Special Rules Apply When Military Members Deploy
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 These funds will not be taxed when withdrawn, but unlike a contribution to Roth TSP the earnings on them will be taxable when withdrawn.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 Contributions and earnings are tax-free when withdrawn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 The contributions will be tax exempt and not taxed when withdrawn, but you will pay taxes on the earning.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.