Maximizing Deployment

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PecuniaryPupil23
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Maximizing Deployment

Postby PecuniaryPupil23 » Fri May 19, 2017 10:35 pm

Hello All,
I'm looking for some military minded advice. I have an upcoming deployment that will put me in CENTCOM periodically. Are there any strategies for maximizing the tax free benefits of CENTCOM. Some specific questions below:
-If I contribute to a Roth while in CENTCOM will it be tax free going in and coming out?
-Would that go for 401K (TSP)?

Thank you in advance!

mhalley
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Re: Maximizing Deployment

Postby mhalley » Sat May 20, 2017 12:54 am

From IRS.gov:
How Much of My Combat Pay Can I Exclude?
Enlisted member, warrant officer, or commissioned warrant officer. If you are an enlisted member, warrant officer, or commissioned warrant officer, none of your combat pay is included in your income for tax purposes.
Commissioned officers (other than commissioned warrant officers). If you are a commissioned officer (other than a commissioned warrant officer), there is a limit to the amount of combat pay you can exclude. The amount of your exclusion is limited to the highest rate of enlisted pay (plus imminent danger/hostile fire pay you received) for each month during any part of which you served in a combat zone or were hospitalized as a result of your service there. For 2016, the applicable amount is $8,222.10 per month (that is, $7,997.10 for the highest enlisted pay + $225 for imminent danger pay).
So definitely max your Roth while getting combat pay, and convert your tsp to Roth instead of regular.
Check out this article on tsp and combat pay:
https://www.brightscope.com/financial-p ... o-Brainer/

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Taz
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Re: Maximizing Deployment

Postby Taz » Sat May 20, 2017 6:00 am

You may want to see if you are in the window for any retention or reenlistment bonuses that can be paid while you are in the qualifying AOR. We had some of our aircrewmen reenlist while across the magic line to get their bonus tax-free.

Caveat: I've been out for 10+ years while so I'm not sure if some of the same rules still apply.
The destination matters.

abracadabra11
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Re: Maximizing Deployment

Postby abracadabra11 » Sat May 20, 2017 10:44 am

Definitely on the right track opting for Roth contributions.

Don't forget that you can actually contribute up to $54k to your TSP while deployed to a combat zone. The first $18k can go into Roth TSP, but the remainder will be Traditional by default.

https://www.tsp.gov/PDF/bulletins/15-u-01.html

Bastiat
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Re: Maximizing Deployment

Postby Bastiat » Sat May 20, 2017 10:49 am

54K for TSP and don't forget the Savings Deposit Program.

https://www.dfas.mil/militarymembers/pa ... s/sdp.html

PecuniaryPupil23
Posts: 4
Joined: Sun Jan 08, 2017 11:50 pm

Re: Maximizing Deployment

Postby PecuniaryPupil23 » Sat May 20, 2017 11:09 pm

Great info, thank you!
Follow on questions- My wife and I are currently not eligible to contribute to Roth IRA due to the income limits so I have been doing backdoor roths for both of us. (1) Due to the fact that my income in the combat zone is untaxed would this (depending on what our combined taxable income comes out to be) potentially lower our effective combined income and make us eligible for Roth outright or is it based on income before taxes. (2) If I still have to do back door Roth would this still excluded from taxes on the front and the back. (3) Is someone keeping track of all this or is there some special paperwork I need to fill out to prove that I contributed while in a combat zone. THANK YOU!!

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Nords
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Re: Maximizing Deployment

Postby Nords » Sun May 21, 2017 12:14 am

PecuniaryPupil23 wrote:Hello All,
I'm looking for some military minded advice. I have an upcoming deployment that will put me in CENTCOM periodically. Are there any strategies for maximizing the tax free benefits of CENTCOM. Some specific questions below:
-If I contribute to a Roth while in CENTCOM will it be tax free going in and coming out?
-Would that go for 401K (TSP)?

Thank you in advance!

Pecuniary, you've asked a straightforward question, but the process is more complicated than ever.

