2006, $15K and taxes

[James]

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Howdy,

I am a military member currently deployed to a "tax free zone". I have my TSP contributions set to the max that I am allowed to this year (10%). Next year I plan to max out my TSP contributions at $15,000 for the year. Making the same contribution every month would have me contributing $1250/month.

But I should still get the first two months of my pay in 2006 tax free. To maximize my tax savings over the year I think that I should not make contributions during those tax free months. Leaving me the last 10 months to contribute to the plan adjusting to $1500/month.

To complicate things even more, while I am over here I earn 2.5 days of "combat leave" per month. This is known as "combat leave" because since they were earned in a tax free zone the pay for those days will be received tax free. I intend on taking about 30 days of leave upon return which will likely spill over 2 different months.

So to maximize my 2006 tax savings on my TSP contributions should be made over those 8 remaining months that I won't receive any tax free pay. Meaning that I'll will contribute $1875/month.

Can I get a sanity check on this logic?
Thanks.

 

[Birchtree]

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It's always different strokes for different folks. Put your contributions on auto pilot and relax. 4 months out of a career time factor doesn't sound like a lot of time. But the sacrifice is you will miss those months for dollar cost averaging - and over time the opportunity you miss may make a difference. Put as much in as you can to build a power account - someday you can make it grow even more. I'd recommend letting fate rule the day - and please keek your head down. Take care.

Dennis

 

[pyriel]

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I agree with Birch about 4 months not makinga difference over a career of investment. But if your goal is to maximize tax reduction then you are correct and somewhat incorrect. Being in a tax free zone, you have the ability to go over 15k for next year. In fact, if someone is deployed for the whole year next year, he can put 100% of their income and special pay in TSP (but how is he going to pay his bill?). Why? It is because their pay is 100% tax free. Remember TSP becomes unlimited next year. Cap provided by IRS is limited to taxed income. Since income in the combat zone is not tax, there is no limitation. So dont worry about contributing to TSP and going over 15k (for your situation, at least). You only need to worry about this cap for those tax income you are going to get for the last 8 months you mentioned. :^

For reservist going back to the IDT mode (weekend warrior). Don't forget that when you get back home, you may be able toput 100% of your pay and special pay to TSP as long as you don't exceed 15k.

 

[James]

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Holy schnikes!

To simplify things if I'm deployed in January and Feb I could put 100% of my base pay, bonus and incentive pay, into the TSP. Then when I start getting taxed on income in March (assuming no combat leave taken) I could contribute $15K more over the next 10 months and not go over the limit?

I am fortunate that I could save up a good portion of money as my house is currently being rented out through January and my bills have been minimized out here to make this a reality.

 

[TSP@ti2de]

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Someone please clarify this, you're saying that if you are in a tax-free zone, hypothetically you could punt your entire tax-free earnings to TSP? Please advise.

 

[KathMorgan]

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Unless I've got it totally confused, while you are deployed you can "max out" you TSP by doing 10% of you base pay and up to 100% of all special pays (i.e. FSA, combat pay, haz duty pay, BAQ, BAS, etc) You can only do 10% of you actual base pay. At least until the caps come off next year.



Kathy Morgan EA
H&R Block Master Tax Advisor
Proud Mom of Sgt RT Morgan
1/156 AR BN, Louisiana Army National Guard
currently serving in Baghdad, Iraq
(home is less than 30 days, by the Grace of God)

 

[rokid]

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I hope your soncomes home safe and sound. I very much admire the men and women willing to serve and put their lives on the line.

 

[TSP@ti2de]

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Here's the link on that:

http://www.tsp.gov/uniserv/features/chapter16.html

 

[Rolo]

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Welcome, Kathy!

The TSP limits for military are removed as of Jan 2006 and will only be subject to the IRS 403(b) limitations.

 

[KathMorgan]

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Thanks for the good thoughts. As of right now it's kind of a good news/bad news thing. He's supposed to be home of Wed or Thur next week. But they are only getting a 3 day pass then off the the Katrina zone they go for an undetermined amount of time. But at least it's not Baghdad.:^



Kathy Morgan EA
H&R Block Master Tax Advisor
Proud Mom of Sgt RT Morgan
1/156 AR BN, Louisiana Army National Guard
currently serving in Baghdad, Iraq

 

[smine]

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Welcome KM:

Did your facility get any New Orleans transplants? You know the Katrina mess is bad enough. I have a cousin and nephew in the guard down there. At any rate welcome to TSP talk.

