Today we’re talking about combat pay and the Thrift Savings Plan (TSP). I’ll be throwing around some tax terms terms, so let me take a minute to go over them.

Tax-exempt - You don’t pay any state or federal income taxes on tax-exempt pay, ever. This applies to all of the pay our enlisted and warrant officers earn in a combat zone. For commissioned officers combat pay is tax-exempt up to $107,868 for 2022, your pay above that is taxed as normal.

Pre-tax, also called tax-deferred - Contributions to Traditional TSP are pre-tax or tax deferred. Your TSP contribution is pulled from your pay first, then you pay income tax on what’s left. You DO you pay income taxes later on both contributions and on the amount your it grows when withdraw it from TSP.

After-tax - Contributions to ROTH TSP or a ROTH IRA are called post-tax, or after-tax contributions. You pay income tax on your pay first, then make contributions to ROTH accounts with what’s left. So you pay tax on all your taxable your income now. But, when you withdraw it after after age 60, your initial contributions and all the growth comes out tax free.

So let’s envision a chart about combat pay contributions to retirement accounts like Traditional TSP, ROTH TSP, and ROTH IRAs. Our chart has four columns. The 1st column lists the type of contribution, the 2nd column asks “Are my contributions taxed when earned?”, 3rd column “Are contributions taxed when withdrawn?", and 4th “Is the growth taxed when withdrawn?” No-one loves to pay taxes, so we’re looking for no answers to these tax questions.

Non-combat pay, Traditional TSP contributions - No, Yes, Yes

Non-combat pay, ROTH TSP or IRA contributions - Yes, No, No

Tax-exempt Combat pay, Traditional TSP contributions - No, No, Yes

Tax-exempt Combat pay, ROTH TSP or IRA contributions - No, No,No, This is the Triple Crown of No Taxes.

Military members deployed to a combat zone can contribute more than the normal $20,500 to their TSP, all the way up to $61,000 in 2022. The details are important. Last week we went over TSP contributions by the numbers. So if you missed it go back to Episode 76 Change TSP Contributions for all the details.

I’m going to boil down all the info from last week and this week into a strategy to get the biggest bang for your compbat pay contributions. First, make sure you have enough cash for an emergency fund, you don’t have high interest debt like credit cards. Go over your cash flow or budget and see how much you can afford contribute while you’re deployed. This money will be locked up for a long time, so don’t over extend yourself.

Alright, here’s my recommendation for your combat pay contributions.

First, contribute up to $20,500 limit into your Roth TSP or up to $27,000 if you will be 50 or older this year.

If you want to save more, next contribute up to $6,000 into a Roth IRA. Or $7,000 if 50 or older. You could also contribute to a ROTH IRA for a non-working spouse.

Want to save even more? Contribute up to another $40,500 of your tax-exempt combat pay into your Traditional TSP, $34,000 if 50 or older.

And once again, for more information on contributing to these accounts, head back to Episode 28 Meet ROTH, Episode 29 ROTH IRA, and Episode 30 To ROTH or Not to ROTH, and last week’s Episode 76 Change TSP Contributions.