Receive Pro Tips & Insider Knowledge On How To Successfully Build Your Real Estate Empire

TSP Vs. 401K: Which is Better?

If you are an employee of the federal government, you have the option of opting for a TSP (Thrift Savings Plan) or a 401K. Both are viable options for your retirement, but knowing which one is better can help you make the choice that’s right for you.

 

For Federal Government employees, a TSP may be a better option. It lacks investment opportunities, but it pairs with the FERS pension for a bigger retirement fund in the future. A TSP can be a traditional or Roth plan. Both options have fewer fees, and better withdrawal options than a 401K and the Federal Government matches 5% towards a TSP.

 

If you’re unsure whether you’re better suited for a TSP or a 401K, this article is here to help. Below, you will discover the similarities and differences between these two defined contribution plans so you can make a decision you’re satisfied with for your future.

Is TSP Better Than 401K?

It’s not a cut-and-dry and answer regarding which defined contribution plan is “better”. It is more important to know the facts about each option before making a decision. Keep reading to find out more information about the finer details of each plan.

Type of Defined Contribution Plan

A TSP and a 401K are very similar. Both are designed to contribute a set amount of money to your retirement. TSPs and 401Ks both offer traditional and Roth options. 

 

  • TSP Traditional – In this situation, you can contribute to your retirement before taxes are taken from your paycheck. However, taxes will be applied and taken from future withdrawals. This option provides a tax break.
  • TSP Roth – With a Roth plan, you pay taxes upfront, so you do not have to pay future taxes during retirement.

 

Tip: If you do not know which type of TSP is right for you, here is a handy comparison calculator that can help.

 

A TSP also works with a FERS pension, which means more money in your pocket for retirement.

Contribution Limits

Both a TSP and 401K have the same contribution limit total: $26,000. This is due to an original $19,500 plus an extra $6,500 for employees over 50. If you’re an active military member deployed in a combat zone, you can save up to $58,000. 

Kiplinger

Plan Fees

Both TSP and 401K plans have fees: administrative and investment. However, one of the major differences between these plans is that a TSP has less expensive fees than a 401K, which could take anywhere from 0.5% to 2% depending on the business, provider, employees, etc. 

 

Here’s a breakdown of fees.

 

  • Administrative – This includes things such as operating and maintaining records, providing participant services, printing and mailing notices, and more. The cost is paid by forfeitures and fees combined.
  • Investment – This dee describes the amount necessary to pay for the investment managers. 

 

To pay for the administrative and investment costs, TSP and 401K plans will take a reduction of one’s retirement funds. When it comes to a TSP plan, all participants have the same percentage based on the expense ratio: expenses divided by the amount in the fund.

 

Depending on the type of fund you choose (G, F, C, S, or I), you will pay anywhere from 0.049% to 0.055%, which is significantly lower than the 401K percentage.

TSP.GOVInvestopedia

Investment Options

Where the TSP falls short is investment options. While a 401K has many investment options ranging from fund families to emerging markets, a TSP has far fewer opportunities. If you are looking to do some complex investing, a 401K may be a better choice. 

 

It’s not all bad for the TSP investment options, though. You still have the option of choosing between:

 

  • Low-risk investment – government securities, fixed income funds
  • Mid to high-risk investment – such as international funds and common stock

Minerva Planning Group

Matching

You may have heard of the term “matching” when it comes to your retirement fund. Well, the TSP tops a 401K when it comes to matching. That’s because the Federal Government will provide up to a 5% match for your retirement contribution.

 

A 401K, on the other hand, tends to be a bit less. Each company will provide its own matching limits, but the average is from 3% to 4.3%. Remember – some companies may even do less than 3%, which is not ideal.

Investopedia

Withdrawal Options

Beginning in late September 2019, TSPs opened up an impressive amount of withdrawal options, including:

 

  • Installment Payments – These can be made monthly, quarterly, or annually with a fixed dollar amount
  • Single Withdrawal
  • Annuity Purchase
  • Combination of any three

 

After you retire, there is no limit to the number of withdrawals one can make to their TSP. However, withdrawals can only be made once every 30 calendar days.

TSP.GOV

Is TSP a good retirement plan?

A TSP (traditional or Roth) is an excellent retirement plan to set you up for financial security during retirement. There are many pros to going with a TSP over a 401K, one of the biggest being lower fees.

Is thrift savings plan the same as 401k?

Although they are highly similar, a TSP is not the same thing as a 401K. They have their subtle differences, and a TSP is only offered to employees of the Federal Government.

Why is TSP the best?

A TSP is simple, automatic, and has a high contribution limit with very few fees. If you are a Federal Government employee, a TSP is undeniably the best option with plenty of benefits over a 401K.

USAAEF

Why is TSP bad?

There aren’t many drawbacks to a TSP. The only potential reason it is “bad” is that once you pull the money out, it’s gone. As long as you are smart with this fund, it can be highly successful and provide you with a secure retirement.

My Federal Retirement

Final Thoughts

A TSP and 401K are similar, but they have their distinct differences, too. If you are a Federal Government employee, a TSP is the better choice. It has lower fees, higher matching, and there are still many ways to customize it how you’d like with investments and withdrawal options.

If you’d like to see the discussions of TSPs and 401Ks from real ADPI members, join our Facebook Group!

 

Kelly Madden

Kelly Madden

Kelly is a 14-year Air Force spouse, real estate agent, real estate investor, and virtual assistant. After starting out as an intern with ADPI in 2019 and later acting as ADPI’s blog coordinator in Jan 2020, Kelly is thrilled and honored to take on the role of ADPI’s new Community Manager as of November 2020. She looks forward to building our community and supporting our members throughout their real estate investing journey.
Kelly Madden

Kelly Madden

Kelly is a 14-year Air Force spouse, real estate agent, real estate investor, and virtual assistant. After starting out as an intern with ADPI in 2019 and later acting as ADPI’s blog coordinator in Jan 2020, Kelly is thrilled and honored to take on the role of ADPI’s new Community Manager as of November 2020. She looks forward to building our community and supporting our members throughout their real estate investing journey.
Share the love
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Share on pinterest
Pinterest
Share on facebook
Share on twitter
Share on linkedin
Share on pinterest

Receive Pro Tips & Insider Knowledge On How To Successfully Build Your Real Estate Empire

Team-photo-sidebar

Our team strives to educate, mentor and empower active duty service members, veterans, spouses and military families to reach financial freedom through creating passive income through real estate investing. Our goal is for Active Duty Passive Income (ADPI) members to own as much of America as possible.