Thread: Deployment advice??

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.

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,

Originally Posted by 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,

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.

EW,

Thanks for the info; I stand corrected. It seems counter-intuitive to me that pre-tax money would be part of a basis calculation if it was from combat pay but not from simple withholding, but it serves me right for trusting my intuition.

You are correct on the Roth issue; there is no military exception and your are limited by your taxable income. In practice, however, it is seldom an issue unless the servicemember is deployed for an entire calendar year. In my last deployment, I arrived in country in mid-February, and stayed for 13 months, so I had more than $4,000 in taxable income from January. Now if I could figure out how to get my cat listed as a dependent on my tax return, all would be well....

Regards,

Originally Posted by Stepanwolf

EW,

Now if I could figure out how to get my cat listed as a dependent on my tax return, all would be well....

Regards,

You can't do it in the 1040 but you can definitely put it in your W4. BTW, the W4 doesn't ask for name and social security of your cat...;-)

Pyriel

In case the IRS is monitoring this forum, I was kidding about my cat. Also, in 2005 the wet bar in my basement was a business expense and I am blind, as shown by mt piir typiong........

Originally Posted by Stepanwolf

EW,

Thanks for the info; I stand corrected. It seems counter-intuitive to me that pre-tax money would be part of a basis calculation if it was from combat pay but not from simple withholding, but it serves me right for trusting my intuition.

You are correct on the Roth issue; there is no military exception and your are limited by your taxable income. In practice, however, it is seldom an issue unless the servicemember is deployed for an entire calendar year. In my last deployment, I arrived in country in mid-February, and stayed for 13 months, so I had more than $4,000 in taxable income from January. Now if I could figure out how to get my cat listed as a dependent on my tax return, all would be well....

Regards,

Tax wise for the year, it is not helpful for the deployed soldiers to max out on the 44k allowable ceiling. However, if we are looking for tax deferred growth then it makes sense to put in 44k. Since the individual is deployed, there are no other qualified tax deferred retirement fund that he/she can set up. ROTH is out of the question if the individual deployed in Jan and stayed in theater for 12 month. Now, if they deployed later within the year, the ROTH will not help to lower down anyone's taxes for the year. 4k for ROTH vs. being able to sock away 44k to me is a good trade off, especially if we are to factor in compounding interest for long term growth.

Now, lets talk about low tax mutual fund. If you are on this board and playing your own TSP, how long do you think you'll be able to keep your hands off from that low tax mutual fund and lets say you have 30 years for retirement? Can you imagine jumping around like the way we do it here in Tom's site? How would you factor in other expenses associated with that?

Originally Posted by pyriel

Delpoyment Advice?

Keep your head down.

And keep away from windows and doors. Especially if you see any vehicles headed your way.

Keep your body armor on, keep your weapon clean. Keep your helmet chin strap on. And drink LOTS of water. All the time.

Originally Posted by pyriel

ROTH is out of the question if the individual deployed in Jan and stayed in theater for 12 month.

Pyriel,
I must disagree. I deployed in January 2005 and returned in Jan 2006. In fact I got back to Camp LeJeune 361 days after I left. But that entire month of Jan 2005 was tax exempt.

I had maxed out my Roth IRA that I opened while deployed before I read about the need for taxable income in order to contribute to a Roth IRA.

Thank goodness that I was renting my house while I was deployed. The rental income more than covered the taxable income for my Roth IRA, thus saving me from a major issue.

Originally Posted by James

Pyriel,
I must disagree. I deployed in January 2005 and returned in Jan 2006. In fact I got back to Camp LeJeune 361 days after I left. But that entire month of Jan 2005 was tax exempt.

I had maxed out my Roth IRA that I opened while deployed before I read about the need for taxable income in order to contribute to a Roth IRA.

Thank goodness that I was renting my house while I was deployed. The rental income more than covered the taxable income for my Roth IRA, thus saving me from a major issue.

Hmmm... I believe we might have a discrepancy here. rental income may not be used as income for ROTH IRA. Rental income falls under the business expense and must be reported with the 1040. I believe you need to use either Schedule E or C? The only caveat to that is for the rental providing income to you by taking out federal taxes, state taxes, FICA, medicate etc.... This means that the business must report this to the IRS. This will then become the taxable income that qualifies for the ROTH IRA.

Of course i'm sure that you are just testing me and what you just mentioned earlier is actually hypothetical. Good luck...

Pyriel

Tax-free combat pay can be placed in a ROTH IRA.

THE FOLLOWING PRESS RELEASE CAN BE FOUND AT: http://www.irs.gov/newsroom/article/...161175,00.html

New Law Expands IRA Options for Military; Many Can Still Contribute for 2004 and 2005

IR-2006-129, Aug. 18, 2006

WASHINGTON — Members of the military serving in Iraq, Afghanistan and other combat zone localities can now put money into an individual retirement account, even if they received tax-free combat pay, according to the Internal Revenue Service.

Under the Heroes Earned Retirement Opportunities (HERO) Act, signed into law on Memorial Day, taxpayers can now count tax-free combat pay when determining whether they qualify to contribute to either a Roth or traditional IRA. Before this change, members of the military whose earnings came entirely from tax-free combat pay were generally barred from using IRAs to save for retirement.

“The HERO act is one more way to let our fighting forces in combat areas know that we support them,” said IRS Commissioner Mark W. Everson. “This is a good way for people serving in combat zones to save more of their earnings for retirement.”

In addition, the HERO Act allows military personnel who received tax-free combat pay in either 2004 or 2005 to go back and make IRA contributions for those years. Eligible military members will have extra time, until May 28, 2009, to make these special back-year contributions.

For those under the age of 50, the IRA contribution limit was $3,000 for 2004 and $4,000 for 2005. For those 50 and over, the limit was $3,500 for 2004 and $4,500 for 2005.

Taxpayers choosing to put money into a Roth IRA don’t need to report these contributions on their individual tax return. Roth contributions are not deductible, but distributions, usually after retirement, are normally tax-free. Income limits and other special rules apply.

On the other hand, contributions to a traditional IRA are often, though not always, deductible, and distributions are generally taxable.

Deductible or not, contributions to a traditional IRA must be reported on the return for the year made. Deductible contributions are claimed on Form 1040, 1040A or 1040NR. Nondeductible contributions are reported on Form 8606, which is normally attached to one of these individual return Forms.

If a return has already been filed for a particular year, contributions should be reported on an amended return, Form 1040X. Depending upon the circumstances, military personnel who choose to put money into a traditional IRA for 2004 or 2005 may qualify for additional tax refunds.

For those planning ahead, the IRA contribution limit for 2006 is $4,000 for those under age 50 and $5,000 for those 50 and over.