Retirement savings are an integral part of financial planning to assist your living, medical, and conditional expenses during old age.  

The Thrift Savings Plan (TSP) and Individual Retirement Accounts (IRAs) are two investment accounts that strengthen your retirement savings to meet financial goals. 

TSP assets account for $845 billion while there are $14.3 trillion IRA assets recorded in 2024. 

More than 65 million US civilians have an IRA compared to 7 million TSP users. 

Let us explore the retirement benefits, contribution limits, withdrawal penalties, and tax considerations for all types of TSP and IRA accounts in this blog.

The Thrift Savings Plan started in 1986 and acts as a retirement investment account. It was established by the US Congress and enforced by the Federal Employees Retirement System Act. It is a tax-advantaged pension plan for uniformed and federal service members. 

TSP is the world’s largest investment program for government employees. It enables participants to make tax-friendly contributions for componential retirement fund growth. Moreover, the administration and portfolio management fees for the TSP accounts are incredibly low. 

Federal employees who have joined services after January 1, 1984, are automatically enrolled in the Thrift Savings Plan. It is an employer-driven retirement investment account with automatic payroll deduction from the federal employee’s basic pay of salary. 

Furthermore, federal employees get the option to roll over their TSP account into other types of eligible retirement accounts. 

The most prominent feature of the Thrift Savings Plan includes the matching government contributions. The federal government must match up to 5% of an employee’s contributions in the Thrift Savings Plan. 

Also, there are 6 different types of investment funds for Thrift Savings Plan participants to diversify their sources of income and get more returns during their retirement. 

The Thrift Savings Plan is an ideal retirement savings plan for federal employees due to its concentrated participant base and simple investment options. 

TSP contribution limits, withdrawal penalties, and all other rules are regulated by the Internal Revenue Service (IRS).  

There are 2 types of TSP accounts –

Traditional Thrift Savings Plan – The contributions made to this type of account are subject to tax deductions. However, no taxes are levied at the time of withdrawals. A 10 percent penalty is applicable for a withdrawal if the federal employees take out the amount from a traditional TSP account before the age of 59 and a half years. 

ROTH Thrift Savings Plan – There are no tax deductions for ROTH TSP account contributions. This means that the money invested in this type of account grows free from tax implications. However, income taxes are levied at the time of withdrawal. Additionally, federal employees can avoid the taxes from ROTH TSP accounts if the reason for withdrawal is death, disability, or financial hardships. 

The age limit to withdraw money from the Thrift Savings Plan account is 59 and a half years. So, if a federal employee has reached the age threshold, they can make withdrawals from their TSP accounts regardless of the service status. 

A service member who has reached the age of 59 and a half years and still serving the federal government can make up to 4 withdrawals from their TSP account in a financial year. 

Furthermore, the federal government can withhold 20 percent of the TSP withdrawal amount as income tax unless this account is rolled over into a 401k, 403b, IRA, or non-government retirement account. 

Here are some of the eligibility conditions for TSP participants – 

• All federal employees joining services after January 1, 1984, are automatically enlisted in the Thrift Savings Plan. 
• Federal employees who joined services before January 1, 1984, who belong to the Civil Service Retirement System can enroll in the TSP program. However, they will not get any type of government matching contributions. 
• Uniformed service members from the US military, navy, marine, air force, space program, or reserved forces are eligible to participate in the Thrift Savings Plan program. 
• US Congress members are also eligible to participate and invest in Thrift Savings Plan.

Read More: A Beginner’s Guide to the Government Thrift Savings Plan (TSP)

The IRS regulates the rules for the Individual Retirement Account (IRA). The account holder is solely responsible for the management of such accounts. It is a retirement savings account for long-term contributions and tax-advantaged returns. 

The IRA is a non-employer-managed plan. This means that the individual is solely responsible for opening, maintaining, closing, or rolling over this type of account. However, conversion or transfer to an employer-based retirement account such as a TSP or 401k into an IRA is also facilitated.  

There are different types of individual retirement accounts such as the ROTH IRA, traditional IRA, Savings Incentive Match Plan for Employees IRA, and Simplified Employee Pension IRA. 

The age of withdrawal from an IRA is the same as TSP which is set for 59 and a half years. 

Any individual who has an active source of earned income is eligible to open an individual retirement account. 

Different Types of IRAs 

Let us walk you through the individual retirement account options to distribute your funds for maximum retirement benefits. Check them out – 

Traditional IRA – The amount contributed in this type of account is reduced from the income tax bracket for the financial year. Income taxes are levied at the time of withdrawals from this type of account. Individuals need to pay income taxes on traditional IRA contributions without an eligible retirement plan coverage. Additionally, it is mandatory to draw the RMDs from this type of retirement account once the individual has reached the age of 73 years. 

