Help my Army Son in Kuwait with a Capital Gains Question
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Help my Army Son in Kuwait with a Capital Gains Question
Dear Bogleheads:
One of my sons is an Army Major stationed in Kuwait for all of 2024. He is single. Under DoD policies, he is in what is called a Combat Zone Tax Entitlement (CZTE) area. Earnings received while in a designated combat zone (CZ) or a direct support area (such as Kuwait) are excluded from taxable income for all enlisted soldiers and warrant officers.
For commissioned officers, like my son, $10,294.80 of earnings per month (the basic pay of the Sergeant Major of the Army) can be excluded from taxable income under CZTE rules. [More details on the CZTE can be found here: https://myarmybenefits.us.army.mil/Bene ... -?serv=122 ]
Because of his low taxable income for 2024, I have advised him to use this opportunity to sell for a capital gain shares in the Vanguard VTSAX mutual fund he has been investing in for years. His VTSAX holding, purchased over many years, is in a taxable Vanguard Brokerage Account and the long-term capital gains are approximately $145,000 according to Vanguard. I note that he has no income state tax obligation as a resident of the state of Washington.
My son’s Army monthly pay will not exceed the $10,294.80 threshold for commissioned officers under the CTZE rules. Thus, none of his Army pay will be taxable in 2024 due to his Kuwait duty location. He will, however, have approximately $10,000 or ordinary dividends and interest and capital gains inside his Vanguard mutual funds. So far in 2024, he has not sold any stocks or mutual funds and currently has no 2024 short-term or long-term capital gains
I am aware that the standard deduction in 2024 for someone filing single is $14,600. The 2024 Capital Gains rate for single filers is 0% for income from $0 - $47,025, and then 15% for taxable income amounts from $47,026 – $518,900.
Assuming he has $10,000 in ordinary dividends and interest and capital gains inside his Vanguard mutual funds for 2024 and that his Army income is $10,000/month (not taxable under the CZTE rules) and that he sells all of his VTSAX funds generating long-term capital gains of $145,000 prior to December 31, 2024, I have 5 questions for the Bogleheads:
1. I believe the “wash sale” rule does not apply to sales of a stock or mutual fund that generates a gain and that he can “buy back” all of the VTSAX funds the same day or a day later, essentially stepping up his basis in these funds by $145,000. Is this true?
2. In practical terms, can the sale and buy back of a large amount of VTSAX mutual fund be done in the same day at Vanguard or is there a wait period?
3. Would the Net Investment Income Tax (NIIT) of 3.8%, somehow apply in his case? I ask because even though his annual Army salary of $120,000 is nontaxable under the CZTE rules, he does have total income (taxable and nontaxable) in excess of the $200,000 threshold for the NIIT applicable to single filers if he has a $145,000 long-term capital gain when selling all his VTSAX shares combined with his other income.
4. How exactly is the 0% and 15% capital gains tax rate applied in his case when his taxable income of $10,000 (prior to the $145,000 capital gain) is under the $14,600 standard deduction applicable to him?
5. Is there anything else he should consider doing as a financially savvy move during this favorable 2024 tax situation?
Thank you,
Househunter
One of my sons is an Army Major stationed in Kuwait for all of 2024. He is single. Under DoD policies, he is in what is called a Combat Zone Tax Entitlement (CZTE) area. Earnings received while in a designated combat zone (CZ) or a direct support area (such as Kuwait) are excluded from taxable income for all enlisted soldiers and warrant officers.
For commissioned officers, like my son, $10,294.80 of earnings per month (the basic pay of the Sergeant Major of the Army) can be excluded from taxable income under CZTE rules. [More details on the CZTE can be found here: https://myarmybenefits.us.army.mil/Bene ... -?serv=122 ]
Because of his low taxable income for 2024, I have advised him to use this opportunity to sell for a capital gain shares in the Vanguard VTSAX mutual fund he has been investing in for years. His VTSAX holding, purchased over many years, is in a taxable Vanguard Brokerage Account and the long-term capital gains are approximately $145,000 according to Vanguard. I note that he has no income state tax obligation as a resident of the state of Washington.
My son’s Army monthly pay will not exceed the $10,294.80 threshold for commissioned officers under the CTZE rules. Thus, none of his Army pay will be taxable in 2024 due to his Kuwait duty location. He will, however, have approximately $10,000 or ordinary dividends and interest and capital gains inside his Vanguard mutual funds. So far in 2024, he has not sold any stocks or mutual funds and currently has no 2024 short-term or long-term capital gains
I am aware that the standard deduction in 2024 for someone filing single is $14,600. The 2024 Capital Gains rate for single filers is 0% for income from $0 - $47,025, and then 15% for taxable income amounts from $47,026 – $518,900.
Assuming he has $10,000 in ordinary dividends and interest and capital gains inside his Vanguard mutual funds for 2024 and that his Army income is $10,000/month (not taxable under the CZTE rules) and that he sells all of his VTSAX funds generating long-term capital gains of $145,000 prior to December 31, 2024, I have 5 questions for the Bogleheads:
1. I believe the “wash sale” rule does not apply to sales of a stock or mutual fund that generates a gain and that he can “buy back” all of the VTSAX funds the same day or a day later, essentially stepping up his basis in these funds by $145,000. Is this true?
2. In practical terms, can the sale and buy back of a large amount of VTSAX mutual fund be done in the same day at Vanguard or is there a wait period?
3. Would the Net Investment Income Tax (NIIT) of 3.8%, somehow apply in his case? I ask because even though his annual Army salary of $120,000 is nontaxable under the CZTE rules, he does have total income (taxable and nontaxable) in excess of the $200,000 threshold for the NIIT applicable to single filers if he has a $145,000 long-term capital gain when selling all his VTSAX shares combined with his other income.
4. How exactly is the 0% and 15% capital gains tax rate applied in his case when his taxable income of $10,000 (prior to the $145,000 capital gain) is under the $14,600 standard deduction applicable to him?
5. Is there anything else he should consider doing as a financially savvy move during this favorable 2024 tax situation?
Thank you,
Househunter
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Re: Help my Army Son in Kuwait with a Capital Gains Question
Correct, the statutory wash sale rules do not apply when stock or securities are sold at a gain. There are circumstances when common law rules could disregard a "wash sale" used solely to recognize gain. The risk of that appears low in the circumstances described. You could hold in a wash sale partner of VTSAX for some period if you wanted to further mitigate this already low risk.househunter wrote: ↑Thu Oct 17, 2024 6:29 am 1. I believe the “wash sale” rule does not apply to sales of a stock or mutual fund that generates a gain and that he can “buy back” all of the VTSAX funds the same day or a day later, essentially stepping up his basis in these funds by $145,000. Is this true?
Not entirely sure, but I think you would have to be in something else for at least a day. I would suggest VFIAX for this purpose. (That could also serve as the partner fund mentioned above if you are inclined to hold one).2. In practical terms, can the sale and buy back of a large amount of VTSAX mutual fund be done in the same day at Vanguard or is there a wait period?
As far as I know, section 112 simply excludes combat zone pay from gross income. NIIT has an add-back for the section 911 exclusion, but not the section 112 exclusion, which suggests combat zone pay should not count towards the NIIT threshold.3. Would the Net Investment Income Tax (NIIT) of 3.8%, somehow apply in his case? I ask because even though his annual Army salary of $120,000 is nontaxable under the CZTE rules, he does have total income (taxable and nontaxable) in excess of the $200,000 threshold for the NIIT applicable to single filers if he has a $145,000 long-term capital gain when selling all his VTSAX shares combined with his other income.
This web visualization should help.4. How exactly is the 0% and 15% capital gains tax rate applied in his case when his taxable income of $10,000 (prior to the $145,000 capital gain) is under the $14,600 standard deduction applicable to him?
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Re: Help my Army Son in Kuwait with a Capital Gains Question
As I understand it, you cannot purchase a mutual fund that you've sold (in the same account) within the past 30 days at Vanguard.HootingSloth wrote: ↑Thu Oct 17, 2024 10:01 amNot entirely sure, but I think you would have to be in something else for at least a day. I would suggest VFIAX for this purpose. (That could also serve as the partner fund mentioned above if you are inclined to hold one).househunter wrote: ↑Thu Oct 17, 2024 6:29 am 2. In practical terms, can the sale and buy back of a large amount of VTSAX mutual fund be done in the same day at Vanguard or is there a wait period?
