I’ve noticed more than a few questions about the difference between tax-exempt and tax-deferred TSP contributions. It’s a good question!
Tax-deferred contributions are regular TSP contributions. You do not pay income taxes on your regular TSP contributions, so your tax bill is lower for that year. When you take the money out of your TSP account (usually during retirement), you will pay the income tax on the amount that your contributed, plus all of the earnings on that amount.
Tax-exempt contributions are contributions made with tax-exempt money. If you are in a designated tax-exempt combat zone, and are receiving tax-free pay, you can contribute that amount to your TSP account and you will never owe income taxes on that money. However, the earnings on your tax-exempt contributions are still taxable when you take the money out of the account.
Your LES (Leave and Earnings Statement) will show the contribution amounts that are tax-deferred and tax-exempt.
If you have any other questions, or more to add to the conversation, please comment.