Roth IRA or Roth TSP?

3D man near red question mark

Q: Should I open a Roth IRA account? I enrolled in Roth TSP. But I did some research and there are lots of peo­ple say­ing that I should max out a Roth IRA before I con­tribute to TSP due to the fact that the fed­eral gov­ern­ment doesn’t match up in TSP, so it makes more sense to con­tribute to IRA where it has more flexibility.

–Songling, U.S. Army

A: Hats off for sign­ing up for the Roth TSP! I think both the Roth TSP and Roth IRA have a lot to offer when it comes to the retire­ment sav­ings game.  Before the Roth TSP became an option last year, many peo­ple felt like the Roth IRA was a great “first” place to start sav­ing for retirement…primarily, because of the poten­tial tax-free nature of the Roth IRA.  The arrival of the Roth TSP at least lev­eled the play­ing field. Let’s look at the two options in a bit more detail.

First, I’ll explore the case for the Roth TSP. There’s no deny­ing it’s easy. Just sign up at myPay and you’re off and run­ning. Every time you get a pay raise or pro­mo­tion you can quickly go in and bump up your con­tri­bu­tion. It’s also very inex­pen­sive. Believe it or not, it is dif­fi­cult if not impos­si­ble to dupli­cate the low cost asso­ci­ated with the invest­ment choices within the TSP. It also has a unique invest­ment option in the “G Fund.” This is a guar­an­teed invest­ment option that pays inter­est based on out­stand­ing trea­sury secu­ri­ties. Finally, you can con­tribute a lot more into the Roth TSP than into a Roth IRA ($17,500 vs. $5,500 in 2013 assum­ing you’re under age 50).

All that being said, the Roth IRA also has its advan­tages. First off, you have a much wider selec­tion of invest­ment choices. The TSP is lim­ited to the 5 core invest­ment options and the tar­get retire­ment date funds (L Funds) that allo­cate among those 5 core invest­ments.  With a Roth IRA, you can select from thou­sands of dif­fer­ent invest­ments. For many, this might be more hurt­ful than help­ful, but if you’re inter­ested in invest­ing in a spe­cific stock or a type of mutual fund  not cov­ered by the TSP choices it could tip the scales. The Roth IRA is also a bit more acces­si­ble than the Roth TSP. The IRS allows you to remove con­tri­bu­tions from the Roth IRA at any­time with­out taxes or penal­ties. So, if you con­tribute $5,000 a year to a Roth IRA for five years, you would have $25,000 that you could access, for what­ever pur­pose, with­out taxes or penal­ties (though I’d most often pre­fer to see peo­ple leave that money alone for retire­ment). Penalty-free access to con­tri­bu­tions is not allowed with the Roth TSP.

In a finan­cial planner’s per­fect world, you would be able to do both, but given the lim­ited nature of what’s avail­able from pay­check to pay­check hope­fully this helps you make the right call for your spe­cific sit­u­a­tion. You’ve already taken the hard­est step: Get­ting started. Good job and good luck.

One response to “Roth IRA or Roth TSP?”

  1. Regard­less of which option you choose, make sure you take full advan­tage of any match. That is a 100 per­cent return on your money! Next, make sure you invest 15 per­cent of your gross pay into retire­ment vehi­cles. That being said, I would not invest a penny into retire­ment until you have paid off all debts (less a mort­gage) and have a fully funded emer­gency account of 3–6 months of liv­ing expenses. For most fam­i­lies, this would be around $10,000 to $15,000.

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