There are (at least) a couple of ways around this...
1. Use ETFs instead of mutual funds. No such restriction exists for ETFs at Vanguard.
2. Schedule an automatic purchase of VTSAX with a future date before selling. Automatic purchases / sales don't seem to be subject to the 30 day rule.
Regards,
"All of us would be better investors if we just made fewer decisions." - Daniel Kahneman
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Re: Help my Army Son in Kuwait with a Capital Gains Question
One caveat: orders can and do change in a few days notice. Your son may be sent home before the end of the calendar year.
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Re: Help my Army Son in Kuwait with a Capital Gains Question
HootingSloth, Retired@50, and Rocky Mtn Man:
These are very helpful replies. Thanks so much. I will pass along to my son.
Any other input from the collective wisdom of the wonderful Bogleheads is welcomed.
Sincerely,
Househunter
These are very helpful replies. Thanks so much. I will pass along to my son.
Any other input from the collective wisdom of the wonderful Bogleheads is welcomed.
Sincerely,
Househunter
Re: Help my Army Son in Kuwait with a Capital Gains Question
Just sell it and buy the ETF, VTI. It's equivalent to VTSAX.househunter wrote: ↑Thu Oct 17, 2024 6:29 am
2. In practical terms, can the sale and buy back of a large amount of VTSAX mutual fund be done in the same day at Vanguard or is there a wait period?
Use this for a dummy tax return to see how much capital gains to capture.
https://sites.google.com/view/incometaxspreadsheet/home
Here are some more deployment tips.
https://sites.google.com/site/myarmyhps ... l-benefits
Re: Help my Army Son in Kuwait with a Capital Gains Question
Roth conversions in a low tax bracket would also be worth looking at.househunter wrote: ↑Thu Oct 17, 2024 6:29 am 5. Is there anything else he should consider doing as a financially savvy move during this favorable 2024 tax situation?
Re: Help my Army Son in Kuwait with a Capital Gains Question
One other little known fact is that servicemembers in a CZ can invest up to 10K at 10% interest while there. I did it three times.
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Re: Help my Army Son in Kuwait with a Capital Gains Question
He can max his Roth TSP deductions. In a combat area the yearly limit is $69k versus $23k. It's all non-tax pay so make sure it is a Roth TSP.househunter wrote: ↑Thu Oct 17, 2024 6:29 am
5. Is there anything else he should consider doing as a financially savvy move during this favorable 2024 tax situation?
Re: Help my Army Son in Kuwait with a Capital Gains Question
The Roth TSP still has the $23K limit. Tax-exempt pay can be contributed to the traditional TSP as well, and since this money is treated as already taxed, only the earnings will be taxed on withdrawal; this is equivalent to a non-deductible IRA contribution. So it is clearly better to max out the Roth TSP (and Roth IRA) first.Rocky Mtn Man wrote: ↑Sat Oct 19, 2024 3:28 pmHe can max his Roth TSP deductions. In a combat area the yearly limit is $69k versus $23k. It's all non-tax pay so make sure it is a Roth TSP.househunter wrote: ↑Thu Oct 17, 2024 6:29 am
5. Is there anything else he should consider doing as a financially savvy move during this favorable 2024 tax situation?
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Re: Help my Army Son in Kuwait with a Capital Gains Question
Good to know.grabiner wrote: ↑Sun Oct 20, 2024 8:13 am
The Roth TSP still has the $23K limit. Tax-exempt pay can be contributed to the traditional TSP as well, and since this money is treated as already taxed, only the earnings will be taxed on withdrawal; this is equivalent to a non-deductible IRA contribution. So it is clearly better to max out the Roth TSP (and Roth IRA) first.
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Re: Help my Army Son in Kuwait with a Capital Gains Question
All Posters:
Thanks so much. I believe this post has run its course and was really helpful for me and my son.
My son talked to VG about a year ago about converting his VTSAX mutual fund shares to VTI, but because he does an automatic investment to buy more shares of VTSAX from his checking account weekly, this can't be done (automatically) to buy VTI. So he did not convert.
As GuyInFL suggested, he plans to sell all VTSAX shares bought over one year ago, generating the large capital gain - taxable for him at 15% (some at 0%) for 2024. This will leave him with some VTSAX shares still in his brokerage account, and he plans to continue the automatic weekly investments in VTSAX, eventually converting some or all the shares to what will be his larger VTI holding.
Watty: Thanks for your many outstanding posts that I have read over the years. I agree that for my son this would be a good year to do Roth conversions, but he made a decision when he joined the Army in 2012 to make all of his TSP purchases in the Roth account. He also has a Roth IRA. He had no Traditional IRA money to convert.
Krafty81: The DoD authorized $10,000 investment for a 10% interest rate return is a good deal, as you note, and my son has done this. Thanks so much for alerting others to this option.
MtnMan and Grabiner - thanks for mentioning the idea of possibly putting up to $69K in the Roth TSP, but Grabiner (thanks for so many good posts) is correct in that only the elective deferral limit of $23,000 can go into the Roth TSP. My son elected to not put money in the Traditional TSP on top of his $23K Roth amount because it is eventually taxed as ordinary income (including the contribution amount). Instead, investing in the stock market permits taxation of long-term gains (currently) at only 15% and the basis amount is never taxed.
All the best,
Househunter
Thanks so much. I believe this post has run its course and was really helpful for me and my son.
My son talked to VG about a year ago about converting his VTSAX mutual fund shares to VTI, but because he does an automatic investment to buy more shares of VTSAX from his checking account weekly, this can't be done (automatically) to buy VTI. So he did not convert.
As GuyInFL suggested, he plans to sell all VTSAX shares bought over one year ago, generating the large capital gain - taxable for him at 15% (some at 0%) for 2024. This will leave him with some VTSAX shares still in his brokerage account, and he plans to continue the automatic weekly investments in VTSAX, eventually converting some or all the shares to what will be his larger VTI holding.
Watty: Thanks for your many outstanding posts that I have read over the years. I agree that for my son this would be a good year to do Roth conversions, but he made a decision when he joined the Army in 2012 to make all of his TSP purchases in the Roth account. He also has a Roth IRA. He had no Traditional IRA money to convert.
Krafty81: The DoD authorized $10,000 investment for a 10% interest rate return is a good deal, as you note, and my son has done this. Thanks so much for alerting others to this option.
MtnMan and Grabiner - thanks for mentioning the idea of possibly putting up to $69K in the Roth TSP, but Grabiner (thanks for so many good posts) is correct in that only the elective deferral limit of $23,000 can go into the Roth TSP. My son elected to not put money in the Traditional TSP on top of his $23K Roth amount because it is eventually taxed as ordinary income (including the contribution amount). Instead, investing in the stock market permits taxation of long-term gains (currently) at only 15% and the basis amount is never taxed.
All the best,
Househunter
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Re: Help my Army Son in Kuwait with a Capital Gains Question
The combat pay contributions to trad TSP are non-taxable. The growth is taxed, but the contribution is kept as a separate item in the TSP account.househunter wrote: ↑Wed Oct 23, 2024 8:47 am My son elected to not put money in the Traditional TSP on top of his $23K Roth amount because it is eventually taxed as ordinary income (including the contribution amount). Instead, investing in the stock market permits taxation of long-term gains (currently) at only 15% and the basis amount is never taxed.
https://www.va.gov/files/2022-03/TSP%20Summary.pdf
See page 7, bottom left column.
Re: Help my Army Son in Kuwait with a Capital Gains Question
This makes the tax treatment of combat pay in the TSP, or any investment in a non-deductible IRA, clearly better than that of a taxable account for bonds, but potentially worse for stock. Therefore, if you can hold only stock in your taxable account, it is not worth opening a non-deductible IRA or contributing combat pay to the TSP; just invest in tax-efficient stock such as Total Stock Market Index. (You should still max out your Roth TSP, and Roth IRA if eligible; Roth is always better than taxable.)Rocky Mtn Man wrote: ↑Wed Oct 23, 2024 10:50 amThe combat pay contributions to trad TSP are non-taxable. The growth is taxed, but the contribution is kept as a separate item in the TSP account.househunter wrote: ↑Wed Oct 23, 2024 8:47 am My son elected to not put money in the Traditional TSP on top of his $23K Roth amount because it is eventually taxed as ordinary income (including the contribution amount). Instead, investing in the stock market permits taxation of long-term gains (currently) at only 15% and the basis amount is never taxed.
https://www.va.gov/files/2022-03/TSP%20Summary.pdf
See page 7, bottom left column.
