If you’re earning combat pay, you can use those tax-exempt dollars to help boost your retirement savings. Make the most of this opportunity by learning the rules for contributing combat pay to traditional and Roth Thrift Savings Plans.
How combat pay contributions work
Become familiar with the rules around combat pay TSP contributions. Traditional and Roth Thrift Savings Plans treat combat pay contributions and distributions differently.
- Traditional Thrift Savings Plan. Combat pay is tax-exempt, so traditional TSP contributions won’t lower your taxable income. However, you won’t have to pay taxes on that money when you withdraw it in retirement, although your earnings on those contributions will be taxable. The rules for traditional TSPs can be complex. The mix of tax-exempt contributions and taxable earnings can complicate retirement planning and rollovers. Be sure to keep detailed records.
- Roth Thrift Savings Plan. The Roth TSP provides a unique opportunity to create a pool of retirement savings that is never taxed. Typically, you pay taxes on income you deposit into a Roth TSP, but not on the money you withdraw after retirement. Because combat pay is tax-exempt, you won’t pay federal income taxes on your Roth TSP deposits. Your distributions after retirement are also tax-free, including your earnings.
- High contribution limit. The IRS allows you to exceed its annual contribution limit when you use combat pay to contribute to your TSP. If you have a Roth TSP, the excess funds will automatically be placed in a traditional TSP. While you can save even more than usual during combat deployments, be sure to consider the future tax implications before contributing the maximum.
Tips for using combat pay for TSP contributions
- Choose traditional vs. Roth TSPs strategically. If you expect to be in a higher tax bracket when you retire, or you value tax-free earnings, consider directing your combat pay contributions to the Roth TSP. Your contributions are already tax-exempt. Your distributions, including earnings, will be tax-free when you withdraw them in retirement. If you choose the traditional TSP, be prepared to pay tax on your earnings when you withdraw.
- Track your tax-exempt contributions. Your TSP statements will show the tax-exempt portion of your account. This will help when calculating the taxable and nontaxable portions of future withdrawals or rollovers.
- Be aware of the annual contribution limits. Use the high annual additions limit to build retirement savings during combat deployments. Remember that amounts over the elective deferral limit must go to the traditional TSP.
- Rollover considerations. If you roll your TSP over to another qualified plan or IRA, make sure that tax-exempt contributions are transferred to a Roth account to maintain their tax-free status.
Combat pay contributions and TSP withdrawal rules can be complicated. Consider consulting a tax professional or a Military OneSource financial counselor to tailor a strategy to your situation. Call Military OneSource at 800-342-9647 or log in to start a secure online chat. OCONUS/International? See calling options.
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