Military TSP 401(k) Advice

[Hagar17]

We all know that pilots are the best people to ask when it comes to financial advice , so here goes....

Currently, I contribute 8% of my base pay to my TSP 401 (k). Where that 8% figure came from, I can't remember, but it seems to me it meant something at the time. Now that I'm above the poverty level with my civilian airline job, I'd like to contribute more to my TSP, but I want to be smart about it.

What's the best and most tax-friendly way to contribute to your TSP? I know some portions of your pay are non-taxable, like incentive (flight) pay and hostile fire. Is it better to contribute all of your flight pay vs a percentage of your base pay? What' s the max you can contribute.

BTW, 401(k)s are made for guys like me that have no investment skills whatsoever.

Hag

 

[Andy Neill]

The maximum you can contribute to all 401k plans for 2008 is $15,500. If you are over 50, you can contribute another $5000 in 2008.

A 401k is not necessarily a passive event (or at least it shouldn't be). It should be in funds that are uptrending and consistently above their 150 day moving average. If the moving averages are downtrending, the portfolio should be shifted to cash positions.

 

[wishIwasinTX]

15,500 is the limit for all accounts with a catch:


Q3: I am a member of the uniformed services and am making contributions from pay that is tax-exempt. Does the elective deferral limit apply to these contributions?





A:
No . However, there is another provision of the Internal Revenue Code, section 415(c) annual addition limit, which limits the total amount of contributions from all sources that can be made to your TSP account. For 2007, the limit is $45,000. The limit for 2008 is $46,000.
In addition, catch-up contributions do not count towards the 415(c) annual addition limit.

Here's a link you may also find helpful.

http://www.tsp.gov/curinfo/contribution-415-examples.html

I would recommend you put the full 15,500 into your 401k/TSP if you can afford it. But make sure you put enough into your civilian 401k first to get the full matching funds before you put any money into your TSP. There are no matching funds for the uniformed version of the TSP. Secondly, I would open a Roth IRA (if you don't exceed the income limits, 101,000? - 114,000? MAGI) and put your tax exempt money there. Putting tax exempt dollars into your TSP kind of defeats the purpose. The Roth would allow that money to grow and be distributed tax free. If you are deployed for a whole year and have no taxable income then I could see putting it in TSP. At least it would grow tax deferred.






Personally, I do a 50% C fund, 25% I fund, 25% S fund mix. It closely mirrors the asset allocation of a long term L fund minus the bonds. You should consider an L fund if you aren't real savvy about investing. Better yet, spend a little money on some financial advise. Preferably from someone who is not motivated to sell you something.

 

[Hagar17]

The maximum you can contribute to all 401k plans for 2008 is $15,500. If you are over 50, you can contribute another $5000 in 2008.

A 401k is not necessarily a passive event (or at least it shouldn't be). It should be in funds that are uptrending and consistently above their 150 day moving average. If the moving averages are downtrending, the portfolio should be shifted to cash positions.

I agree the 401(k) is not a passive event. I was exaggerating a bit, however, I do invest in the L (Life Cycle Fund) that invests for you. Maybe a bit naive, but again, I'm not the most financially savvy guy.

How about the question of what to deduct from: base pay, incentive pay, etc.? What the best option from a tax perspective?

Hag

 

[tankerswede]

Taxable Income

Just to clarify, all PAYS are taxable, ALLOWANCES are not. Base pay, flight pay, the incentive pays the med folks get - all taxable (unless in a combat zone, up to the exclusion limit). BAS and BAH are tax-free.

It would make the most sense to shelter the taxable income, but I was not aware you could determine which income went to the TSP (not a participant myself). It wouldn't make any sense to shelter your non-taxable allowances and I would think you couldn't anyway - why would you put away your dedicated food and grocery money into a retirement account? More correctly, why would they allow you to put your grocery and rent money into the bank? If you can do that, then they must be paying you too much (their likely logic, not mine).

Hostile fire pay should be tax free, but not because it's a tax free entitlement. Rather, the tax-free nature of it comes from the fact that if you earned it that month it is because you were in a combat zone tax exclusion location. I suppose there may be places that are hostile but not CZTE but I have never personally encountered one in my career. Special Ops types may see this on regular basis - can't speak for them.

Hope this helps.

 

[Andy]

TSP - annual maximum tax deferred is $15,500 tax deferred (plus $5000 for over 50 catch up)
- annual maximum is $46,000. You can't get more than $15,500 (plus $5000 for over 50 catch up) unless you have combat zone tax exclusion (CZTE) income. You'd need a decently long CZTE tour in order to get to $46,000 in a year; I think my max was $25,000 or so in a single year.

I recommend putting in the maximum that you can stand, to the point of being painful.

The maximum percentage that I've been able to put in (O-5) is 100% flight pay plus 90% of income. As an O-4, I think that the max they allowed me was 85%.

I've got a little more than $17K tax free in my TSP account. My total account balance is $115K. You don't miss the money if you never have it.
Once you retire, you will likely want to roll your TSP into an IRA. In my case, I plan on taking my full taxable amount first and roll it into an IRA (currently $98K). Later, I will roll the tax free amount into a ROTH IRA. If you withdraw everything at once, I think it all goes to a taxable IRA - not good.

I also encourage you to put in the max into a Roth IRA annually.
I know it's hard to save money, but if you're not saving 15% annually, your standard of living is too high. You will need that 15% in order to be able to retire in the future.

And right now, I've got all of my TSP parked in the G fund. I'm more concerned about preservation of capital than return on capital. The markets are very unstable and I'm waiting for them to come crashing down.

 

[Mooseflyer]

I suppose there may be places that are hostile but not CZTE but I have never personally encountered one in my career.

There are a few of these places, in fact I was in such a country on Friday. A little known fact is that while the military considers certain locations HFP/IDP but not CZTE, the IRS considers them one in the same. Therefore, if you go to a location which pays HFP/IDP only, you CAN claim your pay for that month as tax-free. If you do a fair amount of mil duty that month, it may be worth the effort.

 

[Hagar17]

I've got a little more than $17K tax free in my TSP account. My total account balance is $115K. You don't miss the money if you never have it.
Once you retire, you will likely want to roll your TSP into an IRA. In my case, I plan on taking my full taxable amount first and roll it into an IRA (currently $98K). Later, I will roll the tax free amount into a ROTH IRA. If you withdraw everything at once, I think it all goes to a taxable IRA - not good.

So TSP separates "tax-free" contributions earned in a combat zone from contributions that would have been taxed (non-combat zone)?

 

[Andy]

So TSP separates "tax-free" contributions earned in a combat zone from contributions that would have been taxed (non-combat zone)?

Yes; and at time of withdrawal, those contributions are not taxed.