Deployment advice??

[TSP@ti2de]

imported post

Max your Roth before you leave, then max on TSP when you deploy.

 

[Gastrolith]

Here's what I learned so far, after being 'in country' for just over a month:

[*]Save up $10K for the Soldier Savings Plan at the mobe station so that you can 'max' the program right when you get here. Borrow the money if you have to. It is a RISK-FREE investment backed by the government that pays
-------
Must you contribute to this plan only via payroll deduction or can you write a check?

I've read that contributions are limited to "un-alloted pay." Does that mean that I cannot start with a 10K contribution but must contribute only as much as unalloted pay? TSP allotment would greatly reduce this, if I'm reaching for the 15K or more yearly contribution.)

Thanks,
G

 

[OMA]

SDP pays 10 percent annual interest on deposits made by qualified service
members, compounded quarterly. Soldiers are able to contribute to their SDP
account on a monthly basis. The maximum amount that can be contributed
per month is limited to the soldier’s unalloted income which is the amount
remaining after the collection and payment of all existing taxes, allotments
and debt obligations. Total contributions for the year may not exceed
$10,000, and interest will only accrue on principal and interest up to $10,000.
Deposits to the program made on or before the 10th of the month accrue
interest from the 1st of the month. Deposits made after the 10th of the month
accrue interest from the first day of the following month.

Soldiers are able to make deposits into the SDP after serving 30
consecutive days in a designated area or by spending one day per month for
three consecutive months in a designated area. In order to establish your
SDP account, visit your local finance office, with a copy of a current LES, and
make a deposit by cash, check, or money order. Active Duty Members only
may make deposits by allotment. With an appropriate power of attorney,
outside parties are authorized to make deposits into the SDP program, as
long as the deposit does not exceed the service member’s monthly unalloted
income. A remark will appear monthly on your LES indicating the amount of
money, to include interest, you have accrued.

Withdrawals are limited, during the time within the designated area, to
those necessary to preserve the health or welfare of the service member or
their family. However, you may withdraw quarterly any interest which causes
your account to exceed the $10,000 limit. Interest will continue to accrue for
up to 90 days after redeployment. After 90 days, the balance of the SDP
account will be sent to the address provided by the service member.




The above is the information that finance in Bagram is issuing soldiers here - hope it helps.

 

[James]

A remark will appear monthly on your LES indicating the amount of money, to include interest, you have accrued.

A remark never appeared on my USMC LES. It was a small circus to get documentation to verify that account as an asset to mortgage lenders.

 

[pyriel]

Re: imported post

....but there is an 'overall' limit on both tax-exempt and tax-deferred contributions as defined by I.R.C code section 415. For fiscal year 2006, the 'overall' limit is $44000.

(I'll only be tax free for 2-4 months of 2006, so there's no physical way for me to reach that limit this year, but if you can, more power to you!)

Are all special pay factored in with the 44K limit?
Let's use a doctor for an example and he/she is getting a special pay of 10k per year and he is NOT DEPLOYED. Can this doctor put in 15k coming out of his basic pay? And if he choose to contribute 100% ofhis special pay, this would mean that he is putting in 25k in TSP?
What happens if he is deployed, would we factor in the 44k limit plus his 10k special pay?
Can somebody direct me to the right direction...

 

[shiftomnimega]

The whole time I had SDP they never put remarks on my Army LES. I noticed that once I closed out the account I got a "monthly statement" even though it was the first one I ever got. On mypay it's the option below LES.

But about withdrawing... I hope everyone kept their Cash Collection Vouchers (CCV) for SDP. Two of my deposits are not recorded and DFAS is currently working on getting me the money back. The solution is faxing a copy of the CCVs for the missing deposits to DFAS. So not only do they have to repay me the principal of what I deposited, but also recalculate the total interest due to me.

Lesson learned: call DFAS and request your balance and interest periodically just to make sure that their records match your records.

Call them at 1-800-390-2348, (DSN) 580-5122 (7:00 A.M. – 6:30 P.M. / Eastern time)

 

[FatMoneyClip]

I hope everyone kept their Cash Collection Vouchers (CCV) for SDP. Two of my deposits are not recorded and DFAS is currently working on getting me the money back.

Good advice. I made deposits into the SDP 2002-2003. Evertime I made a deposit, I found a scanner on the base, scanned the CCV and uploaded it to my AKO files server. That way, if I lost the document OCONUS, I still had the scanned copy available.

Funny thing about the SDP. I NEVER got a SDP 1099-INT for 2002 or 2003. I requested a copy and everyone just gave me a blank look. 9 times out of 10, they would say "What is SDP?" Of course, those were the early years of OEF/OIF. Well, guess what happened this month... Two news option appeared on mypay.dfas.mil:
- Savings Deposit Program (SDP) Statements
- SDP Tax Statement 1099-INT

I guess an amended return is now in order.

