TSP

By Lila Quintiliani

Military Saves Assistant Coordinator

Do you look closely at your LES?  I mean, really look at it and ponder what the various boxes mean?  Well, one soldier did, and sent us a very valid question the other day.

Question:  So, I just noticed that there are two separate blocks on my LES regarding my TSP contributions.  One box says Tax Deferred and the other says Tax Exempt. Now that I'm deployed I see that money is starting to build in the Exempt box. What does that mean for me?

This is a great question!  When you contribute to the “regular” Thrift Savings Plan, your contributions are coming out of your pre-tax earnings.  In essence, you are shielding part of your pay from income taxes now.  However, when you start to take withdrawals from your TSP later on, at age 59 ½ or older, you will have to pay taxes on your earnings.  Thus, your contributions are considered to be tax deferred.

On the other hand, when you are deployed to a combat zone, you don’t pay income taxes on your pay.  And if you make a contribution to the TSP while in a combat zone, that contribution is considered to be tax exempt.  You won’t pay taxes on it now, and you won’t pay taxes later on when you withdraw it!  The TSP will track your tax-deferred and tax-exempt contributions separately.  It is very possible that when you make eligible withdrawals later on, some of them may be taxed while others will not.   Another benefit of being deployed is that your contribution limits go up.  In 2012, you are allowed by IRS rules to contribute $17,000 annually to the TSP.  But when you are in a combat zone, that limit goes up to $50,000.

Another facet to all this is the newly-introduced Roth TSP.  Instead of having your contributions grow tax-deferred, you can instead choose to contribute your after-tax earnings.  Then, when you are eligible at 59 ½ years old or older to make withdrawals, you won’t pay taxes on them (provided it has been at least five years since you started contributing).

Both the Roth TSP and regular TSP contributions are subject to Required Minimum Distributions (RMDs). Simply put, the year after you turn age 70½, the IRS requires you to begin receiving a minimum amount of money from your account (unless you are still working). This is your RMD, and it is calculated based on your account balance and IRS life expectancy tables. IRS requirements for RMDs apply to employer-sponsored retirement plans like the TSP with no exceptions; therefore, RMDs will apply to Roth money in your TSP account, even though they do not apply to Roth IRAs.

The TSP website has a discussion of the various tax advantages associated with the different types of contributions and an explanation of how withdrawals are taxed.

For more in-depth information, visit the TSP’s website or call the ThriftLine (1-877-968-3778).  It’s an automated line, but there is an option to be connected to a Participant Service Representative.

Look for another Article from the Thrift Savings Board in our upcoming July Newsletter.  Don't receive the newsletter yet?  Take the Military Saves Pledge today, join a community of savers and receive monthly e-newsletters with articles written by financial experts about topics that affect your financial fitness.

 

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