Go AWOL From Uncle Sam's Savings Plan?
Dear Dr. Don,
I am 23 years old and in the military for about six years now. I am trying to find an investment and retirement plan that will work the best for me. The military pushes us toward the thrift savings plan, or TSP. However, I have been considering opening an individual retirement account as well. Do you think it would be a better idea to invest more into my TSP rather than using the funds to start an IRA?
Thanks,
-Drew Deploy
Dear Drew,
First, thank you for your service to our country. You should start looking for alternatives to your company-sponsored retirement plan when you're not happy with the investment choices or the plan's fees and expenses. However, the rock-bottom expense ratios and the investment choices available in the TSP make it hard for me to say you'd do better in a traditional IRA.
I was all ready to make a Roth IRA argument, saying you could gain some tax diversification benefits by going outside the federal fold to contribute to one of those retirement plans. But the TSP now offers you the ability to contribute to a Roth thrift savings plan. The Roth thrift savings plan was implemented on May 7, 2012.
In general, making after-tax contributions to the Roth thrift savings plan makes sense if you expect to be in a higher tax bracket in retirement than your current marginal federal income tax rate. You won't be able to convert your existing thrift savings plan balances to the Roth thrift savings plan, but going forward you can allocate part or all of your contributions to the Roth thrift savings plan.
I don't think you get matching agency contributions, but any matching agency contributions are held as traditional thrift savings plan balances. Talk to an accountant if you can't decide which retirement plan is right for you.
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