 

[domingo3]

FatMoneyClip
I noticed the SDP statement appeared a couple weeks ago, but had to go back and look. Sure enough, I have an SDP Tax Statement for 2001 and 2002. I'm not trying to evade taxes, but I think that's far enough in history and such a little amount that I can forget about it. Now I know to look for it next time, though.

d3

 

[domingo3]

Re: imported post

Are all special pay factored in with the 44K limit?
Let's use a doctor for an example and he/she is getting a special pay of 10k per year and he is NOT DEPLOYED. Can this doctor put in 15k coming out of his basic pay? And if he choose to contribute 100% ofhis special pay, this would mean that he is putting in 25k in TSP?
What happens if he is deployed, would we factor in the 44k limit plus his 10k special pay?
Can somebody direct me to the right direction...

The $44K limit is THE limit. No person can contribute more than 44K in one year - period.

Similarly, if you're not deployed, $15K is THE limit. The IRS doesn't care whether it's base pay, bonus, special duty, whatever. You just can't contribute more than $15K unless you're deployed.

I've been told that these rules are built in to the system. ie You can just go to MyPay and set your contributions to 100%/100%/100% and when you hit the limit, your contributions stop. When you get to Jan 1, you automatically start contributing again. Since this is the first year with unlimited base pay contributions, I haven't seen it in action yet. I have a certain amount of distrust of what people tell me about DFAS working properly. We'll see if it works like it's supposed to.

d3

 

[Machinist Mate]

Re: imported post

Gary,I wont give you advice on TSP,but do thank you for serving our country.Be careful over there,and keep your eye on your buddy.Back in 69,I was in a similar position,and this war and rules of engagement are getting very political and thats a bad omen for a soldier.I will pray for you and your family.
Bill

 

[Birchtree]

What kind of sleaze hypocrite is this? He was only 14 years old in 1969. But he is gone now. There will always be justice delivered.

 

[Stepanwolf]

Greetings all,

Can anyone explain the point of maintaining TSP contributions during a deployment? Isn't the better plan to stop them altogether while your income is tax-free? Any thoughts?

Regards,

 

[tsptalk]

Can anyone explain the point of maintaining TSP contributions during a deployment? Isn't the better plan to stop them altogether while your income is tax-free? Any thoughts?

I don't know much about the tax laws as they pertain to military pay, but if are suggesting throwing money into a Roth instead of TSP while deployed, you may be on to something. No pre-tax or post-tax on earnings sounds like a sweet deal.

Welcome to the board, by the way!
Tom

 

[Stepanwolf]

Hey Tom,

Thanks for the welcome. The short course on military taxes is that all income is tax-free if you are deployed in a combat zone or qualified hazardous duty area as long as you are an O-4 or lower. My point was regarding the utility of using tax-free income to fund a tax-deferred investment. Assuming a 25% tax bracket and no credit card debt, it seems to me the investment priorities should be in the following order:

1. Full contributions into a Roth IRA;
2. $10,000 into the savings deposit plan; and
3. Everything else into a low-tax mutual fund for long-term investment (for example, VMCAX, not that I am pushing Vanguard).

I know that suggesting the discontinuation of TSP contributions in this forum may be heresy, but what is the point of deferring tax for a 25% rate on tax-free income when you could instead defer a 15% capital gains tax on the gain only, per option 3.?

Granted, I am assuming that the tax rates do not drop, and acknowledge that you would have less flexibility with the mutual fund, but I also believe there is the added benefit of tax diversification for retirement; tax-free (Roth), tax-deferred (TSP) and capital gains (mutual fund). What do you think?

Regards,

 

[tsptalk]

I agree - Take advantage of the tax savings and get more investment options. What's not to like?

 

[pyriel]

Hey Tom,

Thanks for the welcome. The short course on military taxes is that all income is tax-free if you are deployed in a combat zone or qualified hazardous duty area as long as you are an O-4 or lower. My point was regarding the utility of using tax-free income to fund a tax-deferred investment. Assuming a 25% tax bracket and no credit card debt, it seems to me the investment priorities should be in the following order:

1. Full contributions into a Roth IRA;
2. $10,000 into the savings deposit plan; and
3. Everything else into a low-tax mutual fund for long-term investment (for example, VMCAX, not that I am pushing Vanguard).

I know that suggesting the discontinuation of TSP contributions in this forum may be heresy, but what is the point of deferring tax for a 25% rate on tax-free income when you could instead defer a 15% capital gains tax on the gain only, per option 3.?

Granted, I am assuming that the tax rates do not drop, and acknowledge that you would have less flexibility with the mutual fund, but I also believe there is the added benefit of tax diversification for retirement; tax-free (Roth), tax-deferred (TSP) and capital gains (mutual fund). What do you think?

Regards,

I've always advocated that we should max out TSP and ROTH IRA. People will have different tax tax bracket and outlook on retirement which is why there is no right or wrong answer on which one should be funded and maxed out first. However, with this scenario, I agree that ROTH IRA should be funded first. I would also advocate that deployed soldier try to max out the caps for TSP while in theater (44k). Through compounding, 44k will go a long way than the regular 15k that we are allowed when we are not deployed.