If you hold stock in a TSP funded by tax-exempt combat pay, or in a non-deductible IRA, you pay tax on the gains at your full tax rate when you withdraw the money. If you hold it in a taxable account, you pay dividend tax every year, and then capital-gains tax when you sell; the tax rate is lower but you lose the compounded value of the dividend tax.
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Re: Help my Army Son in Kuwait with a Capital Gains Question
Mtn Man and Grabiner,
Thanks for clarifying this point, that I had missed. I have copied the portion of the TSP link that Mtn Man was referring to regarding military members eligible for tax-exempt pay due to being in a combat zone. It states:
Tax-exempt contributions are contributions uniformed
services members may make while earning tax-exempt pay
in a combat zone. If your tax-exempt contributions are
designated as traditional contributions, you will pay no
tax on the contributions, but your earnings will be taxed
when withdrawn. If your contributions are designated as
Roth, you will pay no taxes on your contributions, and
their earnings will also be tax-free when withdrawn,
as long as you meet the IRC requirements detailed in
“Roth (after-tax) contributions” on this page. As a service
member, you may not use tax-exempt pay to make
traditional contributions toward the catch-up limit, but
you may use it to make Roth contributions toward the
catch-up limit.
As Grabiner suggests, it is possible that NOT contributing available funds to the TSP above the elective deferral limit of $23,000 for 2024 can work out better if those available funds are invested in a brokerage account in stocks. Right now the long-term capital gains rate of 15% is better than the likely tax rate when the funds are withdrawn and the gains (not the initial basis) are subject to tax at ordinary income rates. This analysis, of course, could change if future ordinary income tax rates and/or long-term capital gains rate change.
Two general questions for Mtn Man, Grabiner, and others:
1. Would it be a sound strategy to contribute available funds in tax-exempt pay to the Traditional TSP above the elective deferral limit of $23,000 and put those funds all in the TSP G fund? This would essentially provide part of my son's bond allocation and it seems sounder than buying bonds or bond mutual funds in a taxable account. Finally, do you or others have any suggestions for TSP funds if he used the traditional TSP account. Right now, all of his Roth TSP contributions are in the available stock funds, which I believe is sound.
2. Next year, CY2025, he will have 7 months in Kuwait and then 5 months elsewhere after a permanent change of station (PCS) move, almost certainly not in a Combat-exempt pay zone. Is there an available optimal strategy for Roth and Traditional TSP contributions in the first 7 months of the year that would make financial sense? Like all others with him, he eats meals in the mess hall, lives in spartan housing arrangements, and has almost no expenses while deployed in Kuwait. In theory, he could contribute nearly 100% of his tax-exempt pay to the TSP in the first 7 months of 2025.
Again, thanks for your input and advice and the input of all the other Bogleheads.
Househunter
Thanks for clarifying this point, that I had missed. I have copied the portion of the TSP link that Mtn Man was referring to regarding military members eligible for tax-exempt pay due to being in a combat zone. It states:
Tax-exempt contributions are contributions uniformed
services members may make while earning tax-exempt pay
in a combat zone. If your tax-exempt contributions are
designated as traditional contributions, you will pay no
tax on the contributions, but your earnings will be taxed
when withdrawn. If your contributions are designated as
Roth, you will pay no taxes on your contributions, and
their earnings will also be tax-free when withdrawn,
as long as you meet the IRC requirements detailed in
“Roth (after-tax) contributions” on this page. As a service
member, you may not use tax-exempt pay to make
traditional contributions toward the catch-up limit, but
you may use it to make Roth contributions toward the
catch-up limit.
As Grabiner suggests, it is possible that NOT contributing available funds to the TSP above the elective deferral limit of $23,000 for 2024 can work out better if those available funds are invested in a brokerage account in stocks. Right now the long-term capital gains rate of 15% is better than the likely tax rate when the funds are withdrawn and the gains (not the initial basis) are subject to tax at ordinary income rates. This analysis, of course, could change if future ordinary income tax rates and/or long-term capital gains rate change.
Two general questions for Mtn Man, Grabiner, and others:
1. Would it be a sound strategy to contribute available funds in tax-exempt pay to the Traditional TSP above the elective deferral limit of $23,000 and put those funds all in the TSP G fund? This would essentially provide part of my son's bond allocation and it seems sounder than buying bonds or bond mutual funds in a taxable account. Finally, do you or others have any suggestions for TSP funds if he used the traditional TSP account. Right now, all of his Roth TSP contributions are in the available stock funds, which I believe is sound.
2. Next year, CY2025, he will have 7 months in Kuwait and then 5 months elsewhere after a permanent change of station (PCS) move, almost certainly not in a Combat-exempt pay zone. Is there an available optimal strategy for Roth and Traditional TSP contributions in the first 7 months of the year that would make financial sense? Like all others with him, he eats meals in the mess hall, lives in spartan housing arrangements, and has almost no expenses while deployed in Kuwait. In theory, he could contribute nearly 100% of his tax-exempt pay to the TSP in the first 7 months of 2025.
Again, thanks for your input and advice and the input of all the other Bogleheads.
Househunter
Re: Help my Army Son in Kuwait with a Capital Gains Question
Unfortunately this is not a thing you can do. All sources of monies in the TSP are assumed to be spread proportionally across all invested TSP Funds. So unless your son's TSP is now and forever the G-Fund, then some of his combat tax excluded pay will be "in" the other non-G-Funds. Or more specifically upon withdrawal, the TSP disperses funds proportionally and there's no way to say, "only give me the monies that were / weren't tax-exempt". But the result is the same, there will be stock market-based growth on the tax-excluded monies and that growth will be taxed as income as I know you're aware.househunter wrote: ↑Fri Oct 25, 2024 7:15 am 1. Would it be a sound strategy to contribute available funds in tax-exempt pay to the Traditional TSP above the elective deferral limit of $23,000 and put those funds all in the TSP G fund? ... Finally, do you or others have any suggestions for TSP funds if he used the traditional TSP account. Right now, all of his Roth TSP contributions are in the available stock funds, which I believe is sound.
ETA: also there's no way to differentiate his Roth vs Traditional TSP balances with respect to the funds they are invested in. So while his tax-excluded monies can be put into Roth or Trad, his entire TSP account is in whatever mix of funds he chooses. The only difference to above is that now (with recent-ish law changes) your son can withdraw specifically Roth or Trad monies vs being forced to do it proportionally.
He can of course withdraw from Roth or Trad and then immediately rebalance across the funds to effectively withdraw monies only from say, Traditional G-Fund, but the source of those monies will still be proportional to contributed amounts and when he rebalances his entire TSP gets rebalanced, not just the Trad bits; there's still no way to avoid that.
Last edited by mouth on Fri Oct 25, 2024 8:05 am, edited 2 times in total.
Re: Help my Army Son in Kuwait with a Capital Gains Question
However, this still might be desirable, because of the opportunity to roll over. Rollovers of traditional money take the taxable balance first, because many plans will not accept tax-exempt balances. When he leaves the army, he can roll the taxable part of the traditional TSP into his new employer's 401(k), and the tax-exempt part into a Roth IRA, paying tax only on the gains but getting tax-free growth in the future. This works because a commercial 401(k) will not accept tax-exempt money.mouth wrote: ↑Fri Oct 25, 2024 7:45 amUnfortunately this is not a thing you can do. All sources of monies in the TSP are assumed to be spread proportionally across all invested TSP Funds. So unless your son's TSP is now and forever the G-Fund, then some of his combat tax excluded pay will be "in" the other non-G-Funds. Or more specifically upon withdrawal, the TSP disperses funds proportionally and there's no way to say, "only give me the monies that were / weren't tax-exempt". But the result is the same, there will be stock market-based growth on the tax-excluded monies and that growth will be taxed as income as I know you're aware.househunter wrote: ↑Fri Oct 25, 2024 7:15 am 1. Would it be a sound strategy to contribute available funds in tax-exempt pay to the Traditional TSP above the elective deferral limit of $23,000 and put those funds all in the TSP G fund?
