain in the TSP in a ‘beneficiary participant account.’  If this happens, 100 percent of your TSP will be moved into the G-fund until the surviving spouse reallocates the funds. That’s not necessarily a problem. The problem begins when the surviving spouse dies. When the surviving spouse dies, the beneficiary of the ‘beneficiary participant account’ cannot transfer the account into any IRA and thus will have to pay the tax on the entire TSP balance!

Contrast this with IRA rules: If a spouse inherits an IRA, the investments stay where they are. When the surviving spouse dies the inherited IRA can be moved into an inherited IRA and you can continue tax deferral.


The next points are directly impacted by TSP modernization act.

  • Multiple lump sum distributions: The TSP allows only ONE lump sum distribution. If you need a 2ndlump sum distribution, the TSP will require you to liquidate your account. An IRA will allow you as many distributions as you wish.  This can be important if you need money unexpectedly.
  • Specify Roth vs. Traditional: With an IRA you can specify whether you want your withdrawals to come from your ROTH IRA or Traditional IRA. This can help you minimize the taxation of your distributions. You cannot make such specifications from your TSP. Any money you withdraw from TSP will come from BOTH ROTH and Traditional pro-rata.

With the coming of the TSP Modernization Act, these last two points will be less of a concern, because, as mentioned above, the TSP is hoping to offer more withdrawal options with Roth-vs.-Traditional specificity.

The above points are presented in a terse manner to keep this article short. Each bullet point could receive many, many pages of detailed elaboration.  Please consult with a competent advisor before acting on these points.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Stephen’s retirement guidance, benefits guidance and allocation guidance for Thrift Savings Plan (TSP) investing is available online at www.StephenZelcer.com and www.tspplanning.com, but should only be relied upon when reviewed with a competent advisor as part of a thorough financial plan.

 Stephen Zelcer is a financial advisor for federal employees, and a pre-retirement/financial literacy instructor for federal agencies. Zelcer has personally delivered over 300 pre-retirement seminars, teaching thousands of federal employees about the interrelationship between Federal Benefits and personal financial planning. Stephen is also a blogger and author of the retirement readiness workbook “Ready, Aim, Retire!” Learn more about how Stephen helps federal employees at www.StephenZelcer.com.

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