Thread: OK... I have an exempt balance...which fund is the money in?

It seems you were in a "tax free" zone, which I am currenlty in. Your $$$ is where you originally had it allocated to. So, don't worry about that. What"tax exempt balance"simply means is that whatever your tax exempt balance is, that is the balancewhich will not be taxed once you withdraw from the TSP because you were in a tax free zoneat the timeyou made those particular contributions. For example, if youraccount total is$10,000 and your tax exempt balance is $2,000, you will only be taxed on $8,000.

I hope this helps. BTW, welcome to the forum!

God Bless:^

Thank you for your response, Rod. I am still a little confused though. I thought another benefit of tax-exempt contributions wasthat theyGROW tax-exempt as well.:^ For example, two guys in a "tax free" zone bothcontribute $2000.

Guy 1 putshis $2,000in the G fundand it is worth $4,500 when he retires. He gets to withdraw all $4,500 tax exempt.

Guy 2 puts his $2,000 in the S fund and it is worth $16,000when he retires. He gets to withdraw all $16,000 tax exempt.

So it matters where those tax-exempt contributions are invested. BUT how do you tell where the money is?

When I made the contributions in 2002-2003, I allocated 50% in the S fund and 50% in the I fund. I was already making contributions in those funds prior to entering a "tax free" zone, so I have a mix of both tax exempt contributions and tax deferred contributions in those funds. As the S and I funds have run Up I have been skimming some of those profits into the G fund.

NOW this is where it gets confusing. So I took some money out of the S and I funds and placed it in the G fund. Did I move "tax exempt contributions" OR "tax deferred contributions" OR a mixture of both? If both, how much of each?:%

WHERE is my "tax exempt" money? :#

Hope this helps. The way I read it here is nothinghappens until you start withdrawing it and then the part that is "tax free"would bethose contributions you made while in the zone, what you earned on those contributions "is" taxable, although deferred. So in your example theguys would have to pay taxes on everything over their $2000 contribs. The following is right off the TSP website. See "red" print. When you serve in a combat zone or qualified hazardous duty area, most compensation you receive for active service is excluded from your gross income on your IRS Form W-2, regardless of whether you contribute any of it to the TSP. All of an enlisted member's and warrant officer's compensation is eligible for the combat zone tax exclusion. Officers, however, may exclude no more than the highest rate of basic pay paid to each service's senior enlisted member (and any hostile fire/imminent danger pay received by the officer).

In some cases, members who are serving outside a combat zone or qualified hazardous duty area but are directly supporting operations in such a zone or area can also qualify for the combat zone tax exclusion.

You receive no direct tax benefit from contributing pay to the TSP which has been excluded from gross income; however, the earnings on those contributions are tax-deferred.

When you make a withdrawal, money is taken from your total account balance proportionally from your taxable funds and your tax-exempt funds. The amount attributable to tax-exempt contributions will not be taxable.

Your service will notify the TSP whenever your contributions are from tax-exempt money. The TSP will then account for your tax-exempt contributions and, as indicated above, will ensure that these amounts are not reported to the IRS as taxable income. Consequently, those contributions will not be subject to taxation when you withdraw them. Your quarterly participant statement will show your tax-exempt balance separately.

Thanks Walli1 and Rod. It appears I truely misunderstood the benefits (or lack there of)of my tax-exempt contributions to the TSP. The TSP is still a great thing...just not as great as a thought. :'