Reference: Distributions from the TSP
Edit to clarify: Suppose that you contribute $20K of tax-exempt traditional money, and it grows to $40K. You then roll the tax-exempt $20K into a Roth IRA, and the taxable $20K into a 401(k). When you withdraw from the 401(k), you will pay tax on the $20K, and on the growth on that $20K, but you will never pay tax on the growth on the other half of the money. Thus, in this situation, you pay tax at your full tax rate, but on only half the growth.
Alternatively, you could roll the entire $40K into a Roth IRA, paying tax on $20K at that time. You would lose not only the tax on that $20K, but the future growth on the money you use to pay that tax. This strategy is equivalent to putting the taxable money into a traditional IRA and then immediately converting it to a Roth IRA, so it is more attractive if you want to do Roth conversions.
Last edited by grabiner on Fri Oct 25, 2024 8:11 am, edited 1 time in total.
Re: Help my Army Son in Kuwait with a Capital Gains Question
Since he will probably be in a low tax bracket with less than half his salary taxable, he should max out the Roth for that year. He might go all-traditional in a later year in which the entire salary is taxable.househunter wrote: ↑Fri Oct 25, 2024 7:15 am 2. Next year, CY2025, he will have 7 months in Kuwait and then 5 months elsewhere after a permanent change of station (PCS) move, almost certainly not in a Combat-exempt pay zone. Is there an available optimal strategy for Roth and Traditional TSP contributions in the first 7 months of the year that would make financial sense? Like all others with him, he eats meals in the mess hall, lives in spartan housing arrangements, and has almost no expenses while deployed in Kuwait. In theory, he could contribute nearly 100% of his tax-exempt pay to the TSP in the first 7 months of 2025.
He can still decide, as above, whether it also makes sense to put tax-exempt pay into the TSP. If he does, he should still make sure he maxes out the Roth; this might involve contributing only tax-exempt pay to the traditional TSP while in the combat zone and then switching to Roth contributions after he leaves.
Re: Help my Army Son in Kuwait with a Capital Gains Question
Yes there are ways to get part way there at least. But it gets complicated and he can't identify the fund the tax-excldued money is invested in.grabiner wrote: ↑Fri Oct 25, 2024 7:56 amHowever, this still might be desirable, because of the opportunity to roll over. Rollovers of traditional money take the taxable balance first, because many plans will not accept tax-exempt balances. When he leaves the army, he can roll the taxable part of the traditional TSP into his new employer's 401(k), and the tax-exempt part into a Roth IRA, paying tax only on the gains but getting tax-free growth in the future. This works because a commercial 401(k) will not accept tax-exempt money.mouth wrote: ↑Fri Oct 25, 2024 7:45 am
Unfortunately this is not a thing you can do. All sources of monies in the TSP are assumed to be spread proportionally across all invested TSP Funds. So unless your son's TSP is now and forever the G-Fund, then some of his combat tax excluded pay will be "in" the other non-G-Funds. Or more specifically upon withdrawal, the TSP disperses funds proportionally and there's no way to say, "only give me the monies that were / weren't tax-exempt". But the result is the same, there will be stock market-based growth on the tax-excluded monies and that growth will be taxed as income as I know you're aware.
Reference: Distributions from the TSP
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Re: Help my Army Son in Kuwait with a Capital Gains Question
Grabiner and Mouth and others:
Thanks so much. I do have some other questions related to my son's situation and your excellent suggestions and info on post-Army TSP rollovers. Also, this may be important - my son has never made a contribution to Traditional TSP only the Roth portion of the TSP. So, he has never taken a tax deduction for Traditional TSP contributions. For 2024, he is maxing out his Roth TSP at the Elective Deferral Limit (EDL) of $23,000.
Questions:
1. Is the option to contribute to the TSP (Traditional only) above the EDL of $23,000 for 2024 only available to service members in a Combat Pay Exclusion Zone (CPEZ) , or can any service member stationed stateside or elsewhere outside a CPEZ do this? If so, how is their contribution to the Traditional TSP above the $23,000 EDL for 2024 different, if at all, from someone who contributes above the EDL with combat exempt pay?
2. If my son contributes $30,000 to the Traditional TSP in 2024 above the $23,000 he already put in the Roth TSP, while stationed in a CPEZ, I understand the earnings on that $30,000 will be eventually taxed as ordinary income. Let's say he never does another Traditional TSP contribution and stays all Roth in 2025 and later. Assuming he gets out of the Army after xx number of years, I see he can roll the earnings from the Traditional TSP into a 401(k) or Traditional IRA. Is everything else, which is mainly Roth TSP contributions + the Kuwait CPEZ contribution, eligible for rollover to a Roth? Or does the Combat exempt pay contributed to the Traditional TSP have to be rolled into a separate Traditional IRA, but with a basis consisting of the amount of the combat exempt pay originally contributed.
3. For 2025, my son expects to have 7 months in Kuwait, though he understands this could change. Is he allowed to "front load" his TSP contributions so he can max out his Roth portion up to the 2025 EDL and then go above that amount in the Traditional TSP with combat exempt pay before changing station outside the CPEZ?
Again, thanks so much.
Househunter
Thanks so much. I do have some other questions related to my son's situation and your excellent suggestions and info on post-Army TSP rollovers. Also, this may be important - my son has never made a contribution to Traditional TSP only the Roth portion of the TSP. So, he has never taken a tax deduction for Traditional TSP contributions. For 2024, he is maxing out his Roth TSP at the Elective Deferral Limit (EDL) of $23,000.
Questions:
1. Is the option to contribute to the TSP (Traditional only) above the EDL of $23,000 for 2024 only available to service members in a Combat Pay Exclusion Zone (CPEZ) , or can any service member stationed stateside or elsewhere outside a CPEZ do this? If so, how is their contribution to the Traditional TSP above the $23,000 EDL for 2024 different, if at all, from someone who contributes above the EDL with combat exempt pay?
2. If my son contributes $30,000 to the Traditional TSP in 2024 above the $23,000 he already put in the Roth TSP, while stationed in a CPEZ, I understand the earnings on that $30,000 will be eventually taxed as ordinary income. Let's say he never does another Traditional TSP contribution and stays all Roth in 2025 and later. Assuming he gets out of the Army after xx number of years, I see he can roll the earnings from the Traditional TSP into a 401(k) or Traditional IRA. Is everything else, which is mainly Roth TSP contributions + the Kuwait CPEZ contribution, eligible for rollover to a Roth? Or does the Combat exempt pay contributed to the Traditional TSP have to be rolled into a separate Traditional IRA, but with a basis consisting of the amount of the combat exempt pay originally contributed.
3. For 2025, my son expects to have 7 months in Kuwait, though he understands this could change. Is he allowed to "front load" his TSP contributions so he can max out his Roth portion up to the 2025 EDL and then go above that amount in the Traditional TSP with combat exempt pay before changing station outside the CPEZ?
Again, thanks so much.
Househunter
Re: Help my Army Son in Kuwait with a Capital Gains Question
Roth TSP and Tax-Exempt contributions are absolutely a sound strategy in the 12% tax bracket. For 2025, I recommend contacting Nords on this forum, he responds to PM.househunter wrote: ↑Fri Oct 25, 2024 7:15 am Mtn Man and Grabiner,
Thanks for clarifying this point, that I had missed. I have copied the portion of the TSP link that Mtn Man was referring to regarding military members eligible for tax-exempt pay due to being in a combat zone. It states:
Tax-exempt contributions are contributions uniformed
services members may make while earning tax-exempt pay
in a combat zone. If your tax-exempt contributions are
designated as traditional contributions, you will pay no
tax on the contributions, but your earnings will be taxed
when withdrawn. If your contributions are designated as
Roth, you will pay no taxes on your contributions, and
their earnings will also be tax-free when withdrawn,
as long as you meet the IRC requirements detailed in
“Roth (after-tax) contributions” on this page. As a service
member, you may not use tax-exempt pay to make
traditional contributions toward the catch-up limit, but
you may use it to make Roth contributions toward the
catch-up limit.
