TSP vs. 401(k): Choosing the Right Retirement Plan for You

TSP vs. 401(k): Choosing the Right Retirement Plan for You

4 mins read

The retirement savings situation in Europe is a mixed bag. Countries like Denmark and the Netherlands that rely on a pension system rank very highly. Other countries like Italy and Spain score lower.

While some Europeans struggle to retire, the situation is more ominous in the United States. More than half of Americans do not believe they have enough saved for retirement. Fewer Americans have access to a pension and instead rely on 401(k) or Thrift Savings Plans (TSP) to retire.

Read on for a comprehensive guide to the TSP vs. 401(k) debate. Explore relevant topics such as contribution limits and withdrawal rules.

What Is a TSP?

TSP is a retirement account for federal employees of the U.S. government, including members of the military. In part, TSP members get what they put into it.

The U.S. government offers a $1 for $1 match up to 5% of your income. However, the first 1% is an automatic contribution from the employee or service member’s agency.

You can invest in different index funds using your TSP savings. You can choose funds with a higher return, like the C or I Funds. Other funds, like G and F funds, are pegged to the bond market and have less risk.

The elective deferral limit for 2024 is $23,000. Elective deferral is the amount that employees contribute to their traditional or Roth plans. If you have fallen behind on maxing it out each year, you can add another $7,500 in catch-up contributions.

TSP allows for flexible withdrawal options. When you leave federal service, you can opt to withdraw all of your money. Others choose routine installments or a partial distribution of a specific amount.

When you reach a certain age, it triggers the required minimum distributions (RMDs). This is the minimum amount that you must pull out of your TSP account each year.

What Is a 401(k) Plan?

A 401(k) plan operates very similar to a TSP. The biggest difference is that 401(k) plans are privately managed.

Also, instead of a limited number of funds to invest in, 401(k) plans have more flexibility. Your market manager can invest your retirement savings in a wider pool of index funds, stocks, and bonds.

Understanding 401k contribution caps is no different than the TSP. The same $23,000 annual limit, with the potential for catch-up contributions, exists for 401(k) plans.

When you turn 59 ½ years old, you can start taking penalty-free withdrawals from your 401(k) plan. If you need the money earlier, the IRS assesses a 10% early withdrawal penalty. Like the TSP, RMDs come into play when the account holder turns 72 years old.

Your Guide to the TSP vs. 401(k) Plan Debate

Both of these savings accounts are good options for retirees. The TSP boasts lower fees, while the 401k provides account holders with more investment options. With either option, if you reach the contribution cap each year, you are going to be well off for retirement, especially if you contribute early.

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