Some people say that 44k is just too much to invest and it is hard to do. My recommendation is to skip SDP if you really don't need the money. SDP interest is limited for 10% and only good within a year (or several months after deployment). This is a good way of putting money aside instead of putting it in savings and if you plan on using it once you get home. But if you really don't need the money, you might as well put it in TSP so it can earn compounding interest.

Although, you may not use the TSP contribution to help you ease your tax burden for the following year, maxing out TSP will greatly help you in the future rather than putting it in a low tax mutual fund.

Having low tax mutual fund is good to have but only if you can max out both ROTH and TSP.

Pyriel

 

[Stepanwolf]

P,

I think for most service members, the Roth is a no-brainer. However, I can't see the point of using tax-free pay (combat zone) in a tax deferred investment (TSP). Assuming a 25% tax bracket in retirement (as I am), 30 years to retirement and $15,000, here are my numbers:

TSP Contribution: $15,000
Average Return: 8% compounded annually
Value after 30 years: $164,035.94
Taxable Basis: $164,035.94
Tax Rate: 25%
Tax Paid: $41,008.99
Net: $123,026.95

**or**

Low-Tax Mutual fund Investment: $15,000
Average Return: 8% compounded annually
Value after 30 years: $164,035.94
Taxable Basis: $149,035.94
Long Term Capital Gains Tax Rate: 15%
Tax Paid: $22,355.39
Net: $141,680.55

Difference: $18,653.60

Granted, no mutual fund will be completely tax free, and much of this depends on the fund manager's ability to do thier job in this regard, but I can't imagine there would be even close to $18,000 in taxes paid on the investment over 30 years. I know this also assumes tax rates do not go down, but by the some token they might go up, which would make the difference even larger. In the end, what does it for me is the diversification issue. I think too many people have only tax-free and tax-deferred investments for retirement, omitting long-term capital gains.

Again, I love the TSP, and with my state deferred compensation program, I put all I can into it. But when deployed and earning tax-free income, without the initial tax deferment, I just don't think it makes sense.


Regards,

 

[EW_ret]

Your calculations for TSP appear to be incorrect for the tax basis. You did not subtract the tax-free contribution of $15,000. The taxable basis for the TSP and taxable account should be same.

Second point is the taxable account expenses will turn 8% to 7.85% even if the taxable account is a low-cost index fund (0.05% TSP vice 0.20% taxable index).

Third point is I get $150,940 for the final value after thirty years not $164,036 at 8% return. At 7.85% I get $144,776 for the final value. This would also have effect on the comparison.

TSP tax: (150,940 - 15,000) X 0.25 = 135,940X0.25 = 33,985
TSP net = 150,940 - 33,985 = $116,955

Taxable account tax: ($144,776 - 15,000) X 0.15 = $19,466
Taxable net = 144,766 -19,466 = $125,300

The taxable account would have distributions and some could be short-term gains at 25% rate. This should minimal if you use a tax efficient funds, or stocks.

 

[Stepanwolf]

EW,

I don't think there is any basis to be subtracted for the TSP, as it is ALL pre-tax money (for two different reasons, but that is beside the point). All the TSP (priniciple plus gain) would be taxed as income for the owner.

I realize that I am assuming that I could find a low-cost, tax-friendly fund that would get TSP-like returns, but given the wealth of funds out there these days, I don't think that is unreasonable; I will research more.

Thanks for the correction on the calculation; looks like I used 31 years vice 30. The real issue is the basis; why do you think the $15,000 would be subtracted for the TSP?

Regards,

 

[EW_ret]

EW,

I don't think there is any basis to be subtracted for the TSP, as it is ALL pre-tax money (for two different reasons, but that is beside the point). All the TSP (priniciple plus gain) would be taxed as income for the owner.

I realize that I am assuming that I could find a low-cost, tax-friendly fund that would get TSP-like returns, but given the wealth of funds out there these days, I don't think that is unreasonable; I will research more.

Thanks for the correction on the calculation; looks like I used 31 years vice 30. The real issue is the basis; why do you think the $15,000 would be subtracted for the TSP?

Regards,

The TSP must track the tax-exempt and tax-deferred contributions by military members. Why should your tax-exempt combat pay contributions to TSP be taxed upon withdrawal from TSP? Combat pay is supposed to be tax-exempt. Refer to TSP tax notice http://www.tsp.gov/forms/octax92-32.pdf

I agree with you 100% regarding putting most tax-exempt combat pay into the TSP funds. It does not make financial sense to place a lot of your tax-exempt pay into TSP because the earnings on that pay are taxed at ordinary income rates. These rates are likely to go higher in the years ahead. I have retirement funds in Traditional IRA, Roth IRA, Rollover IRA, TSP, and taxable accounts. It makes good financial sense to have money in all types of accounts because you do not know where tax rates are headed.

I do question the legality of placing tax-exempt money in a Roth IRA. I thought one must have taxable earned income, equal to or greater than the Roth contribution. Is military tax-exempt income the exception?


Thank you for keeping our freedoms intact, and taking the risks that these freedoms require. Being ex-Army, I remember the sacrifices you take to guard our country and our way of life.