As Grabiner suggests, it is possible that NOT contributing available funds to the TSP above the elective deferral limit of $23,000 for 2024 can work out better if those available funds are invested in a brokerage account in stocks. Right now the long-term capital gains rate of 15% is better than the likely tax rate when the funds are withdrawn and the gains (not the initial basis) are subject to tax at ordinary income rates. This analysis, of course, could change if future ordinary income tax rates and/or long-term capital gains rate change.
Two general questions for Mtn Man, Grabiner, and others:
1. Would it be a sound strategy to contribute available funds in tax-exempt pay to the Traditional TSP above the elective deferral limit of $23,000 and put those funds all in the TSP G fund? This would essentially provide part of my son's bond allocation and it seems sounder than buying bonds or bond mutual funds in a taxable account. Finally, do you or others have any suggestions for TSP funds if he used the traditional TSP account. Right now, all of his Roth TSP contributions are in the available stock funds, which I believe is sound.
2. Next year, CY2025, he will have 7 months in Kuwait and then 5 months elsewhere after a permanent change of station (PCS) move, almost certainly not in a Combat-exempt pay zone. Is there an available optimal strategy for Roth and Traditional TSP contributions in the first 7 months of the year that would make financial sense? Like all others with him, he eats meals in the mess hall, lives in spartan housing arrangements, and has almost no expenses while deployed in Kuwait. In theory, he could contribute nearly 100% of his tax-exempt pay to the TSP in the first 7 months of 2025.
Again, thanks for your input and advice and the input of all the other Bogleheads.
Househunter
Getting to the additional deferral limit early in 2025 would be awesome. I'd prefer to max the Roth contributions for the tax-free, compound growth. The challenge will be getting contributions in the correct order without reaching the expected annual elective deferral limit of $23,500. Once he contributes that amount to Roth TSP, he'll be locked out of further contributions to the annual additional limit of $69K. Additional limit is only available in the combat zone while the elective deferral limit would be available after his return from the combat zone. A 2019 discussion is: viewtopic.php?t=284357
Simple guy like me, I'd take 100% Roth TSP in Jan & Feb which won't reach the elective deferral limit. After Feb pay cycle is complete in late Feb, change to 100% Traditional TSP in DFAS myPay until the additional limit is reached. If he doesn't reach the additional limit, he can contribute to the Roth TSP elective deferral limit outside the combat zone.
Getting to 100% early is desirable because deployments change. In my case they were usually extended, but some missions get terminated.
Others are correct, TSP participants cannot rebalance TSP Roth or Traditional balances separately, but the contributions stay invested where contributions were invested. In the case above, after the Feb contribution is invested in TSP usually early Mar, change the contribution election on the TSP website to G Fund and future traditional, tax-exempt contributions will be invested in G Fund until your son changes the contribution election on the TSP website. If he never rebalances his allocation in TSP, those funds will not get proportionally redistributed across TSP. FWIW with a probable future pension, I'd invest tax-exempt funds in stock funds...we could all hope to have an investing mistake be a small traditional TSP balance.
I did a TSP rollover to separate Roth, Tax-Exempt, and Traditional balances. viewtopic.php?t=382265
He should plan to spend some of that hard earned money too!
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
Re: Help my Army Son in Kuwait with a Capital Gains Question
Yeshousehunter wrote: ↑Sat Oct 26, 2024 7:50 am Grabiner and Mouth and others:
Thanks so much. I do have some other questions related to my son's situation and your excellent suggestions and info on post-Army TSP rollovers. Also, this may be important - my son has never made a contribution to Traditional TSP only the Roth portion of the TSP. So, he has never taken a tax deduction for Traditional TSP contributions. For 2024, he is maxing out his Roth TSP at the Elective Deferral Limit (EDL) of $23,000.
Questions:
1. Is the option to contribute to the TSP (Traditional only) above the EDL of $23,000 for 2024 only available to service members in a Combat Pay Exclusion Zone (CPEZ) ,
Nohousehunter wrote: ↑Sat Oct 26, 2024 7:50 am can any service member stationed stateside or elsewhere outside a CPEZ do this?
Yes, earnings will be a Traditional TSP balance.househunter wrote: ↑Sat Oct 26, 2024 7:50 am 2. If my son contributes $30,000 to the Traditional TSP in 2024 above the $23,000 he already put in the Roth TSP, while stationed in a CPEZ, I understand the earnings on that $30,000 will be eventually taxed as ordinary income.
If he's at the Roth TSP EDL already, he's locked out of the additional annual limit.
If he's not at the EDL, he can elect Traditional TSP contributions in DFAS myPay which will be Tax-Exempt contributions because he's already in the combat zone. He probably missed changing Oct contributions because pay finalizes 8-10 days before payday. Any DFAS myPay changes would probably become effective for Nov (1 Dec payday) and Dec (1 Jan payday) pay cycles.
Rollovers are allowed after retirement or separation from service. See the link in my previous post.househunter wrote: ↑Sat Oct 26, 2024 7:50 am Let's say he never does another Traditional TSP contribution and stays all Roth in 2025 and later. Assuming he gets out of the Army after xx number of years, I see he can roll the earnings from the Traditional TSP into a 401(k) or Traditional IRA. Is everything else, which is mainly Roth TSP contributions + the Kuwait CPEZ contribution, eligible for rollover to a Roth? Or does the Combat exempt pay contributed to the Traditional TSP have to be rolled into a separate Traditional IRA, but with a basis consisting of the amount of the combat exempt pay originally contributed.
Yes, he needs to be careful as I explained in my previous post.househunter wrote: ↑Sat Oct 26, 2024 7:50 am 3. For 2025, my son expects to have 7 months in Kuwait, though he understands this could change. Is he allowed to "front load" his TSP contributions so he can max out his Roth portion up to the 2025 EDL and then go above that amount in the Traditional TSP with combat exempt pay before changing station outside the CPEZ?
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
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Re: Help my Army Son in Kuwait with a Capital Gains Question
Fishing 50:
Wow, this is really helpful! Thank you.
Househunter
Wow, this is really helpful! Thank you.
Househunter
Re: Help my Army Son in Kuwait with a Capital Gains Question
Hi Fishing50. I don't believe this is correct. Can you point to where this is described in the TSP site?Fishing50 wrote: ↑Sat Oct 26, 2024 8:04 am Others are correct, TSP participants cannot rebalance TSP Roth or Traditional balances separately, but the contributions stay invested where contributions were invested. In the case above, after the Feb contribution is invested in TSP usually early Mar, change the contribution election on the TSP website to G Fund and future traditional, tax-exempt contributions will be invested in G Fund until your son changes the contribution election on the TSP website. If he never rebalances his allocation in TSP, those funds will not get proportionally redistributed across TSP.
My understanding is that however the contribution goes in, even if contributed directly to the G-fund, it is then co-mingled at the fund level even without a redistribution event. Taking OP's general case as I recall it, son's entire Roth is 100% equities (C-Fund to make it easy), let's say its $10,000 for simplicity. While deployed he puts another $10,000 into Trad, directly into the G-Fund via contribution election choice. Then does nothing at all ever again until retirement. Any money he withdraws will be 50% from G and 50% from C- Fund. Even if he withdraws only from Roth or only from Trad.
Now of course nothing says he can't do a partial distribution from Roth and then immediately redistribute across funds to effectively have only taken monies from his desired fund, but that's not the same thing as what you said.
Let's also not forget that "never redistributing" would be a tall order and possibly sub-optimal for the next 20+ years. So if you're assertion is correct, but I never picked up on it (because I've rebalanced plenty), I'd still be of the opinion that it's a distinction without a difference.
Re: Help my Army Son in Kuwait with a Capital Gains Question
We are both correct because we are describing different things, agreed to be a distinction without difference.mouth wrote: ↑Sat Oct 26, 2024 10:06 amHi Fishing50. I don't believe this is correct. Can you point to where this is described in the TSP site?Fishing50 wrote: ↑Sat Oct 26, 2024 8:04 am Others are correct, TSP participants cannot rebalance TSP Roth or Traditional balances separately, but the contributions stay invested where contributions were invested. In the case above, after the Feb contribution is invested in TSP usually early Mar, change the contribution election on the TSP website to G Fund and future traditional, tax-exempt contributions will be invested in G Fund until your son changes the contribution election on the TSP website. If he never rebalances his allocation in TSP, those funds will not get proportionally redistributed across TSP.
