Questions about TSP/Roth TSP and Combat Zones

[bluecollarmusician]

Hello All-

I read some great info in another thread regarding TSP vs. Roth TSP and making contributions above the 18k level.

Here is my question:  I have been maxing out my Roth TSP- however with the changes to how contributions are made, I can only contribute a MAX each month of 65% of my base pay (no allowances, etc.)- this is equals about 1350/month.  I will be deployed for 90-120 days later this year, and I really would like to contribute as much as I can to the TSP this year.  IF I reallocate my contributions to a traditional Roth then I can allocate up to 92% base pay which would be more like $2000/month.  This would allow me to contribute more, but since it would be in the traditional Roth.

A traditional TSP has little interest for me other than that I can invest in the TSP funds, and that I can contribute over the 18k while on deployment to a combat zone- due to the fact that my military income is very low, and we make all our other income very "efficient" are tax liability is very low.  Each year I plan to balance capital losses, real estate depreciation, etc. so that our Federal and State taxes are almost negligible.  So with a traditional TSP the front end tax benefit is not what it would be to someone in a higher tax bracket. 

So the question is:  Is it worthwhile to try to get as much into the TSP as possible while I can?  I could ratchet it up to 92% and then 100% of everything for the deployment.... or just stick with the ROTH TSP until I hit 18k?

The really frustrating part is that if they just gave me the option, I would have invested the 18k already.. :(  Then I could have contributed to the Traditional during the deployment.

Thanks for any insights...

[captainawesome]

Nords has put out some good info on this in the past, link here:
http://the-military-guide.com/2013/08/15/maximizing-tsp-contributions-from-a-combat-zone/

Also, look into contributing special pays to meet your contribution limits. I thought the new rules only applied to base pay, but I could be mistaken.

I would check the latest contribution limits on that if you are deploying to a combat zone. Additionally, there are things in place that you can also invest money in, like the Savings Deposit Plan
http://militarymoneymanual.com/savings-deposit-program-the-only-guaranteed-10-return/

To answer you last question, yes maximizing out as much as you are able to while deployed pays huge dividends in the long term. Much more so than returning and buying a new car or motorcycle like so many of our comrades.

[Nords]

A traditional TSP has little interest for me other than that I can invest in the TSP funds, and that I can contribute over the 18k while on deployment to a combat zone- due to the fact that my military income is very low, and we make all our other income very "efficient" are tax liability is very low.  Each year I plan to balance capital losses, real estate depreciation, etc. so that our Federal and State taxes are almost negligible.  So with a traditional TSP the front end tax benefit is not what it would be to someone in a higher tax bracket. 

So the question is:  Is it worthwhile to try to get as much into the TSP as possible while I can?  I could ratchet it up to 92% and then 100% of everything for the deployment.... or just stick with the ROTH TSP until I hit 18k?

The really frustrating part is that if they just gave me the option, I would have invested the 18k already.. :(  Then I could have contributed to the Traditional during the deployment.

Thanks for any insights...

As CAPT Awesome says, it's worth investing in the TSP no matter whether it's the traditional version or the Roth. 

In your deployment situation, assuming you're in a combat zone, your contributions to the traditional TSP will be tax-exempt.  When you leave the service, you'll be able to transfer those tax-exempt contributions to a Roth IRA with no tax implications.  (You'd have to pay a tax someday on the growth from the contributions, but not the contributions themselves.  You can transfer the growth portion to a traditional IRA and convert that to a Roth IRA.)  However you want to stay with the TSP for as long as possible.

Your main motivation for using the TSP is the world's lowest expense ratios (currently 0.029%), less than half of even Vanguard's cheapest index funds.  Another reason is that you can only contribute to the TSP while you're in uniform (or in federal civil service), so you can't do this after you separate.  A final option is using the TSP's "G" fund in your asset allocation plan (if you deem that necessary), because the "G" fund doesn't really have a civilian equivalent.

Here is my question:  I have been maxing out my Roth TSP- however with the changes to how contributions are made, I can only contribute a MAX each month of 65% of my base pay (no allowances, etc.)- this is equals about 1350/month.

