Your TSP is Not the Same as an IRA

TSP millionaire by Bill Eager

It doesn’t hurt to say – one more time – that a Thrift Savings Plan (TSP) is not the same as an Individual Retirement Arrangement (IRA). Yes, they work in similar fashion being that they are tax-advantaged retirement savings plans, but they have different rules. If you don’t know these rules, you could pay quite a bit at tax time.

Some people have questioned the legitimacy of the Roth tax trap outlined in another article, with one person saying when someone takes money out of a Roth TSP, the withdrawals are seen as coming from their own contributions. If the withdrawal is more than the amount contributed, then it can be taxed.

While the statement is true for Roth IRAs, it’s not for TSP withdrawals or another employer-sponsored retirement plan. Should someone see this statement and take it to heart for the TSP would be in for a real shock at tax time.

What are some other key rules’ differences for the TSP and IRA?

-One rule is to stop people from contributing to a Roth IRA or deduct contributions from a traditional IRA if the income they have is above a certain amount. No limits apply to TSP.

-A person can contribute to a TSP only from their federal salary via a payroll deduction, but contributions to an IRA can come from any source.

-A traditional IRA can be converted to a Roth IRA, but money in the traditional TSP must remain in the account and cannot be moved into a Roth TSP.

-Contributions to the traditional IRA are no longer acceptable if you are working when you turn 70 1/2. Instead, you must start taking the required minimum distributions. If you’re working after this age, you can still contribute to the TSP without having to take any Required Minimum Distributions until you retire.

-If you quit working in federal service when you turn 55, you can access the money in your TSP without any penalties. For special category jobs (air traffic controllers, customs and borders protection officers, DSS agents with the Department of State, firefighters, law enforcement officers, nuclear materials couriers and Supreme Court and Capitol Police) the age is 50. In an IRA, there is a 10 percent penalty on early withdrawals for whatever is used before the age of 59 ½.

Always read the rules of each savings plan before you do anything to ensure you are not hit with an unexpected tax bill.

IRA and TSP fees

Other Aubrey Lovegrove Articles

Aubrey Lovegrove: Tax Numbers You Must Know This Year

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Federal Workers: How Long Does it Take to be Vested? By Aubrey Lovegrove

Financial Goals to Aim for This Year by Aubrey Lovegrove

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