My understanding is that however the contribution goes in, even if contributed directly to the G-fund, it is then co-mingled at the fund level even without a redistribution event. Taking OP's general case as I recall it, son's entire Roth is 100% equities (C-Fund to make it easy), let's say its $10,000 for simplicity. While deployed he puts another $10,000 into Trad, directly into the G-Fund via contribution election choice. Then does nothing at all ever again until retirement. Any money he withdraws will be 50% from G and 50% from C- Fund. Even if he withdraws only from Roth or only from Trad.
Now of course nothing says he can't do a partial distribution from Roth and then immediately redistribute across funds to effectively have only taken monies from his desired fund, but that's not the same thing as what you said.
Let's also not forget that "never redistributing" would be a tall order and possibly sub-optimal for the next 20+ years. So if you're assertion is correct, but I never picked up on it (because I've rebalanced plenty), I'd still be of the opinion that it's a distinction without a difference.
I described a way to invest traditional, tax-exempt contributions into G Fund. If never redistributed, tax-exempt balance would stay invested in G Fund. From 2003-2014 I had detailed records of earnings per share because I was able to rebalance using only new contributions that were a significant percentage of the overall portfolio. I lost the ability to track earnings by share in 2014 with a redistribution because TSP pro rata rules across funds. Statements show the Traditional, Tax-Exempt, and Roth values without detailing the location of the associated shares.
Withdrawals remain a mystery to me. My TSP Roth Rollover was valued at a day's closing price, with a TSP determined amount of shares from C, S, and G Funds.
Only Boglehead's would admire precise G Fund asset location for Tax-Exempt contributions, earning taxable growth!
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
Re: Help my Army Son in Kuwait with a Capital Gains Question
Yeah I think you hit it on the head and those detailed records won't / wouldn't matter because of how everything is pulled pro-rata from the various colors and flavors of money.Fishing50 wrote: ↑Sun Oct 27, 2024 9:55 amWe are both correct because we are describing different things, agreed to be a distinction without difference.mouth wrote: ↑Sat Oct 26, 2024 10:06 am
Hi Fishing50. I don't believe this is correct. Can you point to where this is described in the TSP site?
My understanding is that however the contribution goes in, even if contributed directly to the G-fund, it is then co-mingled at the fund level even without a redistribution event. Taking OP's general case as I recall it, son's entire Roth is 100% equities (C-Fund to make it easy), let's say its $10,000 for simplicity. While deployed he puts another $10,000 into Trad, directly into the G-Fund via contribution election choice. Then does nothing at all ever again until retirement. Any money he withdraws will be 50% from G and 50% from C- Fund. Even if he withdraws only from Roth or only from Trad.
Now of course nothing says he can't do a partial distribution from Roth and then immediately redistribute across funds to effectively have only taken monies from his desired fund, but that's not the same thing as what you said.
Let's also not forget that "never redistributing" would be a tall order and possibly sub-optimal for the next 20+ years. So if you're assertion is correct, but I never picked up on it (because I've rebalanced plenty), I'd still be of the opinion that it's a distinction without a difference.
I described a way to invest traditional, tax-exempt contributions into G Fund. If never redistributed, tax-exempt balance would stay invested in G Fund. From 2003-2014 I had detailed records of earnings per share because I was able to rebalance using only new contributions that were a significant percentage of the overall portfolio. I lost the ability to track earnings by share in 2014 with a redistribution because TSP pro rata rules across funds. Statements show the Traditional, Tax-Exempt, and Roth values without detailing the location of the associated shares.
Withdrawals remain a mystery to me. My TSP Roth Rollover was valued at a day's closing price, with a TSP determined amount of shares from C, S, and G Funds.
Only Boglehead's would admire precise G Fund asset location for Tax-Exempt contributions, earning taxable growth!
As part of my own exploration for trying to extract my non-taxable and Roth out to my IRAs, I tried a few distribution dry runs and the only choices are Trad (taxable + non-taxable always pro-rata based on non-taxable contribution %), Roth, or pro-rata between Trad and Roth. At no point could I only choose a specific fund, and at no point could I pick only non-taxable or only taxable. But perhaps someone who never rebalanced would see an option I wasn't presented [shrug] but I'd be very surprised. So while satisfying to see those per-share detailed, I'm thinking it's just quirk of their record keeping and wouldn't help OP with their goal.
And yes, only Bogleheads
Re: Help my Army Son in Kuwait with a Capital Gains Question
Thanks for the tag, @Fishing50!
First, @Househunter, I’d send this post to your son and have him edit the linked spreadsheet for both 2024 and 2025.
https://themilitarywallet.com/maximizin ... mbat-zone/
https://docs.google.com/spreadsheets/u/ ... li=1#gid=0
The issue is that servicemembers in the Blended Retirement System have to be mindful of contributing at least 5% of base pay to the TSP every month of the year for the DoD BRS matching contributions. However if he reaches the Elective Deferral Limit in the Roth TSP (in either 2024 or 2025) before December, then he’s locked out of contributions for the rest of the year and loses his match.
Servicemembers in the legacy High Three retirement system can front-load their TSP contributions, but again if they hit the EDL in the Roth TSP then they’re locked out of all contribution for the rest of the year.
For military servicemembers, by the tax code, the only source of contributions above the EDL is from Combat Zone Tax-Exempt pay. As soon as he leaves the combat zone (when CZTE is cut off) then he can no longer contribute CZTE above the EDL. But if he’s below the EDL in the Roth TSP then he can continue to contribute to the Roth TSP… up to the EDL.househunter wrote: ↑Sat Oct 26, 2024 7:50 am 1. Is the option to contribute to the TSP (Traditional only) above the EDL of $23,000 for 2024 only available to service members in a Combat Pay Exclusion Zone (CPEZ) , or can any service member stationed stateside or elsewhere outside a CPEZ do this? If so, how is their contribution to the Traditional TSP above the $23,000 EDL for 2024 different, if at all, from someone who contributes above the EDL with combat exempt pay?
It’s complicated. The TSP’s website is not very helpful in figuring out the rollover process.househunter wrote: ↑Sat Oct 26, 2024 7:50 am 2. If my son contributes $30,000 to the Traditional TSP in 2024 above the $23,000 he already put in the Roth TSP, while stationed in a CPEZ, I understand the earnings on that $30,000 will be eventually taxed as ordinary income. Let's say he never does another Traditional TSP contribution and stays all Roth in 2025 and later. Assuming he gets out of the Army after xx number of years, I see he can roll the earnings from the Traditional TSP into a 401(k) or Traditional IRA. Is everything else, which is mainly Roth TSP contributions + the Kuwait CPEZ contribution, eligible for rollover to a Roth? Or does the Combat exempt pay contributed to the Traditional TSP have to be rolled into a separate Traditional IRA, but with a basis consisting of the amount of the combat exempt pay originally contributed.
Once he’s out of the military (completely out, not even in the Reserves or National Guard) then he can roll his TSP accounts over to his IRAs.
Once his Roth TSP funds are in his Roth IRA, if he’s had any ol’ Roth IRA for at least five tax years then he’s eligible to immediately withdraw all of his contributions that he previously made to his Roth TSP, tax-free and penalty-free. That’s *all* of his contributions to his Roth TSP, not just his contributions from CZTE pay. References to the tax code are in Michael Kitces’ post:
https://www.kitces.com/blog/understandi ... nversions/
Of course he’s also eligible to withdraw his Roth IRA contributions at any time for any reason, tax-free and penalty-free, in addition to his Roth TSP contributions.
I’m pointing this out because many people worry about tapping their retirement accounts before age 59.5. He’d probably prefer to keep all of his contributions in his Roth IRA to boost its compounding, but he has the withdrawal option any time before age 59.5.
When he rolls his traditional TSP to his traditional IRA, he should check the box on the TSP’s rollover webpage to not deposit his contributions from CZTE pay (if any) to his traditional IRA. He should also alert his traditional IRA custodian to *not* put those CZTE pay contributions in his traditional IRA either. Instead he should direct the CZTE pay contributions to his Roth IRA, either by depositing the check that he receives (and completing the rollover within 60 days) or by having the IRA custodian agree to deposit the CZTE pay contributions in his Roth IRA. This makes his CZTE pay contributions (to his traditional TSP) also available from his Roth IRA. It also greatly simplifies his (eventual someday) conversion of his traditional IRA to a Roth IRA.
