TSP vs IRA - Contribution Prioritization

[bubbagump]

This post is in reference to in-service contributions while still employed with the Fed, not rollovers.

The "FIRE" and personal finance hive mind typically suggests investing in this order:
1. Employer 401k up to the match%
2. Max out IRA
3. Then, back to employer 401k up to the max/limit

The most cited reasons for favoring the IRA over the employer 401k are: fees, investment choices, and penalty/tax free access to contributions/basis (Roth IRA).
However, TSP fees are relatively low and the investment choices, albeit limited, are arguably quite good for the average investor.

I would argue then, the strongest positive to favoring the IRA is the ability to access the contributions portion of a Roth IRA. This could be helpful in the event of an early retirement, emergency, etc. However, I personally also see that as a potential negative. It might be tempting to tap into that money for uncompelling reasons before retirement. This is especially problematic if the Roth IRA holds the majority of one's retirement portfolio.

What are your thoughts on prioritizing an IRA over the TSP? Is anybody here intentionally following that strategy, or vice versa?

 

[evilanne]

Roth TSP didn't come out until 2012 and their rules were confusing so and at the time thought the tax deferral was better so I stuck strictly with the traditional. With hind sight, I should have started putting money into a Roth years earlier (it came out in late 90's but I didn't open a Roth until 2013).
If you are looking at early retirement, I generally agree with the FIRE outlined.
For #1 I would suggest employees just starting out or early in career put at least 50%, if not 100% in the Roth as they are at their lowest salary & tax rates. The government match will all be in traditional. With families with kids, buying a house etc. you also have more deductions or tax credits reducing your effective tax rate.
Agree with #2 Max out Roth IRA. There are a lot of ETFs similar to TSP that have lower expense ratios than TSP and more investment options not available in TSP. You can access your contributions at any time without penalty and avoid any penalty for certain things like medical expenses >10% of income, up to $10K for first time home buying and higher education. I think the Roth is a better option than other college savings plans or financial savings accounts. It may take discipline not to tap into it but most people cannot afford a $500 emergency these days. You can also borrow from the TSP for emergencies or buying a house while working relatively easy.
For #3 If you are planning on retiring early, before 55 or 50 for LEOs or before being eligible for a pension, I would say that you also need long term investments in a regular brokerage accountaccount. There is nothing wrong with maxing out your TSP but you may want to contribute less and allocate a portion to your brokerageaccount. You can use IRC 72(t) to access retirement funds without penalty but you are limited to how much you get each year and it can vary based on you account balances. see https://institutional.fidelity.com/...or-traditional-ira/understanding-72t-and-sepp You are limited based on the life expectancy tables, for single it ranges from 2.5% at 46 years old to 3.5% at 59. Both Roth & brokerage accounts give you more flexibility if you are retiring early. With the brokerage, long term capital gains rates are lower. I don't think you can ever have too much in Roth
As government employees you will be getting a pension and I think you marginal rate in retirement will be the same or higher if you consistently contribute to your tsp thru out you career.

..

 

[bubbagump]

For #3 If you are planning on retiring early, before 55 or 50 for LEOs or before being eligible for a pension, I would say that you also need long term investments in a regular brokerage accountaccount. There is nothing wrong with maxing out your TSP but you may want to contribute less and allocate a portion to your brokerageaccount. You can use IRC 72(t) to access retirement funds without penalty but you are limited to how much you get each year and it can vary based on you account balances. see https://institutional.fidelity.com/...or-traditional-ira/understanding-72t-and-sepp You are limited based on the life expectancy tables, for single it ranges from 2.5% at 46 years old to 3.5% at 59. Both Roth & brokerage accounts give you more flexibility if you are retiring early. With the brokerage, long term capital gains rates are lower. I don't think you can ever have too much in Roth
As government employees you will be getting a pension and I think you marginal rate in retirement will be the same or higher if you consistently contribute to your tsp thru out you career.

..

Interesting you mention that. I will be eligible to retire at age 50. I've been researching how a Roth IRA and/or a taxable brokerage might be beneficial in early retirement.

 

[FAAM]

Wow - great topic/question & thanks both for your two great posts here.
I also am retired, 3 yrs ago FERS with >38 yrs service - for context; my wife still works for the Fed as a Civil-Servant and will retire with very modest FERS-pension in next couple of years; both in our mid-60s. We are both pretty healthy with good outlooks for now.

I contributed usually the Max I could to TSP (not IRA until retired & then to get some of my "401k" out of TSP, & mostly to convert Traditional $s to Roth $s); I started contributing to TSP Roth a couple years after it was available - only partially for a few years, then all I could later & till retirement -- I wish I'd known better earlier & been able & willing to contribute more of it to Roth; however that wasn't available in TSP most of my career, & with 4 kids to raise & help with college & all, the extra in the paychecks at the time with the TAX-Deferred TSP contributions was helpful in those times of my life. My wife is maxing out her TSP Roth contributions nowadays - regular & catch-up.

I agree with what Bubbagump & evilanne both say/ surmise. I do agree/think that taxes for my wife & I will not likely go down much if at all - & may very well rise over the next few years. Thus, I (we) agreed & have been acting to convert most or all of my (our) Traditional TSP/IRA $s to Roth, somewhat strategically over a few-years period... and taking the required tax hits at the time that go with that... Because - we think we'll at least break-even on the numbers overall, & will appreciate future tax-free withdrawals (with tax-free on all Roth-contribution & post-conversion GAINS too) & no RMDs on the ROTH $s. I also think the tax-free ROTH benefits will largely carry over if we pass any of that on as inheritances. One thing I really dislike after age 65 is that Roth-conversions-amounts in a tax-year apply to your "MAGI" regarding Social Security & Medicare-premiums considerations even though you are not "withdrawing" those TSP/IRA funds at that time (converted amount IS NOT "income" to me then!). (Note that the MAGI generally, for Medicare purposes at least, looks back to your taxes two-years prior to the "present" year in question).

I'm curious to look into the IRC 72(t) & brokerage-account stuff mentioned too.

 

[bubbagump]

It seems having a diverse pool of money to pull from in retirement is beneficial especially if retiring early.

Roth & Traditional
TSP
IRA
HSA
Taxable

I currently have money accumulating in the traditional TSP, Roth TSP, and HSA.

I also have a chunk of money in a taxable investment account. I'm considering funneling that into a Roth IRA or keeping it in the taxable and investing it as part of my retirement portfolio's asset allocation