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Roth TSP in a Combat Zone: Almost a "No Brainer"

Retirement Funding TSP Taxes Military Pay and Benefits

Special Tax Benefits Make the Roth Especially Appealing for Deployed Military Members

There aren't many financial planning questions that I don't answer with "It Depends".  But for a military officer and especially a senior military officer, I can't think of many situations where contributing to Roth Thrift Savings Plan (TSP) while deployed to a combat zone doesn't make sense.

Tax Free Combat Pay Produces Tax Free Earnings

As you probably know, income earned in a combat zone (or a portion thereof) is excluded from income for income tax purposes.  What you may or may not know is that contributions to a Roth account (IRA or TSP) and the earnings on them are not taxed upon withdrawal. This allows a military member deployed to a combat zone to divert money to Roth TSP and NEVER pay income tax on the contributions or the earnings on it.  Think about that, NEVER paying income tax on the income you contribute or the earnings.  I can't think of another situation that allows that.

You are limited on the amount you can contribute to Roth TSP and in 2018 it is $18,500.  If you are older than age 50, then you can also contribute the $6,000 (also a 2018 amount) of catch up contributions to Roth TSP.  Interestingly, catch up contributions from tax exempt combat pay can't be made to pre-tax TSP.

Additionally, while not Roth related, you can make tax exempt contributions in addition to your Roth contributions to $55,000 per year (2018) to a pre-tax TSP account while deployed. In this case, the contributions maintain their tax exempt status, but the earnings are tax-deferred (you'll pay taxes on the earnings when you withdraw them).  For those of you covered by the Blended Retirement System (BRS) the funds contributed by the government on your behalf count towards the annual limit.  Those funds are "normal" in that they will be taxed upon withdrawal as will the earnings on them.

Planning Opportunities for Military Members Preparing for Deployment

If you know you're going to deploy at a certain point, you might want to suspend contributions to TSP and/or other investment accounts in order to be able to max out the $18,500 contribution limit for the year while you're deployed.  Simply save the amount you would have contributed while stateside to use for expenses you need to pay for while you're deployed and use those funds to supplement your available spending money while you're making the larger Roth TSP contributions.  If you're covered by the BRS, this option may make less sense as you may miss out on some matching funds.

If you know you're going to be able to "max-out" the Roth TSP contributions, then you might consider contributing to a Roth IRA.  The limit for this account in 2018 is $5,500 per year (with a $1,000 catch-up limit) and the amount you contribute to Roth TSP does not limit the amount you can contribute to a Roth IRA and vice versa.

If there still are funds available, then take a look at making tax exempt contributions to pre-tax TSP.

A Word of Warning

Remember these are retirement funds so you can't get to them easily or without penalty until you turn age 59 1/2.  If you have a goal of opening a business when you retire from the military, then a retirement account probably isn't the best place to put those funds.  That is why it is important to have a plan for investing your money, along with the rest of you financial affairs, to make sure you money is doing what you want it to.


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