I received an interesting question from a reader today.
"Hi Kate. If I am deployed to a combat zone from Oct to May, does that mean my TSP contribution limits are 49k for the year, or just while I am deployed? I have a large bonus coming in June and this will affect my decision on how I apply it.
Well, Joe, I wish I had a 100% for sure answer for you, but I don't. I have scoured the IRS guidance on TSP contributions, as well as the TSP website and various online forums that talk about Military TSP. I can not find any reference to the timing of contributions when a service member is in a combat zone for only part of the calendar year. I actually have a personal interest in this because my husband will be losing his tax-exempt status sometime in the next few months. (I know you can't hear me cheering, but I am.)
In the absence of actual guidance, here's what I would suggest: Take the bonus money and put it into your savings account. Once you are in a tax-exempt status, adjust your TSP withholding to some ridiculously high rate and use your savings for your living expense. Once you have put in all your money for 2010, switch your TSP withholding back to 1% for the rest of the year. You can repeat the process again in 2011. In this way, you are making a clear paper trail (via your LES) that the money was contributed from tax-exempt income.
If this is confusing, or anyone has a better plan, please comment. It is frustrating that I can't find better information out there. Two other issues to consider when organizing your deployment financial strategy: utilizing a Roth IRA will allow you to earn the money tax free and then take out the growth tax free, and the SDP is an amazing program for non-retirement money.
Thanks for your question, Joe. Travel safe!