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Roth TSP in a Combat Zone: Almost a "No-Brainer"

There aren't many financial planning questions that I don't answer with "It Depends".  But for a Senior Military Officer, I can't think of many situations where contributing to  Roth TSP while deployed to a combat zone doesn't make sense.  Here is why:

As the readers of this blog know, income earned in a combat zone (or a portion thereof) is excluded for income tax purposes.  This allows a military member deployed to a combat zone to divert money to a Roth and NEVER pay income tax on the contribution or the earnings on it.  So, if you are planning to deploy a combat zone you might want to suspend contributions to your retirement funds and save up to build a cushion.  Then once you get to the combat zone, you dump as much money into the Roth TSP as you can.  But there are limits.

First, you can only contribute the "basic" $17,500 to Roth TSP while in the combat zone.  You can't make catch-up contributions to the Roth TSP.  You may have also heard about a $51,000 limit for contributions in a combat zone.  Even with that you can still only contribute $17,500 to a Roth TSP (2013 numbers).  But you can do more...

If you max out your TSP contributions you can still contribute to a Roth IRA (if you meet income limits) and if you still have money left over, you could contribute to a spousal Roth IRA (these contributions don't have to be made while you are in the combat zone).  Since money is fungible (I always wanted to use that word in a sentence), your remaining tax-free income essentially goes to the Roth accounts.

Finally, if you still have funds available you could make tax exempt contributions to your traditional TSP until you reach the combined limit of $51,000.

One word of warning.  While I said this is pretty close to a no-brainer, remember this is retirement money that you can't get to without penalty until you reach age 59 1/2 (or earlier under specific conditions).  You need to be in for the long haul.

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