Episode 77 Combat Pay TSP

Today we’re talking about combat pay and the Thrift Savings Plan (TSP). I’ll be throwing around some tax terms terms, so let me take a minute to go over them.

Tax-exempt - You don’t pay any state or federal income taxes on tax-exempt pay, ever. This applies to all of the pay our enlisted and warrant officers earn in a combat zone. For commissioned officers combat pay is tax-exempt up to $107,868 for 2022, your pay above that is taxed as normal.

Pre-tax, also called tax-deferred - Contributions to Traditional TSP are pre-tax or tax deferred. Your TSP contribution is pulled from your pay first, then you pay income tax on what’s left. You DO you pay income taxes later on both contributions and on the amount your it grows when withdraw it from TSP. 

After-tax -  Contributions to ROTH TSP or a ROTH IRA are called post-tax, or after-tax contributions. You pay income tax on your pay first, then make contributions to ROTH accounts with what’s left. So you pay tax on all your taxable your income now. But,  when you withdraw it after after age 60, your initial contributions and all the growth comes out tax free. 

So let’s envision a chart about combat pay contributions to retirement accounts like Traditional TSP, ROTH TSP, and ROTH IRAs. Our chart has four columns. The 1st column lists the type of contribution, the 2nd column asks “Are my contributions taxed when earned?”, 3rd column  “Are contributions taxed when withdrawn?", and 4th “Is the growth taxed when withdrawn?” No-one loves to pay taxes, so we’re looking for no answers to these tax questions.

Non-combat pay, Traditional TSP contributions - No, Yes, Yes

Non-combat pay, ROTH TSP or IRA contributions - Yes, No, No

Tax-exempt Combat pay, Traditional TSP contributions - No, No, Yes

Tax-exempt Combat pay, ROTH TSP or IRA contributions - No, No,No, This is the Triple Crown of No Taxes.

Military members deployed to a combat zone can contribute more than the normal $20,500 to their TSP, all the way up to $61,000 in 2022. The details are important. Last week we went over TSP contributions by the numbers. So if you missed it go back to Episode 76 Change TSP Contributions for all the details.

I’m going to boil down all the info from last week and this week into a strategy to get the biggest bang for your compbat pay contributions. First, make sure you have enough cash for an emergency fund, you don’t have high interest debt like credit cards. Go over your cash flow or budget and see how much you can afford contribute while you’re deployed. This money will be locked up for a long time, so don’t over extend yourself.

Alright, here’s my recommendation for your combat pay contributions. 

First, contribute up to $20,500 limit into your Roth TSP or up to $27,000 if you will be 50 or older this year.

If you want to save more, next contribute up to $6,000 into a Roth IRA. Or $7,000 if 50 or older. You could also contribute to a ROTH IRA for a non-working spouse.

Want to save even more? Contribute up to another $40,500 of your tax-exempt combat pay into your Traditional TSP, $34,000 if 50 or older.

And once again, for more information on contributing to these accounts, head back to Episode 28 Meet ROTH, Episode 29 ROTH IRA, and Episode 30 To ROTH or Not to ROTH, and last week’s Episode 76 Change TSP Contributions. 

Transcript

Announcer: 0:14

Welcome to the Money Pilot Financial Advisor podcast, where you team up with Money Pilot host, former Army helicopter pilot and your host Katie Cannon, to put your money where your heart is. Together, we'll tackle issues big and small so you can take charge and land your financial life.

