The federal government’s retirement savings program is called the thrift savings plan (TSP). All members of the military as well as federal employees are eligible to have a TSP account. An individual retirement account (IRA) is another type of retirement account available to anyone who meets certain requirements. Both programs are intended to help insure that older Americans will have enough money to live on when they retire through multiple retirement accounts.
Basics of a TSP
The TSP allows participants to contribute a set amount from each paycheck. For those in the military, a TSP deposit can also be made from tax-exempt earnings obtained while in certain hazardous areas. Additionally, military members can specify that all or part of supplemental pay received, such as hazardous duty pay, be placed in the TSP account. Money in a TSP is added before taxes, reducing the account holder’s tax liability for the year in which the contribution is made.
As of 2020, the standard amount contributed from a federally employed individual is 5 percent of their pay. If that 5 percent exceeds the annual limit that the IRS places on contributions, the additional amount will automatically go towards the catch-up amount, but only if you are 50 or over.
Read More: Can I Move a Traditional IRA into My TSP?
Basics of an IRA
An IRA has certain rules regarding who may contribute and how much may be placed into an IRA in any one year. As of the time of publication a person is allowed to contribute a maximum of $6,000 to his IRA (up to $7,000 if 50+). Income restrictions apply differently for traditional and Roth IRAs. For example, a single person can earn up to $124,000 to fully contribute to a Roth compared to $196,000 for a couple filing jointly. Single and married couples not covered by work retirement plans can fully contribute to a traditional IRA regardless of their income.
Contributions to Both Accounts
You are allowed to deposit money into both an IRA and a TSP account, as long as you meet the eligibility requirements. You can open a Roth IRA or a traditional IRA, whichever you feel will work best for you. In most cases you can make small, regular deposits into your IRA or just a few larger deposits during the year, unless the IRA you chose has restrictions. If you wish, you can have more than one IRA, but your total contributions cannot exceed the annual IRA limits for all of your IRAs combined.
Taxes on Both Types of Accounts
Your TSP account will normally not have any taxes due until you begin to take the money out when you reach retirement age. The same is true of most kinds of IRAs, but a Roth IRA handles taxes differently. If you choose to contribute to a Roth IRA, you must pay taxes on the money before you put it in the account. The advantage of doing this is that you don’t need to pay taxes on either your contributions or the earnings of your Roth IRA when you take money out of the account in retirement.
Read More: Can You Enter Your TSP Contributions as a Deduction?