 

[pyriel]

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KathMorgan wrote:

Kathy Morgan EA
H&R Block Master Tax Advisor
Proud Mom of Sgt RT Morgan
1/156 AR BN, Louisiana Army National Guard
currently serving in Baghdad, Iraq

Master Tax Advisor... Hmmm... My kind of woman... I always need tax advices... Welcome to TSPTalk. Your expertise will definitely be appreciated...

P

 

[Spaf]

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KathMorgan wrote:

Kathy Morgan EA
H&R Block Master Tax Advisor
Proud Mom of Sgt RT Morgan
1/156 AR BN, Louisiana Army National Guard
currently serving in Baghdad, Iraq

Kath, Am I glad U are on the board!!!!!

Question: Getting ready to retire. Got a lot of medical bills each year. Was told that I should not pay off home, but rather get a minimum mortgage to ensure that I could itemize with the IRS.

Whats, your thoughts? :% Spaf

 

[Neophyte]

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Hi there. I'm completely new at posting, so I hope that this actually works.

So, here goes:

There is one other thing limit on contributions to the TSP that must be taken into account when contributing both tax-exempt and tax-deferred income. Though the 2006 limit to TSP / 401(k) and other tax deferred retirement plans is $15000, there is an overall limit of $44000 in FY2006 for the combination of tax-exempt and tax-deferred contributions.

Now this really shouldn't affect too many people out there, but now that the limits are lifted on base pay contributions, some military personnel spending a large amount of time in a war zone could actually get close to the limit.

(I've only been contributing to the TSP since it was open to the military, but have maxed out just the tax-deferred side every year. It's been tough, but over the last two years I put in just over $25000, and have seen $10000 in value gained over the same period, to $64000 total.)

 

[Neophyte]

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BTW, the statement about the combined tax-exempt and tax-deferred contribution limit is under the "What's New" section of the TSP web page and specifically states:

I.R.C. Section 415(c) Limit — The limit for 2006 is $44,000.

Some of the people out there could actually be affected by this. Specifically anyone re-enlisting in a tax-free zone who will receive large SRB payments. One of our guys (USS Enterprise - due to deploy later in 2006) just reenlisted for $100,000 total bonus, ($50,000 up front, the rest spread out over the next 5 years).

If he were to do that in a tax-free zone, and were foolish enough to put more than $29,000 of his initial installment into the TSP, he would be limiting his ability to contribute tax-deferred income during the fiscal year. That could actually hurt him once tax time came around.
And, if you think that's bad, an E4 in my rate, who reenlists for 6 years in zone A, gets about $52000 SRB right now!!! (With them, I normally just hope that I can get them to do something other than blow the money on a new car. lol)

 

[OMA]

Here's a 2004 article from Kiplingers that discusses Roth contributions while in a tax-free zone. I'm just finishing 11 months and have maxed the ROTH (4K) for the year - unknowing that my tax exempt status could affect my ability to contribute. Anyone in the war zone should keep an eye out for this....




ASK KIM E-MAIL

I am a soldier currently deployed to Baghdad. My wife and I have been regularly investing in Roth IRAs for the past four years. My question is whether you can invest in a Roth IRA while earning nontaxable income. Both of us deployed in January 2004 before any federal taxes were taken out of our paychecks. The deployment is to last 12 to 14 months; therefore we will not be paying taxes for the entire 2004 year. Can we continue to invest in a Roth IRA? What should we do with the amount we have already invested up to this point?

If 100% of your income is tax-free for the year, you won't be able to contribute to an IRA. The good news is that you qualify for several other special savings plans because you're serving in a combat zone.

"Tax-free income cannot be used as compensation to fund a Roth or traditional IRA," says Ed Slott, CPA, author of The Retirement Savings Time Bomb. You can contribute to an IRA only if you or your spouse have taxable income during the year (even if it's just a few thousand dollars). So you'll have to skip making Roth contributions for 2004.

If you and your wife have been making automatic deposits to your IRAs, stop them immediately. Then contact your IRA administrator, tell them about your situation and ask to withdraw your 2004 principal plus any earnings from those deposits. You'll owe taxes plus a 10% penalty only on the earnings. But that should amount just a few dollars, or if your investments performed in line with the Standard and Poor's 500, you lost about -2%; no earnings, no taxes.

