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Combat Zone TSP question

yeahguy

Active member
Joined
Jun 18, 2004
Posts
26
Total Time
5200+
This one is for any of you penny rubbing, Active Duty mofos out there.

For the last several years, I have had 4-5 months tax free every year, which combined with my outrageous mortgage interest payments and 3 kid tax credits have knocked my federal tax rate to zero.

I don't know why I didn't think of this before, but here goes: I have always contributed the same amount of TSP every month, for non-tax free months it gets coded "deferred" and for tax free months it gets coded "exempt".

"Deferred" = reduce your tax liability this year, pay it sometime in the future when you are old and gray. "Exempt" = never pay tax on what you put in, just on your earnings thereafter.

Since "exempt" is better for many reasons, especially because my tax bracket is zero anyway (taking away any advantage of a "deferred" tax on something that wasn't taxable to begin with!), then why don't I just do the following:

Make my TSP contributions only in the months I know that I will be tax free, thereby guaranteeing myself the much more preferrable "exempt" status for my entire year's contributions? Assuming I can manage the pains of budgeting the months where very little shows up in my paycheck, why not code the highest amount possible of my base pay and flight pay (the limit is what the senior E-10 of any service makes, plus HFP, currently $7100.10/mo. and $45k/yr total) that I can handle and still pay the bills?

This is high level math stuff, but hopefully there are at least a few Poindexters out there who catch my drift. This could be a huge boon to some very significant tax avoidance (vice tax evasion) in your retirement years. If any of you are like me and you get enough tax free months a year to be in the 0% tax bracket, this is definitely worth considering.

I used to do taxes for a living, so I wish I had thought of this sooner. Unless I'm missing something, it could be equivalent to a $45k/yr Roth (except for the earnings). Probably few of us can afford to contribute that much, but if your wife is working and making decent money, you could throw a good chunk towards that 45k ceiling. Of course she's going to be PO'd that you're gone all the time, but we're all expert at managing that. =)

Thoughts anyone, or am I on my own with this one?

Thanks!
 
Last edited:

Kikuchiyo

Well-known member
Joined
Jan 25, 2004
Posts
112
Total Time
6000
Sounds like a smart plan. I think the problem you'll run into isn't the IRS, but Finance. I don't know how easy it'll be to turn on and off your TSP contributions from one month to the next. Don't changes have to be in by a certain date to apply that month? So if you don't make the change early enough before you go, you'll miss out. Or just as easily, you tell them early enough to contribute in a given month, then end up not going. Good luck, either way.
 

yeahguy

Active member
Joined
Jun 18, 2004
Posts
26
Total Time
5200+
Thanks for the reply. You have good points about timing it just right, or failing to go tax free on the month you are anticipating. My experience is that when I change a contribution percentage, DFAS tells me that it will take effect on the 1st of the next month.
 

Be 23

Well-known member
Joined
Feb 10, 2006
Posts
127
Total Time
3500
You're about five years too late to help me out, but it seems like a great idea. A couple of minor problems come to mind, but nothing insurmountable.

The finance folks were always a month or two behind in starting tax free status, so you need some up-front cash for mom and the kids until they catch up. If you're drastically upping your TSP while still withholding taxes, the spousal person may be caught short.

If you rotate home early without getting the TSP change in the system it may cost you a couple hundred in taxes. I've seen a couple of guys skip a rotator home for a few thousand, and quite a few skip for a rotator to get more combat sorties, but never for less than that. It's not enough to keep you there, but just enough to plan for. YMMV.
 

yeahguy

Active member
Joined
Jun 18, 2004
Posts
26
Total Time
5200+
Good point about the timing. It would have to go off without a hitch, and we all now how that goes with pay issues!
 
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