Kathleen Cannon: 0:53

Hello, and welcome back to the podcast. Today, we're talking about combat pay, and the Thrift Savings Plan or TSP. What's so special about combat pay, other than you put your butt on the line to earn it? It's tax exempt income. That means you are when you earn combat pay, you don't pay any federal or state taxes on it. I'll be throwing around some tax terms. So let me take a minute to go over them. So we're all on the same sheet of music. First tax exempt, that's your combat pay. You don't have to pay any state or federal income taxes on tax exempt pay, ever. That's a huge break. This applies to all of your pay, our enlisted and worn officers earn in a combat zone. For commissioned officers combat pay is tax exempt up to $107,886 for 2022. Your pay above that is taxed as normal. Okay, the next term is pre tax, also called tax deferred. Contributions to traditional TSP are pre tax or tax deferred. That is your TSP contribution is pulled from your pay first. And then you pay income tax on what's left. You do pay income taxes later on both contributions and on the amount your nest egg grows when you withdraw it from TSP. So it's no tax now, but pay tax on the whole enchilada later for traditional TSP. Okay, after tax contributions to a Roth TSP or Roth IRA are called post tax or after tax contributions. That's because you pay income tax on your pay first, then you make contributions to Roth accounts with what's left.You pay tax on all your taxable income now, but the beauty of Roth is that when you withdraw it after age 60, the entire amount is tax free.Your initial contributions and all the growth comes out tax free. Okay, so let's envision a chart about combat pay contributions to retirement accounts like traditional TSP, Roth TSP, and Roth IRAs. Our imaginary chart has four columns, the first lists the type of contribution. The second column asks, Are my contributions taxed when earned? The third column is are contributions taxed when I withdraw them? And the fourth, is the growth taxed when withdrawn? Okay, no one loves to pay taxes. So we're looking for no answers to these tax questions. So the first one we'll take a look at is that non combat pay so it'd be your normal traditional TSP contributions. Is that taxed when earned? Nope. Remember, traditional TSP is tax deferred. So you pay the taxes later. The next column, the question was, are the contributions to traditional TSP taxed when withdrawn? Yes. And next column, is the growth taxed when withdrawn? Yes, again, so you get a break now, but you have to pay later. So that's one tax No, and two tax yeses. Okay. How about normal non Combat Zone contributions to Roth TSP or Roth IRA? Is that taxed when earned? Yes. Again, you pay tax now, so you don't have to later. Are those contributions taxed when withdrawn? No. And is the growth on that taxed when withdrawn from a Roth account? No. So you've got one, yes. But two nos, which are the good, no tax columns. All right. Now we're going to look at both those using your tax exempt combat pay to make the contributions. So if you use combat pay to contribute to a traditional TSP. Is that taxed when earned? No. Remember, combat pay is never taxed. Period. Are your contributions taxed when withdrawn? No. Those are still your contributions of tax exempt income. So you don't have to pay tax on it when you withdraw it either. Is the growth tax when withdrawn from a traditional TSP? Yes. So you've got two tax no's and that one tax yes. You're still paying tax on the growth in the traditional TSP. So now take a look at the combat zone tax exempt pay contributed to a Roth account, Roth TSP or Roth IRA. Is it tax when earned? Again, no. combat pay is never taxed when earned. Are your contributions tax when withdrawn? No. Again, the tax exempt contributions are not tax when you withdraw them either. Is the growth taxed when withdrawn? No. So this is the Triple Crown of no taxes. It's a really great deal these Roth accounts. Okay, military members deployed to a combat zone can contribute more than the normal $20,500 of your TSP, all the way up to$61,000 in 2022. The details are important. Last week, we went over TSP contributions by the numbers. So if you missed it, go back to Episode 76 Change TSP Contributions for all the details. Okay, I hope you're still with me and haven't had radio math brain meltdown. Hang in with me. I'm going to boil down all the info from last week and this week into a strategy to get your biggest bang for your combat pay contributions. First, before you pack your bag and head out on deployment, make sure you have enough cash stashed away for an emergency fund, that you don't have high interest credit card debt, and go over your cash flow or budget and see how much you can afford to contribute from your pay while you're deployed. This is a great way to really boost your long term retirement savings. But this money is going to be locked up for a long time. So don't overextend yourself. Alright, so here's my recommendations for your combat pay contributions. First, contribute up to the $20,500 limit into your Roth TSP, or up to $27,000 if you'll be 50 year old or this year. If you want to save more than that, next contribute up to $6,000 into a Roth IRA, or $7,000 if you're 50 or older. You could also contribute the same amounts to a Roth IRA for non-working spouse. And again, these Roth accounts are going to be your triple crown of no taxes. If you've hit those limits and you still want to save more, contribute up to another $40,500 of your tax exempt combat pay into your traditional TSP or $34,000 if you're 50 or older. Okay, and once again, for more information on contributing to these accounts, head back to Episode 28 Meet Roth, Episode 29 Roth IRA, and Episode 32 To Roth or not to Roth, and last week's episode 76 Change TSP contributions. So that wraps it up for this week. And all you deploying service members stay safe out there and come back home to us.

Announcer: 9:47

Thank you for joining today's podcast. To find out more, visit us at www.moneypilotadvisor.com Let's team up and land your financial life.