Tax Exempt TSP Contributions

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.

Thanks -Joe”

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!

About the Author

Kate Horrell
Kate Horrell is a military financial coach, mom of four teens, and Navy spouse. She has a background in taxes and mortgage banking, and a trove of experience helping other military families with their money. Follow her on twitter @realKateHorrell.
  • Guest

    If you are called to active duty and make tax-exempt contributions to the TSP while deployed in a designated combat zone, the sum of all of your regular tax-exempt and tax-deferred contributions to both your uniformed services and civilian TSP accounts combined (including any agency contributions made to your civilian account) cannot exceed the section 415(c) annual addition limit – $49K for 2011.

  • Jason

    If you contribute to TSP while deployed in the tax free zone, your good for the rest of the year even if you return. Example: I put in 49K between feb2010 and dec 2010. I returned in feb 2011 and have put in over 30K so far between jan 2011 and april 2011. I can put in an additional 19K between now and dec2011. this was explained to me by the head of our finance at ft. bragg and by two seperate phone calls to a tsp rep. you should be good…i am.

  • KateKashman

    Jason, I would double check your LES. I’m not saying that it can’t be done, I’m just saying that isn’t the way I’ve seen it.

    My husband seems to go in and out of tax-free zones on a pretty regular basis. His LES clearly allocates his TSP contributions to tax-exempt when he is tax-free, and allocates it to tax-deferred when he is not in a tax-free zone.

    I would love to learn more about this!

  • MCNB

    I got a different answer from TSP reps than Jason but I am not convinced I got the right answer. My wife will be in a tax-free zone Jan-July of 2012. I asked them what happens when she comes back if she’s over the $16,500 (normal) contribution limit…can she still contribute? I was told that she can contribute up to $49K of tax-exempt pay while in the tax-free zone, when she comes back she can only go up to the $16,500 limit of regular (pre-tax) contributions. Additionally, not all of her pay will be tax-free while deployed, and any contributions from the taxable income during deployment will count torwards the $16,500 limit after she gets back. I’m not confused, only wondering if this is the correct answer.

  • sue

    why may a military tp want to make contributions to a tsp while deployed to a combat zone

  • Sonja

    1st question: I was recently deployed for 6 months and not all of my earnings are tax excempt. Does my TSP catch up go in the tax deferred bucket or does it go in the tax excempt bucket?
    2nd question: I was told by finance that my “tax excempt accrued leave” is really not tax excempt since I maxed out my tax excempt status each month. I really do not understand this. My thoughts are that when I take my 17 /12 days of leave I should have 17 1/2 days of what SMG of the Army gets in a tax excempt status and the rest in a tax deferred status.