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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.