TSP vs. 401(k): Which Retirement Plan Is Right for You?

When planning for retirement, selecting the right savings plan is essential. For federal employees and military personnel, the Thrift Savings Plan (TSP) is a common choice, while private-sector workers often use a 401(k) plan. Understanding the differences between these plans helps you determine which one aligns best with your retirement goals. In this guide by Model Investing, we’ll explore the key features, benefits, and considerations of Thrift Savings Plans and 401(k) plans, including options like the Roth 401(k), Solo 401(k), and more.

What Is the Thrift Savings Plan?

The Thrift Savings Plan (TSP) is an employer-sponsored retirement plan available to U.S. federal employees and military personnel. It is similar to a 401(k) plan but tailored for government workers. The TSP offers a variety of low-cost investment options, making it one of the most affordable ways to save for retirement. Participants can choose from several thrift savings plan funds, including lifecycle funds, designed for specific retirement dates.

Key features of the TSP include:

• Employer Matching: Federal employers match up to 5% of contributions.
• Low Fees: TSP expense ratios are among the lowest in the industry.
• Simplified Options: Limited but effective investment choices, such as the G, F, C, S, and I funds.

To calculate potential savings, tools like Model Investing’s Retirement Calculator can help estimate growth and retirement readiness.

What Is a 401(k)?

A 401(k) plan is a retirement savings account offered by private-sector employers. It allows employees to contribute a portion of their salary pre-tax, or post-tax in the case of a Roth 401(k), to grow savings over time. Employers often match contributions up to a certain percentage, providing an incentive to save more.

Types of 401(k) plans include:

• Traditional 401(k): Employees contribute pre-tax dollars, reducing their taxable income for the year.
• Roth 401(k): Contributions are made with after-tax income, offering tax-free withdrawals in retirement.
• Solo 401(k): Designed for self-employed individuals.
• SIMPLE 401(k): A simpler alternative to a traditional 401(k) for small businesses with 100 or fewer employees.

TSP vs. 401(k) Differences: 

Feature	Thrift Savings Plan (TSP)	401(k) Plan
Eligibility	Federal employees, military personnel	Private-sector employees
Employer Matching	Matches up to 5%	Varies by employer
Fees	Extremely low (around 0.05%)	Varies; often higher than TSP
Investment Options	Limited (G, F, C, S, I Funds, Lifecycle Funds)	Wide variety (stocks, bonds, mutual funds)
Tax Options	Traditional and Roth TSP	Traditional and Roth 401(k)
Contribution Limits	Same as 401(k): $23,000 (2024), $7,500 catch-up (50+)	$23,000 (2024), $7,500 catch-up (50+)
Portability	Can be transferred to other retirement accounts	Can be rolled into an IRA or other plans

Best Thrift Savings Plan Allocation

The best thrift savings plan allocation depends on where we are in the economic cycle. During economic expansions, the stock funds (C,S, and I) should be favored. During recessions investors should focus on the F and G Funds.

Here is a description of the TSP’s five core funds:

1. G Fund: Short-term government securities with guaranteed returns and no risk.
2. F Fund: Fixed-income securities offering moderate risk and returns.
3. C Fund: Tracks the S&P 500 for large-cap stock market exposure.
4. S Fund: Invests in small and mid-sized U.S. companies.
5. I Fund: Holds international stocks from developed markets.

The TSP also includes Lifecycle (L) Funds, which adjust the mix of stocks and bonds based on age, however Model Investing does not recommend that TSP participants use the L Funds. The simple reason for this is that the L Funds have a fatal flaw they do not take into account current economic or financial market conditions. This means investors could find themselves fully invested in stocks heading into a recession, or heavily invested in bonds when stocks are set to soar.

Is TSP Better Than a 401(k)?

When comparing the Thrift Savings Plan (TSP) to a 401(k), there isn’t a straightforward answer as to which one is “better.” The answer depends on your career/employer and financial goals. The TSP is ideal for federal employees and military personnel, offering low fees and consistent employer matching of up to 5%. On the other hand, a 401(k) is designed for private-sector workers, providing broader investment options and flexibility. Both plans have Traditional and Roth tax options, making them valuable tools for retirement. At Model Investing, we recommend choosing whichever plan best aligns with your employment and long-term goals.

