TSP In a Combat Zone Part III: How Does It Work?Retirement Funding TSP Taxes
I wrote about the benefits for military members of contributing to Roth TSP while deployed to a combat zone in a previous blog. I also wrote about how you can contribute more than the normal annual limit as well. But how does this actually work? While deployed to a combat zone, Roth contributions count towards your normal annual limit, but pre-tax (sometimes call “Traditional) count towards the increased annual limit. Let’s look at a couple of different scenarios.
I Normally Contribute Less than the Annual Limit to TSP
If your annual contributions are normally less than the annual limit ($19,000 in 2019) then you should change all your contributions to Roth (assuming you aren’t already doing this) to take advantage of contributions from tax-free income and tax-free earnings. But…you’re not done yet. You’re probably paying 12% - 22% in marginal taxes and that goes away when you deploy to a combat zone. So, you should be able to increase your contributions to get closer to the annual limit. Maybe you need to keep some of those taxes as your spouse will need some extra money if you’re not around. But don’t ignore this windfall. If by adding in your taxes your contributions for the year would exceed the annual limit, then the next section could apply to you as well.
I normally Max-Out My TSP Contributions
If you normally max out your TSP Contributions (you hit the annual limit), you should change the percentage that you are currently contributing to Roth TSP when you deploy to the combat zone (again assuming they aren’t already Roth). Then, like above, look at the taxes you won’t be paying and contribute a percentage of them to pre-tax TSP. You can contribute up to the Defined Contribution Plan limit which is a maximum of $56,000 (in 2019) including the annual limit during a year when you are deployed to a combat zone. Just make sure you don’t exceed that limit.
How Does the Blended Retirement System (BRS) Affect This?
The government contributions to the BRS count against the maximum Defined Contribution Plan Limits ($56,000). This means you’ll want to make sure that any contributions you make to pre-tax TSP under the exception for combat zones don’t put you in a position where the government can’t match your contributions because you’ve hit the annual limit.
A Couple of Other Things to Consider
If you contribute to pre-tax TSP while deployed to a combat zone, your contributions will be tax exempt in the future, but the earnings on them will be taxable. Tax exempt balances can be hard to move out of TSP, but that isn’t a reason to not make them.
All government matching contributions will be pre-tax regardless of what type of contribution you make (Roth or Pre-Tax).
Military Finances are DifferentCivilians (even those who support us in a combat zone) don’t have different tax treatment and benefits depending on deployments to combat zones. There are a lot of other things that are different between civilian and military finances. We’re of the opinion that you should work with a financial planner that deals with military finances each and every day.
The Times (and TSP) They Are a Changin'
What Military Officers Need to Know About TSP and Estate Planning
TSP and BRS