And don't worry about your contributions from prior years. That money can remain in the account and continue to accrue tax-free earnings.

Military members can contribute up to 9% of their basic pay each month into the federal employees' Thrift Savings Plan.

Typically, the contributions lower your taxable income and grow tax-deferred until retirement, just like a 401(k). Now that you're in a war zone and your income is tax-exempt, you won't see the immediate benefit from a "pre-tax" contribution. However, when it's time to make a withdrawal, a proportionate share of taxable and tax-exempt money will be taken from your account. Tax-exempt money you put in comes out tax-free. Earnings on your tax-exempt contributions continue to grow tax-deferred. Plus, any bonuses and combat pay you receive aren't subject to the 9% cap, which allows you to increase your contribution while you're in Iraq. Visit the TSP Web site for more information.

You may also qualify to contribute to the military's Savings Deposit Program, a shorter-term program that lets certain members of the military who serve in combat zones earn up to 10% per year on their deposits while deployed (up to a maximum of $10,000). The interest is taxable when the money is withdrawn, which is usually 90 days after leaving the eligible region. Contact your financial office for more information.

 

[James]

OMA, great article.

I was not aware of that and I could be in a sticky situation as my situation was very similar to that couple's situation. I deployed in Jan 2005 and returned in Jan 2006. I had no taxable military pay. I did max out my Roth IRA. Thank goodness that I had rental income and SDP interest withdrawls for a source of taxable income that still allows me to make the contributions to my Roth IRA.

Taxes are going to be interesting this year as I had no money witheald, but I have other sources of income that is taxable.

Combat Leave:
I am upset that my plan to put as much tax exempt income as possible for this year into the TSP has hit a snag. My income in Jan was all tax exempt so I put 100% of everything into the TSP. In Feb I took 14 days of combat leave, so I had elected 100% for Feb as well, except the tax exempt pay for my leave days in Feb did not show up on my Feb LES. I had already adjusted my March election down to 35% since I had to make that election in Feb before I saw the LES. It'll be very interesting to see how my March LES reads and if the tax exempt income will show there. The leave was not shown as used on my Feb LES.

 

[James]

Updates and a question:

It's been awhile sine I've posted. I've been busy with buying my second home and coaching football (semi-pro) since I've returned. It took me almost 6 months to buy a home as the first place underappraised and the second home I had under contract ended up with septic issues.

TAXES:
I did file my taxes finally. I took advantage of the extension I had since I was deployed in January. Even though I had no taxes withheld for the entire year since I was deployed and had about $15K in taxable income (rent, interest) I didn't owe any taxes. That was a relief because I really expected to pay. I didn't run any numbers ahead of time, but I just expected to have to pay.

TSP (question):
By going all in (100%) at the beginning of the year I have ended up with just over $6k in the TSP tax exempt. I have my contributions set so that the remaining 6 months will put me just under $15K tax deferred for the year. That is assuming that the pay taken out for December gets credited as a 2006 contribution. My pay for June wasn't "contributed" until July 3rd. So I am assuming that my pay for December won't be "contributed" until Jan 2nd at the earliest. Will that "contribution" be counted as 2006 or 2007?

If it will be counted as 2007 then I have to adjust my contribution percentages to reach $15k tax deferred for the year.

Thanks in advance for any responses.

 

[Mike]

Why aren't your TSP contributions being applied at the same time as your pay is hitting your bank account? That's bizarre to say the least.

As for your question, I'm pretty darn sure that regardless of when the contribution is "credited" to your TSP account, its tax consequence applies to when you were paid. For example, if your final payday is December 30, 2006 and your TSP contribution hits on January 2nd, 2007, that contribution is deducted from 2006's taxes, since it came from 2006's pay.

 

[GGal]

Hint: To determine how your TSP contributions will play out on your W-2 for 2006, review your leave and earnings statement each period, not your TSP account, to determine what pay period a contribution will be reflected against gross salary as tax deferred.

Hint for civilians: remember that if there are 26 pay periods, some agencies (or perhaps all) do not match PP 1 through 26 to your W-2. PP 25 and PP 26 of 2006 through PP 24 of 2007 goes on 2007 W-2. (this is true for my agency, I cannot speak for others)

PEACHES