financial planner Stephen Zelcer

14 Differences between TSP & IRA

TSP vs. IRA: Both are retirement accounts, both offer a Roth and a Traditional option, yet there are many important differences. Here are 14 differences

1. Contribution Amounts (2024):  TSP allows $23,000 annual contributions while IRAs only allow $7,000.  Furthermore, TSP allows an additional ‘catch-up’ contribution of $7,500 starting the year you turn 50.  An IRA allows only $1,000 of additional ‘catch-up’ contributions.  Contribution amounts are only relevant while employed.  Once retired, you can no longer contribute to the TSP, however you will still have the ability to transfer a Traditional IRA into the TSP.

2. Fees and Commissions:  The TSP doesn’t charge sales commissions and their management fees are tiny.  The TSP expense ratios for the C, S, I, F and G funds have averaged about 0.04% over the last 10 years, of the lowest expenses in the investment industry.
However, IRAs have slashed their fees significantly in the past 5 years.  Many of Vanguard’s ETFs have a management fee of 0.03%. Some of J.P. Morgan’s ETFs have a fee of 0.02%.  And. In 2018, Fidelity introduced 0% fee ETFs.


3. Investment Options:  The TSP offers only 5 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 almost every investment vehicle as an option, including 4 of the 5 TSP funds.  Here are the Publicly Traded Indices that match the TSP funds:
  • C fund = S&P 500 Index
  • S fund = Dow Jones Total Stock Market Completion Index
  • I fund = Morgan Stanley Capital International EAFE (Europe, Australia, Far East)
  • F fund = Bloomberg U.S. Aggregate Bond Index

  • G fund = There is no equivalent to the G fund outside the TSP. 
However, there are alternatives to the G fund, such as high yielding money markets, or insurance products with guaranteed fixed accounts.
In addition to mimicking the TSP funds, IRAs allow you to invest in:

  • Individual stocks, stock mutual funds, stock ETFs,
  • Individual bonds, bond mutual funds, bond ETFs,
  • Real estate (actual real property, where the asset can be purchased and titled in the name of your IRA), and REITs.
  • Commodities, precious metals.
  • Currencies, and Crypto-currencies
  • Options or Derivatives (these instruments are typically used to hedge, or reduce your investment risk exposure.)


4. Different Asset Allocations for Roth & Traditional: The TSP does not allow you to have different asset allocations for your traditional & Roth; for example – you cannot have your Roth TSP allocated as 100% C fund and have your Traditional TSP allocated 100% G Fund.  An IRA allows you to be as specific with your allocation as you want.

5. Pro-Rata withdrawals: When requesting a withdrawal from your TSP, can you specify that you want your withdrawal to come only from your G fund and not your C fund?  No, you cannot.  The TSP will only disburse your money on a Pro-Rata basis. However, you can be as specific as you’d like when withdrawing from an IRA.

6. Ability to borrow against the funds:  You can’t borrow from an IRA but the TSP allows you to borrow against your funds while you are actively employed as a Fed. (maximum loan of $50k). (Theoretically, you can borrow from your IRA for 60 days, as IRAs allow a rollover window of 60 days.  This means, you can roll money out of an IRA, use it but make sure you return it within 60 days.)

7.  Withdrawal for 1st home purchase:  With an IRA, you can access $10,000 of your money with no penalty (other than regular income tax) to purchase your first home.  If you’re married and your spouse will also be purchasing the home with you, your spouse can access $10,000 of his/her IRA money (a total of $20,000). With the TSP, you can’t access your money; however, you may take a loan against your TSP account (up to $50,000) and pay yourself back the interest.

8. Creditor Protection:  Creditors cannot touch your TSP (or other employer plans) but they can touch your IRA. (Most IRAs, however, have a bankruptcy protection up to 1.5M – meaning, you will not be forced to liquidate an IRA to pay back debts in the case of a Bankruptcy.)

9.  Access to Account Before age 59 ½ – the Age 55 Rule:  The earliest you can take a penalty-free withdrawal from your IRA is age 59 ½ (excluding the first-time home purchase mentioned above, or rule 72(t), or some other exceptional cases).  If you take IRA money before age 59 ½, you will be penalized 10% of the withdrawal amount. 

However, with the TSP, you may access your money without penalty starting the year you turn age 55. This is known as the “Age 55 Rule.”  This age 55 leniency is only true if you separated from your employer at age 55 or later.  If you separated before age 55, or if you’re still employed at age 55, the age 55 rule doesn’t apply.  Public Safety employees (Law Enforcement, Fire Fighters) can access their TSP without penalty even earlier than age 55, if they separate with an immediate retirement.

10. RMD Penalty.  Starting the year you turn 73, you will have to start taking RMDs every year from both IRA and TSP.  If you don’t take your RMD in a given year, you will be penalized. 
How much is the penalty? 

In your IRA, the penalty is 50% of what you should’ve taken as your RMD.  In the TSP there is, in practice, no penalty.  Not because you don’t have to take an RMD, but because the TSP will automatically send you the RMD.  (On a historical note – before 2019, the TSP would’ve actually forfeited your entire account if you did not make a “full withdrawal election” by the date of the RMD.)

11.  RMDs if Still at Work.  In an IRA, the above RMD requirement and penalty apply even if you still are working.  However, in the TSP, the RMD requirement does not apply if you are still working for the Federal Government.  If you are working outside the Federal Government, you will need to take your RMDs even from your TSP.

12.  Cannot satisfy RMD with funds from the other type of account. You cannot satisfy a TSP RMD by taking the RMD amount from your IRA, and vis versa – you cannot satisfy an IRA RMD by taking a distribution from your TSP.  So, in this regard, Traditional IRAs and Traditional TSP share the same rule, but they are viewed as different funds.

13. Qualified Charitable Distributions. An IRA will allow anyone age 70.5 or above to directly transfer funds from their IRA to a charity.  This is known as a Qualified Charitable Distribution (QCD).  Any funds distributed from your IRA for QCD will not be counted as taxable income. 

The TSP does not allow you to do a QCD, meaning any distribution you take from the TSP and give to charity will be counted as taxable income.   

14. Tax after the death of the Spouse Beneficiary.  If a spouse is named as beneficiary of your TSP, they may remain in the TSP in a ‘beneficiary participant account.’ This is not a problem, yet.
However, when the surviving spouse dies, then the problems begin:  The beneficiary of the ‘beneficiary participant account’ cannot transfer the account into any IRA, not even an inherited IRA, and thus are forced to realize the balance of the account as taxable income in that year. 
Contrast this with IRA rules:  If a spouse is the beneficiary of an IRA, the IRA stays where it was.  When the surviving spouse dies the inherited IRA can still remain in a new inherited IRA and the children can continue tax deferral.
Because many of the above points have tax implications, consult with your accountant or financial advisor before taking action.

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