Should You Put Your Money into a Roth IRA or a Roth TSP?

Visualization of retirement nest egg

Last week, my wife, my daughter and I were in the middle of a discussion on where to get takeout when I had a flashback to this article. Sounds crazy, I'm sure (welcome to the inner workings of my mind!). But a couple of years ago, I'd compared the choice between a Roth IRA and the Roth TSP to a family decision on where to eat out, and something about that similar discussion fired some neurons and I decided to dust this off.

With all the turmoil of 2020 behind us (fingers crossed), it could be a good time to assess your plans and preparations for retirement.

When it comes to saving for retirement, "Should I use a Roth IRA or the Roth TSP?" may be a question you're deliberating. And while the immediate ramifications may not be as tangible as what's for dinner, the long-term implications could be huge.

Here, I'll take a quick look at 11 factors or considerations that may play into your own decision as you craft your retirement savings strategy.

1. The Roth TSP rules on the expense front. It's hard for an IRA to compete when it comes to operating expenses. In 2019, the average expense ratio with the Thrift Savings Plan was .042%. That equates to 42 cents on every $1,000 invested. On the other hand, what you pay with an IRA will depend on where you invest but, likely, it will be more -- perhaps much more.

2. Access favors the Roth IRA. You can withdraw contributions to a Roth IRA at any time without any income taxes or penalties. That's not an option available through the TSP.

3. Loans are available through the TSP. Speaking of access, the TSP does allow loans. Taking one is not necessarily a good idea, but it's not an option with a Roth IRA.

4. The Roth IRA has more investment choices. Currently, the TSP offers a limited selection of investments. Don't get me wrong, they are broad-based and, in the case of the G Fund, unique. However, if you're looking to invest in real estate, commodities, emerging markets or other more "niche" areas, the TSP doesn't give you the options that a Roth IRA does. By 2022, the TSP plans to make a "mutual fund window" available that should allow participants a wider selection of investments.

5. Either can be automated. Pay yourself first. This is a concept that works. Since contributions to the TSP are made via payroll deduction, that is, by definition, "first." Of course, you can set up an allotment or an automatic investment to fund your Roth IRA and get similar results. What I do like about the TSP is the option to set up your contributions as a percentage of your pay rather than as a flat dollar amount. Over time, with pay raises and promotions, you'll be saving more, even if you don't increase that percentage (which I hope you will!).

6. Both should be top of mind during a deployment. Roth, whether it's TSP or IRA, can be a great way to save for retirement while you're in a tax-free combat zone. Roth contributions with tax-exempt combat pay offer the potential to build a pot of retirement money -- your contributions and potential growth -- upon which you will never pay taxes.

7. The Roth TSP is available to all service members. Anyone who is currently serving can sign up and contribute to the Roth TSP. There are no income limits. In 2021, single taxpayers with income above $140,000 cannot contribute to a Roth IRA ($208,000 for joint filers).

8. The TSP allows you to pile on. In 2021, the maximum you can contribute to the Roth TSP is $19,500. If you're 50 or older, there's an extra additional $6,500 "catch-up" contribution. For a Roth IRA, the max is a relatively paltry $6,000, plus an extra $1,000 for those 50 or over.

9. The TSP may offer free money. Eligible military members covered by the Blended Retirement System who contribute 5% of their own money can garner a total of 5% in employer contributions to their TSP account. That's a sweet deal you don't want to miss out on.

10. The Roth IRA can simmer longer. The Roth IRA is not subject to Required Minimum Distributions. On the other hand, you must begin to pull money out of the Roth TSP at age 72.

11. The Roth TSP may offer more protection. In the event of liability, lawsuits or bankruptcy, the TSP comes with robust federal ERISA protections. IRA protections vary and are based on state laws.

In whatever form or fashion, putting away money for retirement will help create flexibility and options for you -- perhaps adding a few more upscale options to your retirement "where should we get dinner?" dilemma -- down the road. The most important decision may not be which of the two makes more sense, but rather your decision to save.

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