Choosing a retirement savings plan early on as a federal employee is beneficial to reap the benefits of a tax-free income in retirement because the plans that get you to retirement may very well change the face of the life you lead. Here we will see about TSP or IRA
Financial awareness and independence in today’s age will set your future apart from the uniformed officers of the generations passed.
And so, this article is to help you choose out of the two most popular retirement accounts: TSP and IRA; both flexible plans that allow you to withdraw your contributions at your beck and call, without penalty. Here is a detailed study of the two:
TSP or IRA
TSP:
Thrift Savings Plan is a contribution plan, which means that the amount you receive as retirement income would be the fruit of what you debit during your working years and the accumulation of the same over time. It is automatically established for the employees by the government and is an attempt to provide them with the same retirement benefits as an employee of the private sector.
IRA:
Individual Retirement Account is available to taxpayers with earned income, eligible based on their income and tax filing status. Roth IRA contributions are tax-free because the contributions consist of post-tax money.
They are opened and funded by the individual concerned, are flexible, and can hold investments in cryptocurrency.
Comparison
- Eligibility Criteria:
- Only federal employees and members of the military are eligible for TSP.
- All taxpayers who meet income limits are eligible for IRA.
- Ownership:
- The government or the employer sponsors TSP.
- The individual concerned owns and funds IRA.
- Investment Structure:
- For TSP, the employer decides the investment structure menu. It is usually a low-cost lifestyle fund that includes an amalgamation of stocks, government securities, and bonds.
- For IRA, one can include anything except life insurance and collectibles. You can manage it yourself and change as you close in on your retirement.
- Contribution Limits:
- For TSP, the limit is $20500 plus the employer contributions (1% automatic and matching funds). Individuals over 50 can contribute another $6500.
- For IRA, the limit is up to $6000 based on income and tax filing status. Individuals over 50 can contribute an additional $1000.
- Loans:
- TSP permits General Purpose Loans (has with no restriction on where to spend but needs to be repaid within five years) and Residential Loans (Used to build or buy a primary residence and should be repaid within fifteen years). Repayment of the loan with interest will go back to your TSP.
- IRAs do not permit loans. Withdrawal of contributions can take place without any penalties or taxes since the contributions consisted of post-tax money in the first place.
- RDM: Required Minimum Distributions is the amount mandatorily withdrawn to avoid tax penalties once an individual reaches the set age for the same. The purpose of an RDM is to ensure that individuals don’t just defer taxation and leave behind the funds as an inheritance.
- TSP requires you to withdraw a specified minimum amount at 72, depending on your life expectancy.
- IRAs don’t require RMDs.
Making the Right Choice
TSP is the right choice if:
- You’re a federal employee and want to lower your taxable income.
- If you feel your retirement income will precede current earnings, you would be paying fewer taxes by choosing this plan.
Although TSP is less flexible than IRA, it is notable that funds in TSP have one of the lowest fees.
Roth IRA is great if:
- You wish to have the flexibility of accessing your funds without penalty or tax.
- You feel your retirement income will exceed your current earnings. In this case, you’ll pay fewer taxes and clear them during your work years.
The two sides of the coin are; that it’s a wise choice to start with TSP since it’s free money. Its contribution limits are noticeably higher and are unaffected by the current income. On the other hand, IRA gives you a whole list of options to invest your money in compared to TSP.
Both TSP and IRA are tax-free retirement plans and flexible to withdraw from without getting penalized.
Depending on your personal and financial standing, we hope this article helps you choose the right plan for you.
FAQs
Q1. Can one have access to both TSP and IRA?
A1. Yes, the eligibility criteria of the two plans don’t coincide. As long as you work for the government, you can select where you deposit your funds; in a TSP or an IRA.
Q2. When can I withdraw from these plans without penalties?
A2. The age for a TSP participant to withdraw without being penalized is 55 years or older. The age for an IRA participant is 59½.
Q3. Can I withdraw the entire amount at once from TSP?
A3. Yes, you can withdraw it all at once, as monthly payments, as you please.
