Are There Better Investment Options Besides the TSP?

Is the TSP the best investment vehicle for federal employees to use? These are some considerations.

The Thrift Saving Plan (TSP) is one of the biggest employer retirement plans in the world. But despite its size, is it really the best place for you to grow your money? Or are there better options to get more bang for your buck?

Two Big Phases in Life

All of us have 2 main phases in our adult lives: when we are working and then when we are retired. 

The TSP has major pros/cons depending on the stage in which you find yourself. 

While You’re Working

While working, most people have the following goals for their retirement investments

  • Put money away in a simple/easy way
  • Invest in high-quality low-fee investments to prepare for retirement

The TSP is incredible at hitting these two goals while you are working as a federal employee. Putting money away into the TSP is as easy as it gets. The money goes straight from your paychecks and it takes very little management once you’ve got it started.

Also, unlike IRAs, the TSP doesn’t have any income limits. This means that you can still put money in the TSP (or Roth TSP) regardless of how high your income is. 

Take my word for it; the TSP is as simple and easy as it gets.

Good Investment Options? 

The TSP is easy to use, but are the investment options good ones? 

Yes! The TSP funds are high quality with very low fees.

Overall, the TSP is a no-brainer to use while you are working. The only reason I’d invest anywhere other than the TSP is if I was already maxing out the TSP and I wanted to save more.

While Retired

The game does change once you retire. Most people have the following goals for their retirement investments:

  • Withdraw money easily
  • Continue investing during retirement
  • Save taxes

In retirement, the main advantages of the TSP are its simplicity and familiarity. However, the main downside is the lack of flexibility. 

For example, here are some things that the TSP doesn’t let you do in retirement that an IRA does allow:

  1. You can’t do Roth Conversions within the TSP. This is one of the most popular tax-saving strategies used in retirement. 
  2. You can’t initiate withdrawals/transfers from your TSP account without your spouse signing off on it. While this isn’t a big deal for most people, it is just an example of some of the red tape that the TSP comes with. 
  3. When you pull money out of the TSP you can’t pick which investment fund the withdrawal comes from. It comes out proportionally to how you are invested. 
  4. You can’t (normally) change how much tax they withhold from your withdrawals. They will normally withhold 20% even if you are only in the 12% tax bracket. You can ask them to withhold more than 20% but not less.
  5. You aren’t allowed to do qualified charitable distributions (QCDs) from your TSP. For those who don’t know, QCDs are one of the best ways to give to charity while also reducing your taxes. IRAs, however, do allow QCDs.

Final Thoughts

The TSP is a no-brainer while you are working. However, it gets more complicated in retirement. 

An IRA has way more options and flexibility which gives you more control over your investments and taxes. However, whenever there are more options there are more ways to mess things up. 

For most people, it comes down to what they value: Simplicity with some red tape, or flexibility with the extra complexity that comes with it. 

About the Author

Dallen Haws is a Financial Advisor who is dedicated to helping federal employees live their best life and plan an incredible retirement. He hosts a podcast and YouTube channel all about federal benefits and retirement. You can learn more about him at Haws Federal Advisors.