When it comes to funding a retirement income stream, it generally doesn’t matter as much where you save your money – Thrift Savings Plan, IRA, Roth IRA, 401(k), etc. – as it does that you actually save your money.

Unfortunately, sometimes, more attention is paid to whether money should go to this or that type of account than to whether enough is being saved to safely support the desired retirement income stream, or even how the money will be invested once it is saved to a particular kind of account.

I’ve seen this confusion over priorities in the attention to the Roth IRA and Roth TSP topic. Many investors come to me wanting to know whether they should be investing in a Roth account when they haven’t properly determined whether their savings and other resources, such as annuity and Social Security income, will be adequate to support their desired lifestyle in retirement. They are putting the cart before the horse

For most investors, selection of a pretax or post-tax savings plan will have little, if any, impact on their spendable retirement income later in life. Failing to save enough, or to invest savings prudently, however, can have a devastating effect on retirement income.

Successful retirement planning and investment management requires prioritizing your efforts and your resources. Spending time on secondary issues, such as whether a taxable, tax-deferred or tax-exempt account is the best place to save, before making sure that more important factors have been accounted for is foolish. Worry about the biggest, most important decisions first, and then, if you feel the need, you can sweat the smaller stuff. There’s only so much time, effort and expense that can be put into financial planning before the cost starts to work against you, and the trick to success is to carefully deploy your resources where they will have the greatest impact on results.

I recommend the following priorities for your retirement savings contributions:

  • First, save as much as possible in the TSP. In most cases, it’s the best retirement savings environment you’ll have available – especially if you’re covered by the Federal Employees Retirement System, since you’ll also receive agency matching contributions. Max out your allowable TSP contributions, including any catch-up contributions if you’re age 50 or older.
  • Your next target should be an employer’s 401(k) plan that will match your contributions. The matching contributions are the key to this one, since most employer-sponsored retirement plans are otherwise not very attractive. Grabbing the free money offered by your employer makes this a no-brainer, and after you leave that job, you can roll your balance into your TSP account or an IRA at a discount broker.

Next, direct your savings through deductible contributions to a traditional IRA at a discount broker. Depending upon your circumstances, you may only be able to do this through your spouse, but if available, I generally prefer a certain tax break today than a potential tax break tomorrow.

After that, contribute to a Roth IRA at a discount broker, if allowed, and after that to a taxable discount brokerage account or other taxable savings account.

It is likely that you don’t have access to all of these options because there are eligibility restrictions. Just skip through them until you come to the next available alternative. In some cases, that may mean investing only in the TSP, or in the TSP and a taxable discount brokerage account.

Notice that I didn’t mention nondeductible contributions to a traditional IRA, deferred annuity or variable life insurance policy. These vehicles are poor choices for retirement savings, when compared to the alternatives.

Once you’ve saved the money to the right accounts, you’ll have to invest and manage the money carefully to maximize the retirement income stream it will support. This is a difficult exercise that may require professional help. I encourage you to use the TSP as your guide in all of your accounts by trying to emulate its advantages of low cost, efficient diversification, minimized risk and simplicity.

Doing so will have a bigger impact on the results than whether your savings accounts are taxable, taxdeferred or tax-exempt.

Written by Mike Miles
For the Federal Times
Publication November 29, 2010