Can I Invest in a TSP & IRA at the Same Time?

by Beth Winston

Saving for retirement should be a priority in your financial life. If you’re in the military or you work for the federal government, you have the option of contributing to a Thrift Savings Plan or TSP, the equivalent of a private sector 401k. Many people also look after their retirement with individually directed IRA accounts, which offer good tax benefits.

Both

You are allowed under federal regulations to contribute to both a TSP and an IRA. There are limits on annual contributions to both kinds of accounts and you must abide by these, but they are not mutually exclusive. If you are able, you may contribute your maximum allowance to both a TSP and an IRA in the same year.

Matching

As of publication, if you maxed out your TSP and your IRA, you would be saving $20,500 a year toward retirement. While that’s an admirable goal, for most people it’s tough to achieve. This means you must prioritize which to fund first. Check with your employer about matching funds. If you are eligible for matching, you should contribute enough to your TSP to take advantage of the full match. This is, in effect, free money, and you should not miss out on it.

Contributions

After you have maximized your employer matching, the next thing to consider is your tax position. If you are in a relatively low tax bracket right now, but expect to be at a higher tax bracket when you retire (often the case for military members), it makes most sense to contribute to a Roth IRA. Your contributions are post-tax (at your current low rate), and are not taxed again when you withdraw them. In contrast, a TSP gives you a tax advantage now, but withdrawals are taxed when you retire.

Flexibility

If you invest in an IRA, you can choose your own investments and the range of possibilities is very wide. If your money is in a TSP, you have a choice of just 10 mutual funds as investment vehicles. This decision will depend on whether you’re more comfortable choosing your own investments or whether you like the ease of management of a TSP.