I don't understand this situation.  Could you post more details about how it's become this way, or send me a PM/e-mail?

Hypothetically you should be able to contribute at least $1500/month to the Roth TSP, and as soon as you hit the limit then additional contributions would be kicked back to your military pay account.

[bluecollarmusician]

I don't understand either-
last year I was contributing 2100/per pay period to the Roth TSP (basically 100% of my base pay) until I hit the max.  In January everyone had to reallocate, and the max % you are able to contribute within MyPay is 65% to the Roth  TSP, I could contribute up to 92% of Base Pay IF it was to a traditional TSP.  I don't understand this change- and it has me wondering which I should contribute to-

Basically, if the goal is to get as much as possible, I will be able to hit the limit a little faster if I contribute to the traditional (since I will be able to go over 18k while on deployment.) However since I am so limited in the amount I can actually contribute I won't be able to get much over the 18k limit anyway, I am wondering if it is worth the hassle.

My financial situation is probably a little different than most E-4's since I got in a little later in life- but I find this limitation on the amount I can contribute problematic... I would prefer to contribute 100% base pay to my TSP and max it out as quickly as possible, but not an option now... 

[Nords]

I don't understand either-
last year I was contributing 2100/per pay period to the Roth TSP (basically 100% of my base pay) until I hit the max.  In January everyone had to reallocate, and the max % you are able to contribute within MyPay is 65% to the Roth  TSP, I could contribute up to 92% of Base Pay IF it was to a traditional TSP.  I don't understand this change- and it has me wondering which I should contribute to-

Basically, if the goal is to get as much as possible, I will be able to hit the limit a little faster if I contribute to the traditional (since I will be able to go over 18k while on deployment.) However since I am so limited in the amount I can actually contribute I won't be able to get much over the 18k limit anyway, I am wondering if it is worth the hassle.

My financial situation is probably a little different than most E-4's since I got in a little later in life- but I find this limitation on the amount I can contribute problematic... I would prefer to contribute 100% base pay to my TSP and max it out as quickly as possible, but not an option now...

Thanks for your PM.  I consulted a couple other military bloggers & CFPs, and here's some thoughts.

I know that the 92% in the traditional TSP contribution limit is based on having 7.45% left for FICA (Medicare & Social Security).  We used to do this limit with my spouse's Reserve drill pay, and as a result she'd get a pay deposit of tiny amounts like $1.21.

Because of that limit, we're wondering whether the Roth TSP limit is based on tax withholding.  For example, if DFAS' default withholding ratio for taxes is 25% then the Roth TSP contribution limit becomes 100% - 7.45% - 25% = ~65%.  But I don't know how DFAS came up with 65%.

It's even possible that your contributions are limited by your individual income tax withholding, and it'd be interesting to see whether you could contribute more to the Roth TSP by simply claiming more W-4 exemptions.  The Roth TSP's 65% might not kick in until after deductions and allotments, so anything taken out of your pay before the TSP contribution might reduce the remaining amount that's subject to the 65% limit.  If you could eliminate all other deductions/allotments from your pay (other than the 7.45% FICA) then you might be able to max out your Roth TSP contributions.  I wouldn't even take out an allotment to the Combined Federal Campaign.

The other thoughts of our group were that you'd contribute to your spouse's 401(k) up to the employer match, then do as much as you can in the Roth TSP, then maximize your Roth IRA contributions, then maximize the rest of your TSP contributions via the traditional TSP, then maximize the rest of your spouse's  tax-deferred contributions, and then (finally) save more in taxable accounts.  But it looks like you're already doing that.

And you're right, when you're deployed to the combat zone then you want to shovel as much of your pay as possible into the TSP.  You're still stuck with an $18K limit in the Roth, but you could put up to another $35K in the traditional TSP (if you had the earned income!). 

I'm most familiar with Navy re-enlistment programs, and I realize that you're AF, but if you're planning to STAR for E-5 (and perhaps a re-enlistment bonus) then doing it from the combat zone would be an excellent way to stuff more money into your TSP.  But that's assuming you'd be interested in a longer service obligation in the first place.