The TSP vs. the IRA: What’s the Difference?

The Thrift Savings Plan (TSP) and the Individual Retirement Arrangement (IRA) share many similarities, such as the option to fund with pre-tax (traditional) or after-tax dollars (Roths); having penalties for early withdrawals and failing to take required minimum distributions beginning at age 72. However, there are some important distinctions between the two accounts, such as the cost of investing, the limited distribution and investing options of the TSP, and the match Federal employees receive in their TSP.


Since the Federal government subsidizes the TSP’s investment costs, the cost of investing is substantially reduced. For example, all TSP funds have an expense ratio of 0.042%, meaning that for every $1,000 invested, the investor only pays a fee of 42 cents. As impressive as the TSP’s low fees are, you can now find similar low-cost Exchange Traded Funds and Index Mutual Funds that can be included in your IRA. Therefore, cost is becoming less of a differentiation between the two accounts.

The TSP’s exclusive selection of low-cost funds does take the guesswork out of the equation, whereas you could unknowingly own high-cost funds in your IRA.

Contributions & Withdrawals

The differences between the TSP and IRA are more apparent when we review how you fund the accounts. For instance, as long as you have the earned income to cover your contribution, you can fund your IRA from any source. In comparison, the TSP must be funded by payroll deduction. Another difference between the two is that your spouse can use your earned income to fund their IRA, which isn’t possible with the TSP. And like the 401(k), TSPs have an annual contribution limit for 2020 of $19,500, but IRA contributions are limited to just $6,000 (both allow catch-up contributions of $6,500 and $1,000, respectively). Lastly, the IRA does have income limitations for making deductible contributions, whereas the TSP has no such restriction.

Unlike the IRA, which has very flexible withdrawal options, the TSP has some restrictions that may limit the strategies you can implement during retirement. For example, TSP withdrawals must be made proportionally between funds. This limitation can force you to take withdrawals from a fund that has declined in value. To learn more about the TSP’s withdrawal options, read this article.

Another significant difference between the IRA and the TSP is the Roth IRA’s lack of required minimum distributions (RMDs). At age 72, the IRS will require that you take RMDs from your TSP. If you have both a Traditional and a Roth TSP, the distributions will be drawn proportionately from both. Whereas RMDs are not required from the Roth IRA, although the traditional IRA does have RMDs.

Note: RMDs are not required from your TSP if you are still an active federal employee.

The TSP’s lack of withdrawal flexibility often prompts Federal employees to move their money out of the TSP as they approach retirement.

Investing Options

Although the TSP only offers five investment vehicles: The G, F, C, S, and I funds (with L funds having varying allocations of the five funds), the funds are comprehensive and generally provide an adequate level of diversification for most passive investors. Moreover, the simplicity could be seen as a benefit by eliminating the guesswork of constructing a portfolio from scratch.

In contrast, an IRA provides access to similar funds and many other investment vehicles, such as individual stocks, individual bonds, real estate, and emerging markets. Although an IRA allows further diversification, you will have to do the additional homework of deciding which investments to include in your account. Read this article for a deeper look into the TSP’s investment options.


The Federal Government will contribute up to 5% of your salary to your TSP if you contribute at least 5%. All Federal Employees covered under the Federal Employee Retirement System (FERS) or Blended Retirement System (BRS) are eligible for the match. The breakdown is as follows:

Your agency will automatically contribute 1% to your TSP and then match 100% of the first 3% you contribute and 50% of the next 2% contributed. Who doesn’t like free money!

Since your employer does not sponsor your IRA, you won’t see any free money, so you are on the hook for all funding.

Final Thoughts

There are some important differences between TSP and the IRA, which may impact whether and how you utilize both accounts. However, most Federal employees should contribute at least 5% to their TSP to receive the match; since there is rarely a good reason for passing on free money. And since you can utilize both the TSP and the IRA, there is a strong argument for giving yourself some optionality in retirement and funding both accounts. However, like most things in personal finance, your situation should dictate your retirement planning strategy. If you are uncomfortable with creating your retirement plan or want a professional opinion, you should consult with a qualified financial planner.

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2023 Legislative Change Notice

The SECURE ACT 2.0 passed and impacted many of the articles on this website. While the articles were correct when written, it’s impossible to re-write every article. Please consult a qualified professional (i.e., CFP®, CPA, or attorney) before implementing any strategy.

Author: Jose Armenta, MsBA, CFP®, ChFC®, EA

Hi, I’m Jose Armenta, a Certified Financial Planner practitioner. For over 14 years, I have worked with or among federal employees, from serving in the Marine Corps to my stint as a police dispatcher and now as a financial planner specializing in helping FERS federal employees. In that time, I have spoken to hundreds of federal employees about their benefits and retirement. Helping federal employees maximize their benefits, reduce taxes, and live confidently is a passion of mine. When I am not perfecting financial plans, you’ll find me at the shooting range, playing the drums, or breaching blanket forts with my three little ones.