Yes. The simple answer is “use the spreadsheet to design his contributions”, especially if he’s in the BRS pension plan. See above about contributing at least 5% of his base pay to the TSP in every month of the year for the BRS match, even when he’s no longer in the combat zone.househunter wrote: ↑Sat Oct 26, 2024 7:50 am 3. For 2025, my son expects to have 7 months in Kuwait, though he understands this could change. Is he allowed to "front load" his TSP contributions so he can max out his Roth portion up to the 2025 EDL and then go above that amount in the Traditional TSP with combat exempt pay before changing station outside the CPEZ?
Essentially as long as he’s in the combat zone in 2025, he’s going to stop contributing to the Roth TSP short of the EDL (much shorter if he’s in the BRS) so that he can jam some more CZTE pay contributions into his traditional TSP before he leaves the combat zone. But if he hits the EDL in the Roth TSP anytime of the year before December, he’ll be shut out of all TSP contributions for the rest of the calendar year.
That blog post at TheMilitaryWallet has many more suggestions about handling CZTE pay contributions and other deployment administrivia— especially if he gets a query letter from the IRS.
And of course if you have more questions you’re both welcome to send me a PM here or e-mail NordsNords at Gmail.
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Re: Help my Army Son in Kuwait with a Capital Gains Question
FYI, the web page doesn't seem to quite work like that anymore. Not sure if I'm missing something, choosing different options, or they just happen to have changed it recently. But there isn't a check box as described anywhere in the process.Nords wrote: ↑Sun Oct 27, 2024 3:51 pmWhen he rolls his traditional TSP to his traditional IRA, he should check the box on the TSP’s rollover webpage to not deposit his contributions from CZTE pay (if any) to his traditional IRA. He should also alert his traditional IRA custodian to *not* put those CZTE pay contributions in his traditional IRA either. Instead he should direct the CZTE pay contributions to his Roth IRA, either by depositing the check that he receives (and completing the rollover within 60 days) or by having the IRA custodian agree to deposit the CZTE pay contributions in his Roth IRA.
I did a dry run yesterday and instead they seem to 1) remind you that some financial institutions won't accept the non-exempt funds, and then 2) they force you to choose two destinations, one each for the taxable and non-taxable amounts. You can choose the same financial institution if you want (clicking on it twice, once for each type), but of course you wouldn't want to. You'd want to select for the TSP to send the distributions directly to your tIRA and rIRA accounts accordingly. Or if you really want to, you can choose to send one or both to you directly; that option exists too. But I tried a few different options on the website and there wasn't a checkbox as being described.
Quick screen caps I took of the "destination" page. I had to split into two overlapping images because the page is so long:
Re: Help my Army Son in Kuwait with a Capital Gains Question
I think the ‘Destination for Cash Transfer’ should be the Rollover IRA-choose Rollover IRA transfer.mouth wrote: ↑Sun Oct 27, 2024 5:10 pmFYI, the web page doesn't seem to quite work like that anymore. Not sure if I'm missing something, choosing different options, or they just happen to have changed it recently. But there isn't a check box as described anywhere in the process.Nords wrote: ↑Sun Oct 27, 2024 3:51 pm
When he rolls his traditional TSP to his traditional IRA, he should check the box on the TSP’s rollover webpage to not deposit his contributions from CZTE pay (if any) to his traditional IRA. He should also alert his traditional IRA custodian to *not* put those CZTE pay contributions in his traditional IRA either. Instead he should direct the CZTE pay contributions to his Roth IRA, either by depositing the check that he receives (and completing the rollover within 60 days) or by having the IRA custodian agree to deposit the CZTE pay contributions in his Roth IRA.
I did a dry run yesterday and instead they seem to 1) remind you that some financial institutions won't accept the non-exempt funds, and then 2) they force you to choose two destinations, one each for the taxable and non-taxable amounts. You can choose the same financial institution if you want (clicking on it twice, once for each type), but of course you wouldn't want to. You'd want to select for the TSP to send the distributions directly to your tIRA and rIRA accounts accordingly. Or if you really want to, you can choose to send one or both to you directly; that option exists too. But I tried a few different options on the website and there wasn't a checkbox as being described.
Quick screen caps I took of the "destination" page. I had to split into two overlapping images because the page is so long:
I think the ‘Destination for Cash Transfer - nontaxable’ should be the Tax-Exempt contributions-choose check mailed to you.
Everything should get done without any tax withholding.
You can confirm my beliefs by verifying the transfer amounts make sense with your last statement.
You can enter a direct deposit account for the nontaxable portion if you want to wait 7 more days.
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
Re: Help my Army Son in Kuwait with a Capital Gains Question
I think this is a confusion about the 5-year rules. The 5-year rule for distributions to be qualified begins in the year you open a Roth IRA; if you first open one with rollovers from a Roth 401(k), that starts the 5-year rule. However, even if distributions are not qualified, there is no tax on withdrawal of already-taxed money, and no penalty on withdrawal of that money unless it was taxed when converted.Nords wrote: ↑Sun Oct 27, 2024 3:51 pm Once his Roth TSP funds are in his Roth IRA, if he’s had any ol’ Roth IRA for at least five tax years then he’s eligible to immediately withdraw all of his contributions that he previously made to his Roth TSP, tax-free and penalty-free. That’s *all* of his contributions to his Roth TSP, not just his contributions from CZTE pay. References to the tax code are in Michael Kitces’ post:
https://www.kitces.com/blog/understandi ... nversions/
Thus, if you roll a Roth TSP into a new Roth IRA, you can withdraw the amount you contributed to the TSP immediately. You have to wait five years before you can withdraw any of the gains tax-free, and then meet some other requirement allowing withdrawals to be tax-free (for example, reaching age 59-1/2, or $10,000 for a first-time home purchase).
The reason this doesn't work with withdrawals made directly from the Roth TSP is that the TSP always prorates withdrawals between contributions and gains. So if you have contributed $10,000 to the Roth TSP and it has grown to $20,000, half of any withdrawal is considered to be gains. But after you roll it to a Roth IRA, withdrawals come from contributions first, so $10,000 can be withdrawn tax-free.
Re: Help my Army Son in Kuwait with a Capital Gains Question
I confirmed the amounts are all correct in the previous pages. I can confirm that before I got to this point in the website, no taxes are being withheld.Fishing50 wrote: ↑Sun Oct 27, 2024 7:16 pmI think the ‘Destination for Cash Transfer’ should be the Rollover IRA-choose Rollover IRA transfer.mouth wrote: ↑Sun Oct 27, 2024 5:10 pm
FYI, the web page doesn't seem to quite work like that anymore. Not sure if I'm missing something, choosing different options, or they just happen to have changed it recently. But there isn't a check box as described anywhere in the process.
I did a dry run yesterday and instead they seem to 1) remind you that some financial institutions won't accept the non-exempt funds, and then 2) they force you to choose two destinations, one each for the taxable and non-taxable amounts. You can choose the same financial institution if you want (clicking on it twice, once for each type), but of course you wouldn't want to. You'd want to select for the TSP to send the distributions directly to your tIRA and rIRA accounts accordingly. Or if you really want to, you can choose to send one or both to you directly; that option exists too. But I tried a few different options on the website and there wasn't a checkbox as being described.
Quick screen caps I took of the "destination" page. I had to split into two overlapping images because the page is so long:
I think the ‘Destination for Cash Transfer - nontaxable’ should be the Tax-Exempt contributions-choose check mailed to you.
Everything should get done without any tax withholding.
You can confirm my beliefs by verifying the transfer amounts make sense with your last statement.
You can enter a direct deposit account for the nontaxable portion if you want to wait 7 more days.
But why do you think "‘Destination for Cash Transfer - nontaxable’ should be the Tax-Exempt contributions-choose check mailed to you. "? Why wouldn't/couldn't/shouldn't someone choose to send that directly to Vanguard into their own Roth IRA account? Why have them send a check / direct deposit to then turn around and deposit into that same Roth IRA?
Re: Help my Army Son in Kuwait with a Capital Gains Question
I learned commercial lingo to accomplish my mission.mouth wrote: ↑Mon Oct 28, 2024 7:34 amI confirmed the amounts are all correct in the previous pages. I can confirm that before I got to this point in the website, no taxes are being withheld.Fishing50 wrote: ↑Sun Oct 27, 2024 7:16 pm
I think the ‘Destination for Cash Transfer’ should be the Rollover IRA-choose Rollover IRA transfer.
