TSP or Fidelity and Vanguard? A $1 million case study

1. The question every federal retiree asks

When a federal employee retires, a natural question arrives almost immediately: should you keep your money in the Thrift Savings Plan, or roll it to an IRA at a firm like Fidelity or Vanguard?

The pitch for moving is easy to understand. Fidelity and Vanguard offer thousands of funds, more flexible withdrawals, and — the headline argument — index funds with expense ratios as low as, or even lower than, the TSP’s. It sounds like a straightforward upgrade.

It usually isn’t. When you run the actual numbers, the TSP-or-Fidelity-and-Vanguard decision turns out to be much less about cost than it first appears. The fee difference, on close inspection, is almost a rounding error. The real decision is about control, the G Fund, and how you want your retirement income designed. This dispatch walks through a $1 million case study to show why.

2. The fee argument, tested on $1 million

Start with the argument people lead with: lower fees. Take a retiree who rolls a $1,000,000 balance at age 65, with the same investment mix whether it stays in the TSP or moves to an IRA. Project it forward 20 years at a 6% return, and vary only the expense ratio:

Look at the top two rows. Rolling $1 million to an IRA and buying the cheapest available index funds beats staying in the TSP by about $6,000 — over twenty years. On a balance that grew past $3 million, that’s a rounding error. The “lower fees at Fidelity and Vanguard” argument, taken on its own terms, is real but trivial.

Now look at the bottom row. If the rollover lands in an IRA managed by an advisor charging a 1% assets-under-management fee, the same $1 million ends at $2,653,000 instead of $3,177,000 — a $524,000 difference. That is not a rounding error. That is the genuine financial stakes of the rollover decision, and it points the opposite direction from the sales pitch.

Rolling $1 million to cheaper index funds saves about $6,000 over twenty years. Rolling it to an advisor charging 1% costs about $524,000 over the same period. The fee that matters isn’t the fund’s — it’s the one a manager charges to hold your money.

The lesson: if the fee argument is what’s driving a rollover, the argument is weak. The TSP’s costs are already so low that beating them saves almost nothing — and the most common rollover destination, a managed account, costs dramatically more.

3. What the TSP has that no IRA can match

If cost isn’t the reason to move, what about the reasons to stay? The TSP has genuine advantages an IRA cannot replicate.

The G Fund. This is the big one. The G Fund is a government security issued specifically to the TSP — it pays an intermediate-term Treasury yield with no principal risk whatsoever. Nothing in the private market does this. The closest substitutes — money market funds, short-term Treasury funds — either yield less or carry price risk. For a retiree who wants a truly stable allocation sleeve, the G Fund is irreplaceable, and it disappears the moment you roll the money out.

Why does that matter so much? In an ordinary market downturn, bonds usually cushion a portfolio while stocks fall. But in an inflation spike — the kind seen in recent years — stocks and bonds can fall together, because rising rates push bond prices down at the same time equities drop. A retiree relying on a normal bond fund for stability gets hit on both sides. The G Fund doesn’t fall: its principal is fixed, and it keeps paying its Treasury-based rate regardless of what the market does. That makes it not just a low-risk holding but a genuinely different asset class — one a federal retiree gives up permanently by rolling everything to an IRA.

Rock-bottom costs without having to think. The TSP’s roughly 0.05% expense ratio applies automatically to a small, solid menu of funds. At an IRA, those low costs exist — but only if you choose the right funds and avoid the expensive ones. The TSP makes the low-cost choice the default.

Simplicity and protection. A small fund menu is a feature for many retirees, not a limitation. Fewer choices means fewer ways to make an expensive mistake. The TSP also carries strong federal creditor protections.

4. What an IRA does better — and the verdict

The case for moving isn’t empty. An IRA genuinely does some things the TSP can’t:

• Fund-specific withdrawals. An IRA lets you choose which holding a withdrawal comes from. The TSP withdraws pro-rata across every fund — which is why some retirement income strategies work better in an IRA.
• A wider toolkit. Roth conversions and Qualified Charitable Distributions are cleaner to execute in an IRA, and the investment menu is effectively unlimited. The TSP’s 2026 launch of in-plan Roth conversions narrowed this gap, but didn’t close it entirely.
• Better non-spouse inheritance. The rules for non-spouse beneficiaries are generally more favorable for an IRA than for a TSP account.

So what’s the verdict? For most federal retirees, it isn’t all-or-nothing. The approach many land on is a hybrid: keep a meaningful portion in the TSP — enough to hold the G Fund and preserve the plan’s low-cost core — and roll the rest to an IRA for the flexibility and control. That captures the irreplaceable parts of the TSP and the genuine advantages of an IRA at the same time.

What should not drive the decision is the fee pitch. As the case study shows, the TSP’s costs are so low that “cheaper funds” saves almost nothing, while the most common rollover — into a managed account — is the single most expensive thing you can do with the money. Decide based on control, the G Fund, income design, and your estate plan. Decide based on what the structure does, not on a few basis points. For the full mechanics of moving money in either direction, see TSP rollovers in 2026.