Does splitting your TSP affect your growth?
Does splitting your TSP worry you? Many Federal Agents worry that saving for retirement by using the Thrift Savings Plan (TSP) AND outside accounts might slow down their nest egg’s growth. The same concern pops up when a Federal Agent in retirement divides their balance between the TSP and, say, an Individual Retirement Arrangement/Account (IRA).
Any time I get a question more than twice, I try to write about it. And quite a few have recently asked about the first scenario where one contributes 5% to their TSP (to get the full matching contribution) and then considers opening, for example, a Roth IRA to fund the next portion of their retirement before going back to the TSP to save more. Well, let’s look at this first scenario by way of an example, which will hopefully clear up some confusion.
Example please:
Let’s say Wyatt – age 33 – is a Federal Agent out there catching fugitives, slugging down way more black coffee than even an elephant can handle and making $100,000 per year as a GS – 12 in Tombstone, AZ. Wyatt, being ahead of his time, signed up for MoneyArmor™ and built out his Financial Scorecard.
He then decided that he wanted to initially shoot for a 15% savings rate toward his retirement. It’s just a starting point. Something for him to work towards. Wyatt saves 5% into his TSP to ensure he gets the full match from Uncle Sam – free money essentially.
Next, Wyatt wants to open a Roth IRA at Charles Schwab. Wyatt is smarter than the average bear. He realizes that it’s good for his financial education if he starts getting familiar, even just a little, with how outside accounts (outside the TSP that is) work. He also understands that there’s nothing wrong with getting that 5-year clock going on the Roth IRA. Wyatt knows that, generally speaking, he needs to have a Roth IRA open for at least 5 years. He also has to be over age 59 ½ in order to remove the earnings tax and penalty free. Since Wyatt is still very young, the 5-year rule isn’t that big of a deal. But hey, being early is being on time. Wyatt goes for it and opens his Roth IRA and then contributes the maximum he can (for 2024), $7,000.
Summary of Wyatt’s Smart Money Moves:
So Wyatt has contributed 5% (or $5,000) to his TSP and received a full matching contribution from the government for doing so. Now he’s contributed another 7% (or $7,000) of his $100,000 salary to a Roth IRA at Schwab. This is a total savings rate of 12% toward retirement. At this point, Wyatt decides that he’ll go back into the TSP and contribute another 3% (or $3,000).
Wyatt has met his goal of 15% toward retirement savings by:
- TSP = 5% then,
- Roth IRA = 7% then,
- Back to the TSP = 3%.
Mission accomplished. Wyatt meets his “math goal” of 15% for this year (and he’ll be able to monitor this going forward with his Scorecard). Moreover, by opening a Roth IRA, he’s building his financial armor and getting familiar with outside investments.
Now, the concern that sometimes creeps in stems from a misconception. It’s that keeping all funds together in one large balance (say the TSP) leads to faster growth. Let’s debunk this myth and explore why splitting your TSP doesn’t necessarily impact your overall returns.
Understanding Investment Growth
The growth of your retirement savings depends on, generally speaking, the expenses associated with the investment and the rate of return. It’s not about whether the funds are in one account or several. Here’s two scenarios to illustrate this point:
Scenario 1: One Large TSP Account
➢ Total balance: $300,000
➢ Annual return: 10%
➢ Total Growth after one year: $30,000 (10% of $300,000)
➢ New Total Balance: 330,000
Scenario 2: Split Between TSP and One Roth IRA
➢ TSP balance: $200,000
➢ Roth IRA balance: $100,000
➢ Total balance: $300,000
➢ Annual return for each account: 10%
Scenario 2: Growth after one year
➢ TSP: $20,000 (10%of $200,000)
➢ Roth IRA: $10,000 (10% of $100,000)
➢ Total Growth after one year: $30,000
➢ New Total Balance: $330,000
As you can see, the total growth remains the same in both scenarios, all things being equal (i.e., the expenses of the fund, rates of return etc.).
As Federal Agents, it’s important to understand that splitting your TSP retirement savings into the TSP and one or multiple IRAs (or for that matter other types of accounts such as Health Savings Accounts) won’t inherently slow down your nest egg’s growth. In fact, key factors affecting growth are the expenses of the investment, the rate of return and the total amount invested, not the number of accounts.
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