Paycheck Chronicles

From The Mailbag: Roth TSP and CZTE


UPDATE:  After a lot of research and discussion, here is the situation as best as my financial expert friends and I can figure.

Adding to retirement accounts while in an area designated as Combat Zone Tax Exempt (CZTE) is an amazing way to beef up your accounts with tax-deferred and tax-free money.

Here's a recent question:

"Hey Kate. I'm just learning about the Roth TSP benefits in a combat zone.  Is it based on a calendar year?  So, if I only have a few pay periods left in the year, then I should be putting in as much as I can in for the rest of the year ?  I'm a single person and I don't really have any expenses, so I can afford to save a lot."

I love this question, I just wish that it had come sooner in the year!  Here's my answer:

"You are absolutely right that you should take the maximum advantage of all the retirement and savings benefits while you are in a Combat Zone Tax Exempt (CZTE) area. There are a couple of rules to deal with here, and it can get confusing.

You are also correct that  TSP contributions are based on a calendar year. If you make the change today, you should be able to get it in for the December pay period. Because all military pay is calculated on a monthly basis (except for certain allowances), I don't think there is any way to affect a change for November.

Then, there is the issue of maximum contributions. Without knowing what you've been contributing all year, I can't do the math. There are three different contribution limits that apply to your situation: the maximum regular contribution limit (called the elective deferral limit) of $17,500 for 2014. This is the most you are able to contribute to your TSP from regular, non-CZTE income. There is also the overall limit to total contributions that can be made, $52,000 for 2014. I'm guessing that is not an issue because it is December already :) The last limit is that you can also only contribute a maximum of $17,500 to a Roth TSP account...if your total contributions are more than this, then you have to put any amount over $17,500 into a traditional TSP account.

If you are aged 50 or over, you can add $5,500 to each of the numbers listed above.

Also, remember that you can contribute up to $5,500 to a Roth Individual Retirement Arrangement (IRA). Tax-free in because of the CZTE, tax-free out because it is a Roth IRA. It is a beautiful thing.

Lastly, don't forget the Savings Deposit Account available because you are in a CZTE. You can only put $10,000 in, but it earns 10% for the entire time that you are CZTE plus 90 days post CZTE. That interest is taxable, but it is still more than you're likely making anywhere else.

I hope that helps, and let me know if you have any questions. I love this kind of question!"

Have you been able to store away some money while you've been in a CZTE area? How has that worked out for you?  Did you know all the benefits of contributing to a Roth TSP account while you're in a CZTE zone?

UPDATE:  After a lot of research and discussion, here is the situation as best as my financial expert friends and I can figure.

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