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Paycheck Chronicles

30 September 2016 Military Pay

Since 1 October 2016 falls on a weekend, the next regular, active duty military payday is Friday, 30 September 2016.  That means that your 30...

Your Mission: Saving for Retirement

Young Servicemember and Family

Whether you’re beginning to save for retirement or have an active plan of action, bravo! You’re well on your way to securing the future for you and your family. If you plan to stay in the military through retirement, your pension will act as a good starting point. You may be eligible for a pension, or retired pay, if you serve a minimum amount of time—usually 20 years. The amount of your pension will be based on the number of years you served and your salary. Here are more details regarding the military retirement system. Regardless, you’ll want to pair your retired pay with other savings options to make sure you can maintain your lifestyle.

No matter how long you plan to stay in the military, use your servicemember status now to take advantage of special savings opportunities and tax breaks. Contributing to a variety of accounts will provide you with more choices (and peace of mind) when you decide to retire.

Thrift Savings Plan

The Thrift Savings Plan (TSP) is similar to a 401(k) plan in the private sector, but is available to government employees, including servicemembers. It’s known for its low administrative fees, which help keep your money working for you. A TSP gives you several options for investing your contributions, depending on your goals, risk tolerance and timeline. 

You can choose to make pre-tax contributions to a traditional TSP or after-tax contributions to a Roth TSP. Earnings in both accounts grow tax-deferred. With a traditional TSP, you pay tax on your withdrawals in retirement.* With a Roth TSP, withdrawals are tax-free as long as you’ve held the account for at least five years and are 59½ or older when you take distributions.

If you receive tax-exempt combat pay, a Roth TSP offers the opportunity to grow your money completely tax-free: you can contribute your tax-exempt pay, it grows tax-free and you can withdraw it without tax. A win-win-win!

Depending on your total household income in 2015, you can contribute up to $18,000 to a traditional or Roth TSP, or any combination of the two. If you’re 50 years old or older, you can contribute an additional $6,000 catch-up amount for a grand total of $24,000.

Once you reach your TSP contribution limits, you’ll want to consider pairing the plan with other options to maximize your earning potential. In addition, you’ll find more investment options available when you invest in an Individual Retirement Account (IRA). Check with your tax advisor to review the income thresholds.

Traditional IRA

With an IRA, you may be able to take a tax deduction for the money you contribute. Tax-deductibility depends on your (and your spouse’s) participation in an employer’s retirement plan and your income; see your tax advisor for details. Keep in mind—when you do withdraw the money, you’ll pay taxes not only on your contributions but also on money earned over time.**

Roth IRA

Roth IRAs are different from Traditional IRAs in that you make contributions with after-tax dollars in the beginning to avoid paying taxes when the money is withdrawn. Just like the Roth TSP, a Roth IRA is a smart option if you’re earning combat zone pay because the money will go into the Roth IRA tax-free, grow tax-free and can be withdrawn tax-free.***

You can contribute up to $5,500 to a traditional or Roth IRA, or any combination of the two, each year, plus an additional $1,000 catch-up contribution if you’re 50 or older.†

*Tax-exempt contributions will be tax-free at withdrawal, but earnings will be subject to tax.

**Taxes will be due at ordinary income tax rates upon withdrawal from a traditional IRA. Premature withdrawals (generally, those made before age 59½) may be subject to a 10 percent tax penalty, too.

***Withdrawals are tax-free at retirement if the account holder is at least age 59½ and has held the account for at least five years. Premature withdrawals are subject to ordinary income tax and a 10 percent tax penalty.

†This is the limit for 2015. It is indexed to inflation for future years. Maximum contribution is $5,500 or your taxable compensation for the year, whichever is less. Non-wage-earning spouses of wage earners may also contribute to an IRA.

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