I'll start with the answers to your questions:
Roth TSP: Yes. It's a tax-free contribution (because your pay is untaxed), and Roth TSP gains are free of taxes.
Traditional TSP: Partly. It's another tax-free contribution but the gains (as always) will be subject to tax at your personal income-tax bracket rate.
Roth IRA: Contributions to your Roth IRA will be untaxed because so much of your pay is free of taxes. You probably won't pay any income tax during the tax year(s) of the deployment. Gains in your Roth IRA are free of taxes.

But there are a bunch other issues to consider.

First, make sure you're in the right parts of CENTCOM. Here's the list that DoD gives to the IRS:
https://www.irs.gov/individuals/military/combat-zones

If you're in the Combat Zone Tax Exempt pay area, you have higher TSP contribution limits:
https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/contributionLimits.html

Note these three caveats for uniformed services.
CZTE pay has a higher annual addition limit of $54K per calendar year (even if it's the same deployment):
"For members of the uniformed services, it [the elective deferral limit] includes all traditional and Roth contributions from taxable basic pay, incentive pay, special pay, and bonus pay, but does not apply to traditional contributions made from tax-exempt pay earned in a combat zone."

Roth TSP contribution limits are $18K/year no matter the $54K annual addition limit:
"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 2017) 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."

Here's an issue for the Blended Retirement System if opt in to the BRS and you deploy in 2018:
"If you are called to active duty and make tax-exempt contributions to the TSP while deployed in a designated combat zone, the sum of the employee and agency contributions to your civilian account as well as the tax-exempt contributions made to your uniformed services account cannot exceed the annual addition limit."
"This limit is per employer and includes employee contributions (tax-deferred, after-tax, and tax-exempt), Agency Automatic (1%) Contributions, and Matching Contributions."

Second, some services are better than others at reporting your location. The Army usually sends the notification to the Defense Finance and Accounting Service the day you step off the plane into the desert, and your myPay account coordinates with the TSP computers. However the Navy tends to hop back & forth across the lines (with new messages to DFAS) so your TSP contributions may lock out for a few weeks if you've already exceeded $18K. The Air Force depends on whether they're staying in the area or just flying back & forth from non-CENTCOM areas. The Marines, as usual, do their own Marine thing which is different from the other services. Just be aware of where you are on that list of CZTE areas. Keep an eye on your Leave & Earnings Statement and your TSP account contribution summary.

Finally, here's how to finesse your Roth TSP limit of $18K/year. Before you deploy, if you can, contribute to the Roth TSP just short of the limit (around $17,900). When you're officially in CENTCOM then you can turn off your Roth TSP contributions and boost your traditional TSP contribution limits (in myPay) to whatever you can afford. (Ideally you'd contribute $36K to your traditional TSP in order to reach the $54K annual addition limit.) Note that you'll want to enter percentages in the myPay blocks for special pay (as well as incentive & bonus pay) because you may be pulling Imminent Danger Pay and Hostile Fire Pay. (Since you lived without IDP and HFP before you deployed, then while you're in CENTCOM you could put 92% of those into your traditional TSP... or perhaps use them to pay down high-interest debt.) When you leave CENTCOM then you can switch myPay back to maximize your Roth IRA contribution ($18K). Don't worry about going over the limits-- readers have confirmed with us bloggers that the TSP computers will kick back any excess.

If you're deployed across both 2017 and 2018 then you can contribute up to $54K in each calendar year, subject to the same $18K/year limit in the Roth TSP.

You may wonder what you'll live on for daily expenses if you're putting so much into your TSP. Some servicemembers draw down their taxable investment accounts (taking capital gains) because so much of their income is tax-free that they'll be in the 0% capital-gains tax bracket and will probably not even pay any income tax. This is a great way to realize capital gains with no taxes and to load up your retirement accounts. Others will eschew some TSP contributions to take advantage of the Savings Deposit Program's $10K limit at 10% interest. A very few might be able to re-enlist or sign a retention bonus contract in the CZTE area, which makes their entire bonus exempt from taxes. This has been abused in the past, however, so your service may have limits on receiving lump-sum bonuses in a CZTE.

