If you’re like many government employees, your thrift savings plan (TSP) balance is one of your largest retirement assets. The TSP is a valuable retirement resource. It allows you to make pre-tax contributions for your retirement savings. You can allocate the contributions across a range of investment choices and implement an allocation that meets your needs and goals.

One of the things that makes your TSP such a valuable savings tool is that it’s tax-deferred. That means you don’t pay taxes on investment growth as long as the funds stay inside the TSP. Instead, you pay taxes when you take distributions in retirement. Tax-deferral may help your funds compound at a faster rate than they would in a taxable account.

Matching contributions can also help you accumulate retirement assets. Your agency makes an automatic 1 percent contribution to your TSP, regardless of whether you contribute money. The agency then matches your contributions dollar-for-dollar on the first 3 percent, and 50 cents on the dollar on the next 2 percent. If you contribute 5 percent of your salary to the TSP, your agency would contribute another 5 percent, giving you a total contribution of 10 percent.1

While the TSP is a powerful savings tool, it’s not the only savings vehicle available. You could also contribute to an individual retirement account (IRA). An IRA is a tax-deferred account held at a financial institution. Most IRAs offer a broad range of investments so you can create an allocation that’s right for you.

How much can you contribute to an IRA?

The IRS sets annual limits on how much you can contribute to an IRA. In 2019, you can contribute up to $6,000 to an IRA. You can contribute an additional $1,000 if you are age 50 or older. These contribution limits are usually increased every few years.2

You can contribute to an IRA no matter how much you contribute to your TSP. The two are independent of each other. Keep in mind, though, if you’re a high-earner, there may limitations on how much you can contribute to certain types of IRAs, like the Roth.

Which type of IRA is best?

There are a few different types of IRAs, but two are more popular and widely-used than the rest. One is the traditional IRA, which is the first type of IRA that was introduced. With a traditional IRA, you can deduct your contributions from your taxes, assuming you are under income limitations. Your funds grow tax-deferred until you decide to take distributions, which are taxed as income. If you take a distribution before age 59 ½, you could face a 10 percent penalty.

The other option is a Roth IRA. With a Roth, you can’t deduct your contributions. However, your funds grow tax-deferred and all distributions after age 59 ½ are tax-free. You can withdraw your contributions at any time without paying taxes or penalties, but withdrawals of growth could face taxes and penalties before age 59 ½.

There’s no universal right answer on which type of IRA is best. It depends on your unique needs and goals. A financial professional can help you determine if an IRA is right for your strategy and which type you should choose.

Ready to boost your savings strategy? Let’s talk about it. Contact us today at Benefit Resource Partners. We can help you analyze your needs and implement a plan. Let’s connect soon and start the conversation.

1https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/typesOfContributions.html

2https://www.irs.gov/retirement-plans/traditional-and-roth-iras

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18712 – 2019/3/28