Paycheck Chronicles

TSP & IRA: You Can Do Both


Across the many different channels where I talk to military members, I’ve heard the same confusion again and again: how the Thrift Savings Plan (TSP) and Individual Retirement Arrangement (IRA) accounts work together.  Here’s the super-cool thing:  basically, they don’t, so there are no special rules to understand.

How They’re Related

The only way in which TSP and IRA accounts impact each other is that if you are eligible to contribute to TSP, regardless of whether you contribute, then it might limit the deductibility of your traditional IRA contributions, if you are in a higher income group.  Other than that, TSP and IRAs are totally separate, and you can contribute to both up to the limits that apply to your situation.

What About Traditional vs. Roth?

Both TSP and IRAs have traditional and Roth choices, and you can choose either or both in each plan.  They’re not related.  For example, you might want to have a Roth TSP account and a Roth IRA account (these are the most popular choices.)  However, based upon your own individual situation, you may prefer to have a Roth TSP but a traditional IRA, or a traditional TSP but a Roth IRA.  What’s right for you depends on a bunch of stuff, including your income level, your tax bracket, and other variables.  The most important thing is that you can do what is right for you without worrying about conflicting rules.

There are, however, special rules for TSP if you’re contributing over the elective deferral limit with tax-exempt income earned in a combat zone.  If you’re in this situation, be sure to reach out to me or someone else who has spent a significant amount of time understanding the nuances of the rules.

Which One Should You Fund First?

Once we’ve cleared up that confusion, the next question I hear is “which should I contribute to first?”  Honestly, there isn’t a wrong answer.  I prefer that people fund TSP first because it is made through payroll contributions and it has super-duper low fees, but there are advantage to IRAs, too.  Again, you need to evaluate your situation.

When it comes to non-working spouses, your only option for retirement saving are IRAs.  Please be putting money into this retirement account for your non-working spouse.  It’s the right thing to do, and you might get some additional tax benefit if you are in a lower income bracket.

If you’ve been wanting to contribute to retirement savings accounts, but have been confused about how TSP and IRAs work together, don’t put it off any longer.  While one choice might be more ideal for your particularly situation, it is more important that you get started saving than that you make the “perfect” selection.  Start your savings now!

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