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Don't Leave Money on the Table (And Don't Get Double Taxed Either).

Retirement Funding TSP

You've decided to "Hang-up" your G-Suit or ABUs or whatever uniform you wear to work each day.  You're pretty confident you'll roll into the new job you've been looking forward to and it won't take too much time.  If your new job offers a 401(k) (or 403(b) or TSP) there are some things you need to think about AND you need to make sure you don't screw up some other things.  By the way, these concepts also apply if you change civilian jobs during a year.

First of all, we'll start with some basics.  As of this writing (2016) the maximum amount of salary you can defer via a 401(k) is $18,000 ($24,000 if you are age 50 or older) per year.  For those of you who will be self-employed the deferral amount is the same, but you may be able to also shelter more income through a profit-sharing plan implemented through your 401(k).  Regardless of how many employers you have and how many plans you had access to, the maximum contribution for the year is either $18,000/$24,000.

Now, let's suppose you contribute to TSP while on active duty.  If your potential new employer offers a 401(k) with matching funds you may want to re-think your TSPcontributions.  Here is an example.  Suppose your employer matches 100% of your first 5% of salary contributed to your 401(k).  You need to take a look at your Gross Salary for the portion of the year that you will be working in your new job.  Take that amount and multiply it by 5%.  Whatever the answer is to that question, you'll want to make sure you have that much remaining "deferral space" when you retire.  In other words if your civilian salary for your transition year is $150,000 make sure you don't contribute/defer more than $10,500 to TSP while you're on active duty.  If you do, you'll leave money on the table.

While making sure you don't leave money on the table is important, not getting double taxed is critical.  When you work for one company during a year, the company protects you from yourself.  Even if you put down a 100% deferral rate, your employer will stop deferring your income when you reach your annual limit of $18,000/$24,000.  This isn't the case when you work for two employers during the same year.  You could theoretically defer $36,000/$48,000 (assuming two employers).  This is bad.  Real bad.

If you contribute too much you really need to get the money out before you file your taxes (and get an updated W-2).  Otherwise, you'll need to declare the excess deferral as income and pay taxes on it.  But, here's the kicker...even if you declared the income and paid taxes on it when you over-contributed if you leave the money in your 401(k) when you take the money out of your 401(k) you'll pay taxes on it again.  It gets better though.  Your employer doesn't have to let you take out the money.  If the Summary Plan Document doesn't allow withdrawals for excess contributions, you're out of luck.  Basically your employer is saying, "We're not going to fix your screw-ups".  Whether you can reverse the contributions or not varies from employer to employer.

It is worth it to keep your eye on these issues. 

You may have thought your financial life was simple.  It may have been.  It won't be as you make your transition to the civilian world.  I'm guessing that it also won't get any less busy.  Do what you do best and let others who specialize in developing financial plans and strategies take that load off your back.  Give us a call if you'd like us to "pick up your pack".

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