Update: The importance of funding a Roth IRA while in a tax-exempt combat zone has change since the introduction of the Roth TSP option. The Roth TSP has different rules than a Roth IRA, particularly when it comes to combat zone contributions. Please be sure that you understand carefully before making any decisions.
Everyone always has questions about TSP (Thrift Savings Plan) and IRAs (Individual Retirement Accounts), and they are important questions. We all need to be saving for retirement, even if we are counting on Social Security and a military pension.
Most of us are not able to contribute the maximum to our TSP and IRA accounts every year, so we have to decide which account is a better choice for our particular situation. There are lots of things to consider and lots of ways to evaluate the information, but one fact is clear: if you are in a tax-exempt combat zone, then you need to be contributing to a Roth IRA.
While you are in a tax-exempt combat zone, that income is not taxed as you earn it. Therefore, depending on your family’s overall tax situation, you will have a lower, or even no, federal tax bill for that year. Therefore, you will pay less or no federal income taxes on the money going into the Roth IRA. Roth IRAs grow tax free, and withdrawals from a Roth IRA are not taxed. It is a win-win-win situation.
If you are deployed to a tax-exempt combat zone, be sure to contribute some of that money to a Roth IRA account. Even a small investment will continue to pay off for years to come.