If you’re getting ready to deploy to a combat zone, you should plan your Thrift Savings Plan (TSP) contributions. In a previous article (here), I stated that contributing to Roth TSP while deployed to a combat zone is a pretty good idea. Tax free income, contributed to a Roth that produces tax free income is a pretty good deal. You can do this up to your annual contribution limit ($18,500 in 2018) plus catch-up contributions ($6,000 in 2018) if you’re age 50 or older.
But There is More
There is an annual additional limit for TSP contributions. Under normal circumstances your contributions, limited as stated above, plus any government matching can’t exceed a specific limit ($55,000 in 2018). For most military officers this isn’t an issue as you don’t receive any matching….except for those who are covered by the new Blended Retirement System (BRS).
When you deploy to a combat zone, the rules change. You are allowed to make tax-exempt contributions from your combat pay to your pre-tax (traditional) TSP in addition to the limits above up to the annual additional limit. These funds will not be taxed when withdrawn, but unlike a contribution to Roth TSP the earnings on them will be taxable when withdrawn.
So What Does That Look Like?
Let’s assume that cash flow isn’t an issue. Either you’re single or your total income isn’t required to support your family while deployed and you can contribute the maximum allowed by law. What might it look like? You could do the following
Make elective deferrals up to the limit, plus catch-up contributions (if age 50 or older) to Roth TSP ($18,500/$24,500 in 2018). Contributions and earnings are tax-free when withdrawn
Make additional contributions up to the Annual Addition Limit (an additional $36,500/$30,500 if 50 or older). The contributions will be tax exempt and not taxed when withdrawn, but you will pay taxes on the earning.
What You (or your Financial Advisor) Don’t Know Could Hurt You
If you or your advisor don’t know about or ignore this option, you may miss a great opportunity. I know that not everyone has enough cash-flow available to meet the maximum. But if you do, you can contribute a significant amount of money ($55,000 in 2018) with between 34% and 45% of that income and the earnings on it exempt from taxes…forever. The rest will accrue income tax-deferred until you retire and like the Roth , the contributions are tax-free forever as well and only the earnings will be taxed.
That’s why I think it is so important that your financial advisor understand the unique opportunities (and threats) that come with military service.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. C.L. Sheldon & Company, LLC does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to C.L. Sheldon & Company, LLC website or incorporated herein, and C.L. Sheldon & Company, LLC takes no responsibility therefore. All such information is provided solely for convenience, educational, and informational purposes only and all users thereof should be guided accordingly. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.