Which Retirement Plan Is Right for You?

TSP for Federal Employees

If you work for the federal government or serve in the military, the TSP is an excellent choice. Its low costs and simple investment options make it perfect for those who prefer a straightforward approach to retirement savings. Using tools like the TSP Allocation Model can enhance account performance and help you reach your retirement goals quickly.

401(k) for Private-Sector Workers

Private-sector employees will benefit from a 401(k) plan due to its flexibility and variety. However, be mindful that not all 401(k) plans are created equal. Some contain a limited selection of high-fee funds while others include a wide variety of low-cost index funds. Employees need to carefully choose which funds they invest in and when. Model Investing’s 401(k) Allocation Model can help with this decision.

When You Have Access to Both

Some individuals, especially those transitioning from military to civilian roles, may have both a TSP and a 401(k). Rolling funds between the two plans can optimize tax advantages and investment opportunities. Model Investing recommends that investors keep funds in the TSP whenever possible, as the TSP has an excellent lineup of easy-to-use low-cost index funds. TSP investors also have access to the G Fund, which is a truly risk-free option that many outside investors wish they could use.

Maximizing Your Retirement Savings with Model Investing!

At Model Investing, we specialize in helping you keep your portfolio allocations in sync with changing economic conditions. Whether you’re using a 401(k) or the Thrift Savings Plan, we offer investment models to help you allocate your portfolio for maximum growth. Our tools and guidance will ensure you’re on the right path to retirement success.

Conclusion

Both the TSP and 401(k) are powerful tools for building a secure financial future. The TSP’s low fees and simplicity make it a standout choice for federal employees, while the flexibility and variety of 401(k) plans cater to private-sector workers. Evaluate your needs, consider your available options, and use resources like those at modelinvesting.com to guide your investment and allocation decisions.

FAQs:

1. Is the TSP better than a 401(k)?

The TSP is better for federal employees and military personnel because of its low fees and consistent employer matching up to 5%. However, a 401(k) offers more investment options and is better suited for private-sector workers. The best plan depends on your employment and retirement goals.

2. What are the cons of the TSP?

• Limited Investment Options: TSP offers fewer choices compared to 401(k) plans.
• Exclusivity: Only available to federal employees and military personnel.
• No Self-Directed Accounts: You cannot directly invest in individual stocks or alternative assets.

3. Is it better to leave money in the TSP after retirement?

Leaving money in the TSP after retirement is a great idea because of the low fees and solid investment options. This is what Model Investing recommends. However, some retirees may prefer to roll over their TSP into an IRA for more flexibility and investment choices. It depends on your financial needs and goals.

4. Can you have both a 401(k) plan and TSP?

Yes, you can contribute to both a 401(k) and a TSP if you transition between federal and private-sector jobs or if you work in both sectors simultaneously. However, your combined contribution limit applies across both accounts.

5. What investment options are available in a 401(k)?

Most plans include mutual funds, index funds, and target-date funds. Some also offer self-directed brokerage accounts for individual stock investments.

6. What happens to my TSP if I leave federal employment?

You can keep your TSP account, roll it into an IRA, or transfer it to another retirement plan like a 401(k). Each option has tax implications, so choose wisely. We recommend you keep your TSP account as long as possible.

7. How does a Roth TSP differ from a Traditional TSP?

With a Roth TSP, you pay taxes upfront, but withdrawals in retirement are tax-free. A Traditional TSP offers tax-deferred contributions but taxes your withdrawals.

8. What are the withdrawal rules for the Thrift Savings Plan (TSP)?

TSP participants can start penalty-free withdrawals at age 59½. Withdrawals before this age may incur a 10% penalty unless exceptions apply.

9. Are there fees for rolling over a TSP into a 401(k) or IRA?

Typically, there are no fees for rolling over your TSP into a 401(k) or IRA, but it’s essential to check the receiving plan’s fees and investment options. Model Investing recommends that you do not move funds out of the TSP because you will lose access to the plan and its funds.

10. Can I contribute to a Solo 401(k) while having a TSP?

Yes, if you are self-employed or have a side business, you can contribute to a Solo 401(k) alongside your TSP, as long as you stay within IRS contribution limits.