tsp in a tax free zone

[markmark90]

I am active duty and new to tsp. I am in a combat zone and wondering what the benefits are (if any) of contributing tax free money into tsp??

[jdeacon]

When you eventually withdraw that money from your regular TSP, I believe it will be taxed as ordinary income. Hence I would recommend that you invest that money in either a roth IRA, or when available, a roth TSP. As an alternative, I would consider investing that money in a regular taxable account where you would be taxed at the lower capital gains and dividend rates upon withdrawal. Of course I am assuming capital gain and dividend rates will be lower than income tax rates when you start withdrawing and that we do not go to a national consumption tax scheme in lieu of income taxes.

[markmark90]

Well I've already maxed out my roth for 2011 so that's out. But if it's smarter to invest the $$ into some type of regular taxable account because I would be taxed less upon withdrawal, then why invest any $$ in TSP? Wouldn't it make more sense to invest all money in that type of account? I'm new at all this, so my apologies if this is going right over my head.

[houston]

Technically it should be tax free withdraw. I looked at my statement and along with the regular contributions and gains it has a seperate tax free zone spot where I had contributed.

[MICOCDR]

Mark,

I was in the same situation as you, in a combat zone and maxed out my ROTH IRA for the year and was wondering if TSP was the best place to put my money while in a tax free environment.

The answer for me, and more than likely for you, is yes. Any money invested into TSP while in a combat zone is tax exempt come retirement. (Not to be confused with your gains) Also your contribution limit is $49,000, compared to $16,500 while back in the states. Its a great time to gain some serious capital while still young.

For more info, check out: https://www.tsp.gov/planparticipation/e ... mits.shtml

[Navig8tor]

Any money you invest in TSP while in a designated combat zone is TAX FREE FOREVER. The total amount will be reflected on your TSP statement. Each amount will say either "Pre-Tax Contributions" or "Tax Exempt Contributions."

Also, and as someone else mentioned, your contributions are maxed at $49,000/yr vs. the standard $16,500/yr.

If you're in a combat zone over a period covering two different calender years, even if it's only 6 months of each year; you are permitted $49,000 total contribution for EACH YEAR. So, if you depart in April 2011 and you come back in April 2102, you have until December 31, 2012 to run up your $49,000 contribution for 2012. If you can afford to drop in $49,000 in the first year of your tour...I'd do it if I were you. If you can keep it up the entire second year, I'd do that too.

I managed to max my ROTH both years AND drop $89,000 into my TSP account during my 1-year deployment 2009-2010. I was contributing 100% of my base pay, and living off the COLA, Haz-Pay, IDP etc. It's not like you have time to blow money over there anyway! Well, maybe if you're in the Navy and stationed in Bahrain...a NAVY base full of people who never go to sea

Meanwhile, if you can squeeze it and make the full contributions for both years, your taxable income will be virtually nothing for the period of your deployment. You'll more than likely get a tasty tax return when you file; I did.

Coming back to the States and seeing a $20,000K drop in your pay is a shock...but you knew it was coming anyway.

Be safe!

[markmark90]

great answers..this helps so much..thanks guys

[jdeacon]

1. I did not realize the TSP administrators were sophisticated enough to break out the combat tax free contibution. Regardless, reading the above you will still get taxed at the higher "income" rate on all capital gains, interest, and dividends the tax free contribution earns. For that reason I think you should at least consider putting that tax free money in a taxable account where the capital gains, interest, and dividends are taxed at a lower rate. Of course, you will be taxed each year on any accrued interest and dividends as well as the capital gains on any trades you make in that given year. In the TSP you would only be taxed as you withdrew the money.
2. With regards to your second question about why one would put money in a TSP if it is taxed upon withdrawal at the higher "income" rate---do not forget that ordinary income you put in a TSP, IRA or 401K is subtracted from your taxable income in the year it is contributed, hence the income tax on that amount is deferred until you withdraw it many years hence. Eventually the USG does get "their" money however. If you do not withdraw it all and it goes to your heirs, the USG ensures they get it from them as they withdraw the money from the TSP.

[EpicWin]

Do TSP participants in combat zones receive a 5% match like? If they do, then a minimum contribution of 5%, at least, makes sense since you'll effectively be earning another 5% of your salary.

[markmark90]

I've never heard of any 5% match..

[houston]

no match except for civilians.

[tspguy]

Here's how Tax Exempt Balances Work.
If you serve in a Hazard or Combat Zone the contributions are Tax Exempt meaning TSP does not report the tax exempt monies to IRS when you make a withdrawl the funds come out pro-rata (equally) but not reported to IRS>those tax exempt monies are tax free no taxes taken out.All Military Members check quarterly statments only tax free if serve in a hazardous or combat Zone..also DFAS (payroll finance) reports these to the TSP. Agency Matching 5% is only for FERS (Federel Employee Retirement System) Not for Military.only Civilian FERS.