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The following is a recent email I received from a fellow Air Force captain. If you have a military related personal finance, investing, or other financial question, shoot me an email on the contact page or check out my Facebook page or Twitter @MilitaryMoneyM.
I'm an active duty officer (O-3) in the AF as well. I'll be deploying in the near future and I wanted to get your take on maximizing my TSP contributions while I'm deployed. I won't qualify for the SDP due to the location but it is an CZTE (combat zone tax exclusion) location so my basic pay will be tax free as well (I won't reach the max enlisted pay while deployed).
I was wondering if you could help me with understanding how to maximize my TSP contributions? My deployment will span this year and next so could I potentially max out $53,000 of the annual limit for both this year and next? I think I could only contribute $18,000 to the Roth TSP and the rest to the traditional TSP but how do I plan for that now to take full advantage for this year?
My understanding is that once I do deploy then I can begin contributing more than the $18,000. But if I want to get a head start, can I reach the $18,000 before I deploy and continue to contribute or will finance have a heart attack and prohibit me from doing so since I haven't begun my deployment? Last time I checked on mypay there was a 60% max contribution of basic pay for the Roth TSP but in order to reach the max of $53,000 I would need to contribute about 80% of my basic pay. Thank you in advance.
Thanks for the email. First thing: I'm curious as to why you think your location won't qualify for the SDP but will qualify for CZTE? Check SDP qualifications on the DFAS website. Basically if you receive CZTE, you are eligible for SDP.
A guaranteed 10% on $10,000 is a great way to boost your investment returns. I would definitely do this with any funds you don't have routing to your TSP.
How to Get $106,000 Into Your TSP in 1 Year
You are definitely correct that you can maximize the $53,000 contribution for this year and the next for $106,000 total into your Roth and Traditional TSP. All you need to do is cross the end of the calendar year (Dec 31-Jan 1) and make sure that you are contributing as much of your pay as you can (up to the contribution limits).
According to the TSP website, you are eligible to contribute an additional $35,000 into your Traditional TSP after you reach the $18,000 Roth TSP cap with CZTE tax free deployed income. Only Traditional TSP contributions can be made past the $18,000 and they need to be tax free contributions.
There's also a note that states (emphasis mine):
If you are a member of the uniformed services, you should know that Roth contributions are subject to the elective deferral limit ($18,000 for 2015 and 2016) even if they are contributed from tax-exempt pay. If you want to contribute tax-exempt pay toward the annual additions limit, you will have to elect traditional contributions for any amount over the elective deferral limit.
You may need to contribute more than just your base pay in order to reach $53,000 in each year, but any kind of pay (basic, incentive, special, bonus) can be contributed to the TSP, just not allowances like BAH or BAS.
Just as a reminder, this will be a major savings boost for you! That $106,000 should grow to over $1,200,000 in 30 years if invested properly (i.e., not in the G fund) and you don’t make any additional contributions. If you make just the $18,000 contributions for the next ten years, you should see over $2 million in 30 years.
I think you have a solid plan but it might be confusing to finance, so be ready to fight the battle. I would try to just under contribute to your Roth or Traditional TSP before you deploy at $17,900. Then stop any Roth TSP contributions and contribute just to your Traditional TSP, making sure the contributions start after you touch a combat zone.
While you're deployed in the year you will return, make contributions to the Tradtional TSP account up to $53,000. Once you return from your deployment, switch your contribution to the Roth TSP plan if you have any contributions left to make you can contribute up to $18,000 into your Roth TSP account.
As for contributing beyond the percentage allowed in MyPay, you may be out of luck. I think asking your finance office to fill out a paper form might be your best option.
I hope this helps! Deployment can be an extremely financially positive opportunity: income rises, expenses drop to near zero, tax rates decrease, and the SDP becomes available. Besides working out and working long days, make sure you put your money to work as well! You have a unique opportunity here to put over six figures into your retirement account in less than a year, something most people don't do for a few decades.
It’s the FICA taxes (6.2% for social security + 1.45% for medicare = 7.65% ~ 8%) capping max contribution at 92% unfortunately. SGLI is not a factor because it is optional.
Quick update:
I decided to balance a higher contribution to TSP while also buying a house with a 3-year payoff plan. My wife and I decided to buy a house during my deployment so that she can move closer to family. We planned a quick payoff so that we can rent it out to either airbnb or a traditional rental for additional income.
