Split TSP Contributions Between Roth & Traditional? Is Earning a Military Pension Likely? | Military Money Manual Podcast Episode 63

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In this episode, Spencer Reese and Jamie answer 2 reader questions:

  1. Should you split your Thrift Savings Plan (TSP) contributions between the Roth TSP and Traditional TSP?
  2. Should I focus on contributing to my TSP or should I just rely on my military pension?

While government TSP matching must deposit into your Traditional TSP, you can contribute all of your funds to the Roth TSP and you will still get the matching.

Military Money Manual Podcast Episode 63 Links

Outline of Episode:

  • Is there an advantage to splitting the contributions between a Roth and a traditional TSP?
  • Can you rely solely on a military pension?

Military Money Manual Podcast Episode 63 Transcript

[00:00:00] Spencer: But to assume that you're going to be in the military at first for another nine years to make it to the 20-year pension, but then to do another five or even another 10 on top of that. So you're talking about another 16 or 19 years in the service. That is a very far bridge to cross.

[00:00:44] Spencer: Hello podcast listeners. Welcome to the Military Money Manual Podcast. I'm Spencer Reese, your co-host founder of militarymoneymanual.com and author of The Military Money Manual.

Hey, if you find this episode valuable, the easiest way that you can say thank you is by leaving us a five-star review on Spotify, Apple, or wherever you listen to podcasts. That helps spread the word about the good things that we're doing on the podcast.

Today, my co-host Jamie and I are taking two listener questions.

Jamie, do you mind reading the first email that we received from Chris?

[00:01:16] Jamie: Hey Spencer. Chris says, “I'm a first lieutenant in the United States Air Force, and I just had a quick question about the matching contributions on the TSP. Is there an advantage to splitting the contributions between a Roth and a traditional due to the fact that the 5% match can only go into a traditional? Right now I allocate it all to the Roth. Thanks. Love the book by the way.”

[00:01:37] Spencer:  Chris, thanks for the kind words. I appreciate that. The book he's talking about is The Military Money Manual: Practical Guide to Financial Freedom, available on Amazon and my website, shop.militarymoneymanual.com. And with that advertisement will return to our regularly scheduled program.

So Chris, thanks so much for the question. The interesting thing about this Lieutenant's situation is that if you just pinned on First Lieutenant, he probably has been in for two years, and it takes two years for the 5% automatic matching to start kicking in. So the 1% match automatically starts when you've been in the service for 60 days.

So if you start making TSP contributions when you're in basic training or. when you first commission, then you're going to start getting a 1% and it's not even a match really. It's just an automatic contribution. Then the up to 5% match, you have to contribute up to 5% of your pay. That starts at the two-year mark.

So if he just pinned on First Lieutenant, then he should start seeing that match going in there. And Chris, if you're not seeing that match going in there, reach out to your finance office. There's a misunderstanding in your question. So you said that the match has to go into the traditional, and that's true, but you don't need to contribute to the traditional to get the match.

People stumble over that. I get this question quite often. Contribute to the account that makes sense for you. So if you're a high-income earner, which is probably an O-4 or above, maybe a very senior enlisted service member, especially if you're dual mil or you have two incomes, if your spouse is, I don't know, a doctor or a nurse or something, is making some extra money.

If you are a high incoming earning couple, then the traditional TSP might make sense. But if you're a single military service member and you're below the rank of O-4, you probably cannot go wrong by contributing to the Ross TSP, and if you are wrong. The difference will be a couple of thousand dollars in taxes paid over the course of your lifetime.

It's not the kind of mistake that you really have to lose sleep over. The bigger mistake would be not contributing to your TSP, which we'll get into in the next listener question. To conclude, Chris, there's no advantage for a First Lieutenant to be splitting your TSP contribution. The DOD match is going to go into your traditional.

If you contribute 5% to your Roth, they'll still put 5% into the traditional. They cannot put the match into the Roth because of the way that the IRS rules are set up. Don't ask me why. That's just the way that the rules are written. 

[00:03:59] Jamie: I'm a big fan of Roth as well. Spencer, you hit the nail on the head there that especially at First Lieutenant level Roth is probably where you want to be. 