I think the ‘Destination for Cash Transfer - nontaxable’ should be the Tax-Exempt contributions-choose check mailed to you.
Everything should get done without any tax withholding.
You can confirm my beliefs by verifying the transfer amounts make sense with your last statement.
You can enter a direct deposit account for the nontaxable portion if you want to wait 7 more days.
But why do you think "‘Destination for Cash Transfer - nontaxable’ should be the Tax-Exempt contributions-choose check mailed to you. "? Why wouldn't/couldn't/shouldn't someone choose to send that directly to Vanguard into their own Roth IRA account? Why have them send a check / direct deposit to then turn around and deposit into that same Roth IRA?
Commercial firms like Vanguard do not understand Tax-Exempt contributions. My advisor recommended receiving a check, and submitting that exact amount to Schwab with a cover letter explaining the funds were a rollover from ‘after tax 401k / TSP contributions’ which is appropriate civilian description that ensured TSP withdrawal 1099 tax form matched Schwab deposit 1099 tax form.
Retired Military Officer. 80% equites / 20% bonds for life, ZERO emergency fund, 100% taxable in equities (dividends in cash), 33% taxable, 30% Roth, 37% tax deferred. Gone Fishing At 52yrs old!
Re: Help my Army Son in Kuwait with a Capital Gains Question
Hmmm you make a compelling point. I got so caught up answering the question if I "could do something" I forgot to ask if I "should do it".Fishing50 wrote: ↑Mon Oct 28, 2024 10:16 amI learned commercial lingo to accomplish my mission.mouth wrote: ↑Mon Oct 28, 2024 7:34 am
I confirmed the amounts are all correct in the previous pages. I can confirm that before I got to this point in the website, no taxes are being withheld.
But why do you think "‘Destination for Cash Transfer - nontaxable’ should be the Tax-Exempt contributions-choose check mailed to you. "? Why wouldn't/couldn't/shouldn't someone choose to send that directly to Vanguard into their own Roth IRA account? Why have them send a check / direct deposit to then turn around and deposit into that same Roth IRA?
Commercial firms like Vanguard do not understand Tax-Exempt contributions. My advisor recommended receiving a check, and submitting that exact amount to Schwab with a cover letter explaining the funds were a rollover from ‘after tax 401k / TSP contributions’ which is appropriate civilian description that ensured TSP withdrawal 1099 tax form matched Schwab deposit 1099 tax form.
I might contact VG to see what they think since I've got some time anyway (not doing any of this till Jan). Maybe they've had a few chances to practice since the TSP made it's change. I guess part of me just worries ,"will VG believe me" if I'm just sending them a check with a letter, and not even sending them the TSP's check which has what I'll loosely call "provenance" for the monies.
But to not totally highjack OP's thread, hopefully this is still useful info for his Son as he consideres all his options and the mechanics that surround it.
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Re: Help my Army Son in Kuwait with a Capital Gains Question
Nords, Mouth, Fishing50, and Grabiner:
Thanks for the PhD version of how to help my Army son. I think I understand it pretty well.
I like Fishing50's suggestion from his Tax Advisor regarding the Tax-Exempt Contributions in the TSP once he separates from the Army:
Commercial firms like Vanguard do not understand Tax-Exempt contributions. My advisor recommended receiving a check [from the TSP], and
submitting that exact amount to Schwab with a cover letter explaining the funds were a rollover from ‘after tax 401k / TSP contributions’ which
is appropriate civilian description that ensured TSP withdrawal 1099 tax form matched Schwab deposit 1099 tax form.
My my son is on the older "high 3" pension system, not the Blended Retirement System, so he doesn't need to fine-tune contributions quite as much to continually get the 5% DoD match for the entire CY.
Nords, I will pass on the email you generously noted to my son, and he may contact you.
It seems to me the optimal plan for my son is something like stopping this: Stop his weekly automatic purchases in his VG taxable VTSAX brokerage account, which is where his extra money goes now AND stop his Roth TSP 2024 contributions immediately, which are on track to be at the EDL of $23,000 by the end of December. At the start of the November pay cycle, make changes to TSP contributions. Use 100% of available pay for the last two pay periods in the month (Nov and Dec pay periods paid at the end of each month) to MAX OUT his traditional TSP, which will maximize the amount of tax-exempt pay put into the TSP in CY2024, given his late start doing this. I am not sure how he gets to the $23K max Roth in 2024, but I am not sure that this matters, as he is close now to the Roth EDL now.
Then in 2025, put all or nearly all of his January and February pay in the Roth TSP, while remaining short of the 2025 EDL of $23,500. Then in the March pay cycle, switch to the Traditional TSP and maxing out contributions to the Traditional TSP - going toward the annual contribution limit of $70,000 for 2025. Once he leaves the Combat Pay Exclusion Zone, likely sometime in July 2025, stop all Traditional TSP contributions and resume Roth TSP contributions until he hits the $23,500 EDL or somehow hits the annual cap of $70,000 first.
Because he has only ever contributed to the Roth TSP since joining the Army until now, the end result is that all of his TSP investments will be either Roth or Traditional Tax-Exempt at the end of 2026.
If this is less than optimal for my son, please let me know.
All the best,
Househunter
Thanks for the PhD version of how to help my Army son. I think I understand it pretty well.
I like Fishing50's suggestion from his Tax Advisor regarding the Tax-Exempt Contributions in the TSP once he separates from the Army:
Commercial firms like Vanguard do not understand Tax-Exempt contributions. My advisor recommended receiving a check [from the TSP], and
submitting that exact amount to Schwab with a cover letter explaining the funds were a rollover from ‘after tax 401k / TSP contributions’ which
is appropriate civilian description that ensured TSP withdrawal 1099 tax form matched Schwab deposit 1099 tax form.
My my son is on the older "high 3" pension system, not the Blended Retirement System, so he doesn't need to fine-tune contributions quite as much to continually get the 5% DoD match for the entire CY.
Nords, I will pass on the email you generously noted to my son, and he may contact you.
It seems to me the optimal plan for my son is something like stopping this: Stop his weekly automatic purchases in his VG taxable VTSAX brokerage account, which is where his extra money goes now AND stop his Roth TSP 2024 contributions immediately, which are on track to be at the EDL of $23,000 by the end of December. At the start of the November pay cycle, make changes to TSP contributions. Use 100% of available pay for the last two pay periods in the month (Nov and Dec pay periods paid at the end of each month) to MAX OUT his traditional TSP, which will maximize the amount of tax-exempt pay put into the TSP in CY2024, given his late start doing this. I am not sure how he gets to the $23K max Roth in 2024, but I am not sure that this matters, as he is close now to the Roth EDL now.
Then in 2025, put all or nearly all of his January and February pay in the Roth TSP, while remaining short of the 2025 EDL of $23,500. Then in the March pay cycle, switch to the Traditional TSP and maxing out contributions to the Traditional TSP - going toward the annual contribution limit of $70,000 for 2025. Once he leaves the Combat Pay Exclusion Zone, likely sometime in July 2025, stop all Traditional TSP contributions and resume Roth TSP contributions until he hits the $23,500 EDL or somehow hits the annual cap of $70,000 first.
Because he has only ever contributed to the Roth TSP since joining the Army until now, the end result is that all of his TSP investments will be either Roth or Traditional Tax-Exempt at the end of 2026.
If this is less than optimal for my son, please let me know.
All the best,
Househunter
Re: Help my Army Son in Kuwait with a Capital Gains Question
This sounds like a good opportunity.grabiner wrote: ↑Sun Oct 20, 2024 8:13 amThe Roth TSP still has the $23K limit. Tax-exempt pay can be contributed to the traditional TSP as well, and since this money is treated as already taxed, only the earnings will be taxed on withdrawal; this is equivalent to a non-deductible IRA contribution. So it is clearly better to max out the Roth TSP (and Roth IRA) first.Rocky Mtn Man wrote: ↑Sat Oct 19, 2024 3:28 pm
He can max his Roth TSP deductions. In a combat area the yearly limit is $69k versus $23k. It's all non-tax pay so make sure it is a Roth TSP.