It was not possible to contribute the max of $53,000 last year due to the timing of my deployment but I was able to take advantage of contributing slightly more than $18,000. This year, I’m shooting for about $36,000 in contributions. This allows for a balanced approach of higher TSP contributions and a quick pay-off of our house.
I understand the benefits of letting a mortgage ride out for as long as possible due to the low interest rate we have, but for us, it makes more sense to pay it off quicker so that we can re-use the VA loan on another home. Our plan is to also be financially independent by age 40 and hopefully our aggressive investing and setting up different sources of income will be in place by then.
The SDP is alive and well here so I made sure to take full advantage of it after the 30-day waiting period.
Spencer,
I think you need to clarify several key conditions that would allow an O-3 to max out $106K into TSP, or show me where my analysis below errors. It doesn’t seem like just any O-3 on just any deployment spanning two calendar years could achieve this. I believe it would be hard for even a senior O-3 with lots of incentive/special pay to make it happen, and they would have to contribute more than 80% of their basic pay.
The statement, “All you need to do is cross the end of the calendar year (Dec 31-Jan 1)” does not seem to be accurate. It’s not just about crossing from 31 Dec to 1 Jan and having both years open to you, because unlike other investments, TSP contributions come out monthly from your pay. For example, a one-year deployment ending in January would only allow January’s pay to be added tax free. Then you would be limited to $18K + January’s contribution for that year (unless of course you went tax free again later). So, to get $106K into TSP in two years, you need get $53K in per year, $35K of which would have to be tax-free, assuming $18K into Roth before and after the deployment. Most deployments would allow $53K in one year or the other, but not both.
For this to be possible, the deployment would pretty much have to be from July to Jun, providing six months tax free per year, OR, the O-3 would have to be maxing-out special pays (e.g. either a flyer or health professional), OR have prior enlisted time, OR some combination of the above.
Using 2016 pay tables, a senior O-3 with more than 8 years would make $5,818.80/month (assuming O-4 is made on time around year 10 and assuming no prior enlisted time). While the documentation says 1-100 percent is possible for basic pay, myPay will cap you at 92%. You could certainly try, but I doubt you will be able to fill out a paper finance form to get that up to 100%, as I believe that cap is there not ensure your pay covers SGLI and Social Security. Roth caps are irrelevant since you’d already have $18K maxed for Roth prior to and after the deployment.
For now, let’s assume non-flyer Hazardous Duty Pay, $150, and Imminent Danger/Hostile Fire Pay, $225. This is an assumption, however, as not all CTZE locations are HDP/IDP. That’s an additional $375/month in incentive pay.
So for the senior O-3 with no further incentive or special pay, or bonus, that’s $5353.29/month (92%) in basic pay and $375/month in incentive pay, totaling $5728.29/month. For six months, that’s $34369.74. It is my understanding that bonuses are not eligible to be tax-exempt (if I’m wrong please fact-check me and point out which, if any, officer bonuses are eligible).
So even if you are lucky enough to get a Jul-Jun deployment allowing six months in each year, you would be $630.26 short of the required $35K. A flyer making $650/month in aviation career incentive pay and additional $25 in HDP could bridge that gap. So could Health Professional Officers’ special and incentive pays. An O-3 with over 14 years could as well (with prior enlisted time). But each of these exceptions would have a difficult time with a deployment that didn’t perfectly bridge both years (I admit I am not familiar with the Health Professional Officer’s incentive pays since they are annual amounts).
I believe the real significance of your post is the often misunderstood notion that $18K is the TSP limit, when in fact, up to $53K is possible. However, $106K into TSP from one deployment would seem to require a combination of luck and duty-specific incentive/special pay.
Also, I agree with you that it’s curious that a CTZE location would not be SDP-eligible.
What are the benefits of contributing the additional $35,000.00 into a Traditional TSP? Since your income is non-taxable in a CZTE, there are no tax benefits to a Traditional TSP/401K. The only benefit I can see would be the low expense ratio of the TSP fund. Any other thoughts?
Also, completely agree on SDP!
Couple of advantages: you can squirrel away almost an additional 2 years of tax advantaged investments in just a year. Contributions go in untaxed and comes back out untaxed (growth on contributions is taxed though).
Your point about the low expense ratios is exactly right. It is extremely difficult to contribute extra money to the TSP. The more opportunities you have to get money into it and take advantage of the low expense ratios the better.
Ah ok, I was unaware that the contributions would not be taxed when taken out. I assumed since its a traditional TSP, contributions would be taxed as normal. Thanks!