The second question is a little bit more on military pension, so I'll read that one. This is from Ian who sent us this message on Instagram. “Hey, Gents. Quick question. I'm 31 years old. I'm an active duty First Lieutenant”

 O-2 as well, double First Lieutenants today. Interesting. 

“With 11 years time in service as prior-enlisted, I'm set to be a major around my 17-year mark, but I'm aiming to do about 25 to 30 years before I retire, probably as a Lieutenant Colonel or a Colonel, which is O-5 or O-6. My TSP was an afterthought until about two years ago. Should I focus on pumping it full of money to catch up, or can I rely on my military pension?”

He has three young kids. Average bills are about $1,400 a month, plus the essentials like food, and they have a three-month safety net in cash savings. He says, thanks for the advice. So what do you think about Ian's questions, Spencer?

[00:04:55] Spencer: Yeah, I'll kick it off, Jamie and then I'll kick it back over to you.

But the first thing that jumps out to me, Jamie, about this question, is that the guy's been in for 11 years prior E. That's awesome. And then went and got his commission also awesome. But to assume that you're going to be in the military at first for another nine years to make it to the 20-year pension, but then to do another five or even another 10 on top of that, and you're talking about another 16 or 19 years in the service, that is a very far bridge to cross and there is no guarantee, first of all, that you're even going to make it to 20 years.

A lot of people. Just think, oh, the military pension is guaranteed. If I can just make it to 20 years that's a big, if a lot of people don't make it to 20 years, a lot of people either get kicked out or get force shaped or get medically retired. There are a lot of reasons that you don't make it to a 20-year career.

So I think that the first thing that jumps out to me about this question is that there are a lot of assumptions built. To the fact that you're going to make it to 20 years. And then the other assumption is that you're going to make it to O-6 or to Colonel, even in the military, which I find as a paint-by-numbers organization, where you can pretty much on the officer side, you can pretty much make O-5 if you do the things that they tell you to do, right? 

Go get a master's degree or go to this school or do these jobs, and you've got a pretty good chance, higher than, I would say, higher than 80% chance of making O-5. Especially if you're in certain career fields like in the Air Force.

If you're a pilot, you've got a good chance if you stick around to 20 years of making oh five. But there's almost no guarantee even in service, like the Air Force of making O-6, Colonel.

[00:06:45] Jamie: The first thing that jumped out at me is congratulations on the progress so far. Having an emergency fund in place and all the intentionality you have with your future is really good, so I'd encourage you to keep that up.

I'd also urge you to try to maximize your TSP and your IRA for you and your spouse, if applicable. I didn't see that in the initial question but maximize them as much as you can. And if you haven't started yet, hopefully, hear this in time to maybe get a little bit more in there by the end of 2022. If not, you might be able to contribute at the beginning part of 2023 to last year's IRA to 2022 IRA if you haven't done that yet, you can't do that with a TSP. 

So hopefully you're contributing to the TSP significantly and pushing towards maxing it out as much as you can. And if you can't get there yet, that's okay. Just keep trying and then in a couple of years hopefully you'll be there.

Oh, max out your IRAs. Get as close as you can to maxing out your TSP right now, that's $20,500. It is likely going to go up in 2023, but I haven't seen any official announcement yet. 

Spencer, I don't know if you see anything in the news on the TSP or 401k going up.

[00:07:45] Spencer: No official announcement. Usually, the IRS releases the 401K and TSP limits in November.

I think it was around November 7th of the previous year or so. In this case for 2023. It'll be November 7th, 2022. But I did see that now that they have the September inflation data, a lot of guys have just gone ahead and done the calculation that the IRS is going to do, and the amount is going to be $22,500. Okay, that's the prediction.

And that's where people think it's going to end up, but it's not official yet. So wait until, actually, by the time this episode's released, maybe it will be November of 2022 and we'll know what the 2023 amount will be.

[00:08:25] Jamie: The other thing I wanted to say in response to the question was, specifically about relying on my military pension, I would strongly urge you to have a plan other than your pension.

A couple of points there. Do you know that your pension is enough to live off of so you can do the math assuming you're a 30-year O-6 if that's where you think you might end up being? Spencer already talked about that. And some limitations there. I doubt for most families without extra savings on the side, the pension is going to be enough to live off of.