ROTH IRA – Contributions into this account for a financial year are free from tax deductions. The withdrawals from this type of account are tax-free if the individual meets the retirement and withdrawal criteria. Furthermore, there are no RMDs for ROTH IRAs. So, this money will continue to grow tax-free even after you reach the age threshold. It is possible to contribute to this plan regardless of age as long as the individual has a valid earned income. 

Simplified Employee Pension (SEP) IRA – Self-employed individuals such as contractors and businessmen can start investing in SEP IRAs. This type of account applies the same tax rules as the traditional IRA in case of withdrawals. The contribution limit for this type of account is set to $69,000 or 25% of compensation (whichever is less). 

Simple IRA – The Simple IRA is also targeted at business owners and self-employed personnel. The withdrawal and tax implications are as same as traditional IRAs. However, there is a difference in the contribution limit for this type of account. It is set at $16,000 with an additional catch-up contribution opportunity of $3,500 provided the individual is more than 50 years old. 

NOTE: The contribution limit is the same for traditional and ROTH IRAs (combined). This means that an individual cannot invest more than $7,000 in a financial year regardless of the number of IRAs they have. 

TSP and IRAs have different contribution limits. A federal employee with both types or only one type of TSP account (ROTH or traditional) can contribute up to $23,000 in a financial year. Similarly, an individual retirement account holder can contribute up to $7,000 in their traditional or ROTH IRAs collectively. 

For example, if a TSP participant has both ROTH and traditional accounts and contributed $15,000 to the ROTH account in one year, they are still allowed a contribution of $8,000 to the traditional TSP account for that year. 

It is the same for the IRA where if an employee contributes $5,000 to their traditional IRA, they can add up to $2,000 to their ROTH IRA. 

Additionally, both TSP and IRA participants get catch-up contribution options if they are more than 50 years old. The amount is set at $7,500 for a TSP account holder while it is only $1,000 additional for an IRA holder. 

There are certain differences related to the flexibility, terms, withdrawal options, costs, and tax implications of Individual Retirement Accounts and Thrift Savings Plan funds. Let us give you a breakdown of the noteworthy investment options –

It is pivotal to understand the tax considerations and withdrawal options before you select the ideal retirement investment account to meet your retirement objectives. We will individually break down the tax implications for your Thrift Savings Plan distributions and Individual Retirement Accounts withdrawals – 

• Traditional TSP Tax Rules – Traditional TSPs have pre-tax contribution options. The taxable income from the contributions in this type of account is deducted annually. The overall earnings are free from taxes at the time of the withdrawal due to tax-deferred growth. Additionally, income taxes are levied on withdrawals after retirement. 
• ROTH TSP Tax Considerations – There are no tax deductions on contributions to this type of account. The income grows freely every year. Additionally, if a federal employee has reached the age of 59 and half years and maintains the ROTH TSP account for more than 5 years, they can make tax-free withdrawals from this account. 
• Tax Implications on TSP RMDs – It is imperative to draw the RMDs from both traditional and ROTH TSP accounts once the federal employee has reached the age of 73 years. Traditional TSP account RMDs are subject to income taxes during withdrawals. However, ROTH TSP accounts do not charge taxes if the retirement qualifications are met. 
• TSP Early Withdrawal Tax Penalties – Apart from regular income taxes, an additional 10% penalty is charged on the withdrawal amount from a traditional TSP account if the federal employee makes withdrawals before the age threshold. However, certain annuity and financial hardship withdrawals are free from tax implications. 
• Traditional IRA Tax Assessment – Contributions in this type of account are subject to tax deductions based on the income and the type of employer-sponsored retirement plan. This means that no taxes are levied on the earnings in the account. However, withdrawals are subject to income tax deductions. Withdrawing from a traditional IRA before the age of 59 and a half years will deduct a 10 percent penalty. 
• ROTH IRA Tax Benefits – ROTH IRA contributions cannot deduct income taxes. So, the funds will grow without any tax deductions. Additionally, qualified retirees who have reached the age of 59 and a half years and have continued this type of account for at least 5 years get tax-free and penalty-free withdrawals. Furthermore, there are no obligations to draw RMDs from a ROTH IRA making this a more flexible retirement investment plan. 
• Tax Exemptions on Traditional IRA RMDs – The RMD criteria for traditional IRAs are the same as traditional TSP RMDs. Once an individual has reached the age of 73 years, it is essential to withdraw the RMDs manually from this type of account. However, there are no RMD options if an individual invests in a ROTH IRA account.
• IRA Early Withdrawal Tax Charges – Participants are allowed to withdraw ROTH IRA contributions without penalties and taxes at any time. However, this does not apply to the earnings from this type of account. Nevertheless, withdrawing from the traditional IRA before the age of 59 and a half years incurs a 10 percent penalty.

