TSP’s Roth vs. Traditional Roth IRA: Advice From an Expert

Should you invest in the Roth option within the Thrift Savings Plan or do a traditional Roth IRA? One financial advisor offers his advice to a member of the Air Force on what he believes is the best choice.

Should you invest in the Roth option within the Thrift Savings Plan or do a traditional Roth IRA?

Personal money management expert and national radio personality Dave Ramsey offered his advice to a caller from the Air Force on his show recently who asked this question.

“I would do a traditional Roth IRA before I would do a Roth 401k or Roth TSP because you have more mutual funds to select from with more flexibility and more control. The TSP basically has three options I would pick from: the C, S, and I funds,” said Ramsey.

He noted that an exception to this is if one gets an employer match inside of an employer provided savings plan like the TSP since it would be prudent to take advantage of getting that extra money. In this case, the caller didn’t get any match from the Air Force, so the advice given was to do a Roth IRA first. Ramsey recommends that individuals put at least 15% of their income towards retirement, so in this case he advised the caller to put that amount into a Roth IRA, up to the annual contribution limit for IRAs.

For those who do invest in the TSP, Ramsey recommends an allocation that is weighted heavily in the C fund, usually something like: 60% C fund, 20% S fund and 20% I fund and nothing in the G or F funds. Alternatively he has recommended allocations of 40% in the C fund, 40% in the S fund, and 20% in the I fund or 80% C fund, 10% S fund and 10% I fund. Ramsey recommends a lighter allocation for the I fund because he says it has a weaker long term track record.

For those interested in in investing in a Roth IRA, keep in mind the contribution limits that affect this type of account. For 2014, the maximum annual amount you can contribute is $5,500 , or $6,500 for those age 50 and older. To contribute to a Roth IRA, you cannot make over a certain annual income. See the IRS guidelines which delineate what those annual income ranges are for single and married filers.

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Ian Smith is one of the co-founders of FedSmith.com. He has over 20 years of combined experience in media and government services, having worked at two government contracting firms and an online news and web development company prior to his current role at FedSmith.