By the way, a tax-free bonus is a horrible reason to re-enlist or to extend your obligation. Do it because you're feeling challenged & fulfilled and were going to stay in the military anyway... not just for the money.

You can set your myPay contributions to the traditional TSP at 92% (the other 7.45% is reserved for FICA). You can only set your Roth TSP contributions to about 60% due to DFAS' tax withholding regulations (even though you're in a CZTE area receiving tax-exempt pay). Keep an eye on these settings because if you exceed the Roth TSP limit then excess contributions won't automatically be redirected to your traditional TSP... the TSP will kick back the amount over the Roth TSP's $18K limit to DFAS and you'll have to wait until the next month to direct that month's contribution to the traditional TSP.

Here's the catch with the Blended Retirement System.
If you opt for the BRS, then you'll receive your 5% matching TSP contributions from DFAS. Those matching contributions do not count toward your $18K/year limit, but they do count against your $54K/year limit. You also want to make sure that you space out your TSP contributions across the 12 calendar months so that you get the 5% DoD match every month. If you somehow contributed $54K to the TSP in January, then some of that would be kicked back because of DoD's 5% match. Even worse, for the next 11 months you'd be locked out of further TSP contributions (you already hit the $54K limit) and you'd receive zero DoD matching contributions in those 11 months.

I've heard from one servicemember who was able to continue contributing to their traditional TSP (for the rest of the tax year) after leaving the combat zone. In that situation, they had not reached their Roth TSP limit of $18K and they were able to hit the remaining $36K in their traditional TSP even though they were no longer in the combat zone. We bloggers are waiting to hear feedback from more servicemembers to help us figure out whether this was a computer glitch or just the way that the TSP interprets the tax code.
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Nords
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Re: Maximizing Deployment

Postby Nords » Sun May 21, 2017 12:28 am

PecuniaryPupil23 wrote:Great info, thank you!
Follow on questions- My wife and I are currently not eligible to contribute to Roth IRA due to the income limits so I have been doing backdoor roths for both of us. (1) Due to the fact that my income in the combat zone is untaxed would this (depending on what our combined taxable income comes out to be) potentially lower our effective combined income and make us eligible for Roth outright or is it based on income before taxes. (2) If I still have to do back door Roth would this still excluded from taxes on the front and the back. (3) Is someone keeping track of all this or is there some special paperwork I need to fill out to prove that I contributed while in a combat zone. THANK YOU!!


Good "problems" to have.

(1) It's based on modified adjusted gross income before taxes. You'll have a much lower taxable income number on your W-2 (and your LES). It's also a messy calculation:
https://www.irs.gov/publications/p590a/ch02.html#en_US_2016_publink1000230985
Essentially, if your modified AGI is below $186K then you can contribute to a Roth IRA.

(2) Well, in the first place, your contribution to your traditional IRA was probably non-deductible (which would normally imply that you'd already paid taxes on it). During the combat deployment you'd contribute some tax-free pay to your traditional IRA. Then you'd promptly convert that to a Roth IRA (and the basis would be the contribution) so there would be no gains on the traditional IRA and no taxes on the conversion either.

(3) Hahahahaha! But yes, it's on your W-2 and your LES and on your Forms 8606 (Roth IRA conversions). Tax software programs may also ask you if you want to track the basis of your Roth IRA contributions (TurboTax does this) in case you someday decide to withdraw those contributions (for any reason, free of penalty and free of tax).

Your TSP account statement would also reflect what contributions were made from tax-free pay. This can be an issue if you roll over your traditional TSP account to a rollover IRA, because many IRA custodians don't accept or handle or track tax-free contributions. In that case the portion of the rollover that consists of the tax-free contribution would be returned directly to you. It's not taxable income (because it was tax-free) but it's also no longer in your rollover IRA earning gains for you.
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