Check out the major differences between the Thrift Savings Plan and Individual Retirement Account for federal employees – 

• Service Fees and Transaction Costs – There are no sales commissions for TSP accounts and the management fees are negligible. It has the lowest expense ratio in the investment industry with 0.04% for all types of TSP funds. However, the service fee for IRAs has significantly decreased over the last 5 years. ETFs from Vanguard, J.P. Morgan, and Fidelity offer competitive rates lower than TSP funds. 

• Contribution Limits – The contribution limit for TSP accounts (ROTH and traditional inclusive) is $23,000 in 2024 while the contribution limit for IRAs is $7,000 in this financial year. Additional catch-up contributions are allowed in both types of retirement accounts if the employee is more than 50 years old. The catch-up contribution limit for TSP is $7,000 while it is $1,000 for the individual retirement accounts. 

• Investment Choices – Noteworthy investment choices for TSP and IRAs are – 

• TSP Funds

• C Fund – Common stock exchange index investment into S&P 500 companies 
• F Fund – US bond market index investment 
• I Fund – International stock exchange index investment 
• S Fund – Small cap stock index investment into large and small businesses within the US
• G Fund – Government securities index investment 
• L Fund – Lifecycle or collection of the C, F, I, S, and G funds

• IRA Investments 

• Stocks (individual, mutual funds, and ETFs) 
• Bonds (individual, mutual funds, and ETFs) 
• Real estate and Real estate investment trusts 
• Precious metals and commodities 
• Cryptocurrencies and currencies 
• Derivatives and Alternatives such as hedge funds 

• Asset Allocation Options – TSP does not offer the flexibility to make concentrated allocations into the traditional or ROTH accounts. For example, a TSP account holder cannot invest the entirety of the contributions into a single fund. However, IRAs enable investors to choose specific allocation categories. 

• Specific Withdrawal Requests – TSP withdrawals are only available on a Pro-Rata basis. This means federal employees need to withdraw either from the ROTH or Traditional account. No liquidation of money from a single TSP investment fund is allowed. Nevertheless, IRAs are highly flexible and enable employees to make as specific withdrawal requests as possible. 

• Loan Options – There are no loan options from individual retirement accounts while the Thrift Savings Plan enables federal employees to take out loans from their contributions. There are two types of TSP loans including the general loan and the primary residence loan which come with specific terms and conditions. For example, the federal employee has to repay a general-purpose loan within 5 years and clear a primary residence loan within 15 years. 

• Debt Protection Measures – Creditors are unable to touch the money to clear debts from a federal employee’s TSP account. However, it is possible to clear debts from the money contributed to an IRA. Nevertheless, IRAs are also protected against bankruptcy of up to 1.5 million where it is not mandatory to liquidate IRA funds for debt repayment in case of bankruptcy. 

• Withdrawal Age Limits – The age limit for withdrawal from both IRA and TSP is 59 and a half years. However, there are rules for public safety officials to withdraw from their TSP account at the age of 55 years without the risk of penalty deduction. 

• Required Minimum Distribution Penalties – Due to the auto payment method of the employer-supported TSP program, participants will get automatic required minimum distributions (RMDs) from their TSP account if they have reached the age of 73 years. However, it is mandatory to take out RMDs from the IRAs once the individual has reached the age of 73 years. This needs to be done manually and failing to take the RMDs will result in a heavy excise tax of 50 percent on the RMD amount. 

• Beneficiary Options – If the surviving beneficiary of a TSP account passes away, the account cannot be rolled over into an IRA. Therefore, the withdrawal balance is treated as taxable income for the withdrawal year or death year of the account beneficiary. However, the leniency to transfer the funds in an IRA is better than the TSP if the surviving beneficiary passes away. The children or other beneficiaries can withdraw the amount from the transferred IRA without any tax deductions. 

• Tax Treatment – No taxes are deducted for Thrift Savings Plan rollover to IRA. Nevertheless, it is essential to maintain that the rollover is done from traditional to traditional and ROTH to ROTH. However, taxes are charged in case the rollover is from traditional to ROTH accounts or vice versa. A thrift savings plan transfer to an IRA will avoid potential income taxes on the withdrawal amount. 

Read More: California Federal Employees: Plan Your Retirement with Confidence and Clarity

Several factors determine the ideal retirement investment option. For example, the age of the person, the type of employment, the preferred retirement age, and the financial goals are all considered before choosing a Thrift Savings Plan or an Individual Retirement Account. 

Talk to a PSR Assurance retirement consultant to learn about all the guidelines and compare the benefits of each type of retirement account before you can start investing. It is essential to understand the differences between the investment accounts and identify the rates of return to determine the best choice to align with your retirement objectives and meet your financial goals. 

We can help to manage your TSP and IRA portfolios and assist with eligible rollover. Moreover, we will provide you with the thrift savings plan loan and IRA return calculator to determine your retirement annuities. 

Get in touch now and secure your retirement benefits today!