So pension's cool, and it can mean you need to save less for financial independence, which is great, but probably not enough to live off of by itself. 

The second point is what happens if, God forbid there's a reduction in force, or you get hurt or you leave the service earlier than expected, like Spencer mentioned? You might be the sharpest airman or soldier, marine or sailor in your unit right now with surefire promotions, but you never know and you can't control the military branch.

You can't control Congress, the DOD instructions, or your branch's policies and procedures. You can only control your savings and how much you have just in case you need it. So with that said, I would pump as much of your savings as you can afford into retirement accounts like the TSP and the ira, and then that way you're covered, even if you don't make it to retirement age and earn the pension.

And then if you do, it's a cherry on top of all the other planning that you've done.

[00:09:44] Spencer: Yeah. In the book, Psychology of Money by Morgan Housel, he talks about how there's almost never a bad reason to save. And he encourages the readers of the book to save, just to save, just for the purpose of saving. And you don't have to have a specific reason.

It doesn't have to be for a vacation, a new home, a new car, or a baby just save because you don't know what's going to happen. And life is unpredictable, but it's predictably unpredictable. And that's why we always encourage people to have emergency funds or to have sinking funds. But even beyond that, once you have an emergency fund, just save.

Just save money and no one has ever gone through a recession or a depression and thought, “Man, I wish I hadn't saved all this money that I can now access in this bad time.” It's like the story in the Bible about Joseph in Egypt where they have the seven good years and the seven lean years. If you've got a military job and you're healthy and your family's good, you're probably in the seven good years and you want to be setting aside some of that grain, in this case, some of those dollars, so that when the seven lean years come you can turn around and say, it's okay. I've got it covered. 

Like Jamie said, if you've got the military pension, that could be your bedrock because the military pension, as much as sometimes we say that you can't count on it, once you've earned it, it's probably one of the most guaranteed pensions and most guaranteed sources of income in the world.

The United States government is probably 99.99%, not going to default on the benefits earned by its veteran. But it always behooves you to have a backup plan. It always pays to have additional savings. And in the military, a lot of people get this mindset of they rely on the government paycheck and they rely on the benefits that they receive.

As a service member, and then when they retire or they separate, they go right back and work for the government again. It's good money, it's a good gig, and for some people, it's the right place to be. But for other people, there's more to life out there than just working for the government.

And if you can use your pension to catapult yourself and move up to the next level. Use it as your fail-safe, right? Like you know that you can always fall back and at the very minimum, you're going to be able to eat. And that's the beauty of having a military pension for most people, it's going to cover the very basics of reasonable housing and a reasonable food budget, reasonable transportation, and then anything above that then you can add based on the lifestyle that you want.

Hey listeners, we hope today's discussion will help you maximize your military benefits. We really like getting questions from listeners and readers of the website, like Chris, who is asking about Roth versus traditional TSP and which one to contribute to get his matching. And then Ian with, it's pretty incredible to me that people are counting more on earning a military pension than saving their own money.

But that's just a mindset thing where you have to pivot. And one thing that Ian mentioned was that for three young kiddos and the average bills were only $1,400 a month. And he said, plus essentials like food. But to me, that sounds like he's got his lifestyle dialed in and he knows where his money is going and that's a great place to then rapidly achieve financial independence. If you have a low-expense lifestyle and you're making extra money, then there's no excuse why you can't be putting that money into investments and rapidly achieving financial independence.

[00:13:21] Jamie: With only $1,400 a month, I'm guessing maybe that doesn't include rent as well, or maybe they live on base or on post, but that is well below average for monthly expenses for the average American family.

So if you're not paying housing because you're on post or on base, make sure that you account in your long-term numbers and plan for some kind of housing expense. $1,400 plus food even is still less than half of the average. So keep that in mind. Your expenses will probably go up.

[00:13:48] Spencer: That's a good point.

Hey, if you got any questions or feedback to share with us, you can message us on Instagram at @MilitaryMoneyManual or via email at podcast@militarymoneymanual.com. We love all the questions and messages we get. Keep sharing the podcast episodes with your friends, families, and coworkers. It does mean a lot to us, and we'll catch you on the next episode of The Military Money Manual Podcast.

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