Combat Leave

[James]

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Scenario: I will be ending my deployment in January. I will have 17.5 days of combat leave that I will be taking in February. My pay for those 17.5 days is going to be tax exempt. I want to get all of that tax exempt money into my TSP and still contribute the maximum $15K of taxable income for the year.

This seems kind of tricky and I've been trying to wrap my brain around it and what I've come up with is this:

The only way that I can see to get all of that tax exempt pay into my TSP is for me to contribute 100% of my base pay in February. That will leave me with the remaining 10 months to contribue the rest of the $15K ($15K - my taxable pay in Feb).

Any thoughts or suggestions?

Thanks in advance.

-James

 

[pyriel]

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Damn James you always have good questions but I like the way you think. I also have not seen that in the TSP manual so you are getting into a gray are territory which would most likely let you get away with it. Leave sold is converted into base pay equivalent which should allow you to stash it into your TSP. But to do that, I have to agree with you that your allocation must be changed to 100% until you actually see it go in your TSP account. Good luck and looking forward if it works for you...

 

[cowboy]

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You will need to find out when you should start the deduction to equal the 17.5 daysand when to end it so you get the seventeen days in. It may cost you a few days, don't they go by two week increments. Start of one pay period and end after the next a total of 4 weeks. So if the increments are longer then the 17.5 days then you would not need to put it in at full 100% just the fraction of pay that equals the 17.5 days. Plus that it may take the governmenttime to implement the move. I think when I did this last timeit was a month before they put my allocation change into effect. Can I ask you why you would want to do this? Why not use thetaxed money and put that into TSP to get the deferral till retirement?I would take the tax exempt money as it is already tax free. Putting it into the TSP won't it get taxedwhen withdrawn?

 

[Griffin]

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I recently read something along these lines and I apologize because i'm not sure if it was on the tsp site or a Human Resource Information Letter,and I can't find it or verify it at the moment.If my memory serves (which itdoesn't all the time)tells me that the only TSP contributions that are tax deductible atretirementare ones made while in theater. I am fairly sure that TSP will track the tax free contributions automatically. Once you return CONUS, the military contributions made during the redployment period are subject to taxes at withdraw which would include accrued leaveregardless ifyou take it or cash it in. I have fellow employees in a similar situation and will shoot my HRO an e-mail. It may take awhile to get a response, due to the vacation period. However, you are onto something, and would be wise to stick every dime you can into the TSP while OCONUS.

On a similar topic, you can make up contributions missed while deployed see: http://www.tsp.gov/forms/oc95-5.pdf

 

[James]

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I'm not certain that everyone understands the situation.

Some concepts that I want to clarify.

Tax Exempt Zones - When you spend one day in a Tax Exempt Zone that entire month's pay is Tax Exempt.

Combat Leave - Leave is earned at a rate of 2.5 days/month. When in a combat zone that leave is considered combat leave and since you earned that leave in a tax exempt zone the pay for the day you take that leave will be tax exempt.


Pyriel,
I will not be selling leave. I will be taking the leave as a well deserved vacation after spending a year in this sandbox.

Cowboy,
Military TSP contributions are made once a month. Yes, we have two pay periods per month (1st & 15th) but the contributions are only made once a month. I want to put the tax exempt pay from my combat leave into the TSP because it doesn't count against the $15K tax deferred limit per year. Over the rest of the course of the year I will max out the $15K of tax deferred contributions I am allowed. No, contributions that are made from tax exempt pay are tracked as a tax exempt balance and will not be taxed when I withdraw them.

Griffin,
The pay for the days that I take the "combat leave" is tax exempt as they are leave days that were earned while I was in a tax exempt zone. I would be highly surprised (furious) if those contributions were treated differently than contributions from other tax exempt pay. If you find out the scoop on that, I would greatly appreciate it because the warrant officer I asked about it gave me the deer in headlights look.

 

[cowboy]

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I am not military so I am of little help on this. It would seem then if he were to do this he would have to do it soon as the military only puts it in TSP once a month then.

 

[Griffin]

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According to DFAS KC 722.31-R, your pay from your Combat Leave is tax deductible IAW Combat Zone Tax Exclusion (CZTE - 100% if your enlisted or a warrant - not so much as an officer).

http://www.missa.manpower.usmc.mil/media/MISSO06/CBTLV.ppt

You definitely deserve the vacation! I hope you can time the leave with your TSP contribution so as to max the tax deduction at retirement. If you take the CLB with other leave the combat leave will be deducted first - apparantly this is a must. Your CLBmust beused up before anyother type of leave can be used.

 

[Gastrolith]

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I'm not an expert in Tax Code, but maybe someone here is...



As you are not taxed on the income you earn while in a combat zone, you are already at as low a tax bracket as you can get. Why contributeto your TSPwhen you will enjoy NO tax benefit from those particular dollars?



It seems to me, and this is where someone savvy in tax code might step in, that you should invest those nontaxable dollars in tax unfriendly funds. Heck, you should do all the crazy things that would jack up your taxable income when your tax rate is at its lowest. Example, when I was in tax exempt status, I rolled over my wife'sTraditional IRAinto a Roth. It didn't hurt because I didn't make enough (taxable) money to suffer.



Perhaps it makes more sense to invest some, if not all, of that money outside the TSP. You cannot further lower your taxable income by putting it into the TSP.



Can anyone help with this concept??



Gastrolith

 

[James]

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Gastrolith wrote:

As you are not taxed on the income you earn while in a combat zone, you are already at as low a tax bracket as you can get. Why contributeto your TSPwhen you will enjoy NO tax benefit from those particular dollars?

Because I can contribute more to the TSP when the contributions come from tax exempt pay. For 2006 I am maxing out my TSP ($15K + tax exempt contributions) and maxing out a Roth IRA.

It seems to me, and this is where someone savvy in tax code might step in, that you should invest those nontaxable dollars in tax unfriendly funds. Heck, you should do all the crazy things that would jack up your taxable income when your tax rate is at its lowest. Example, when I was in tax exempt status, I rolled over my wife'sTraditional IRAinto a Roth. It didn't hurt because I didn't make enough (taxable) money to suffer.

I am single and do not have a traditional IRA from any previous employment.

Perhaps it makes more sense to invest some, if not all, of that money outside the TSP. You cannot further lower your taxable income by putting it into the TSP.

I agree with your concept abut not lowering my taxable income by contributing taxable funds to the TSP. But at this point in time I am not going to start any additional investments (besides maxed TSP and Roth IRA) until after I have returned from my deployment, bought a second home on the beach and set up 529 college savings plans for my niece and nephew.