From The Mailbag: Roth TSP and CZTE

UPDATE:  After a lot of research and discussion, here is the situation as best as my financial expert friends and I can figure.

Adding to retirement accounts while in an area designated as Combat Zone Tax Exempt (CZTE) is an amazing way to beef up your accounts with tax-deferred and tax-free money.

Here’s a recent question:

“Hey Kate. I’m just learning about the Roth TSP benefits in a combat zone.  Is it based on a calendar year?  So, if I only have a few pay periods left in the year, then I should be putting in as much as I can in for the rest of the year ?  I’m a single person and I don’t really have any expenses, so I can afford to save a lot.”

I love this question, I just wish that it had come sooner in the year!  Here’s my answer:

“You are absolutely right that you should take the maximum advantage of all the retirement and savings benefits while you are in a Combat Zone Tax Exempt (CZTE) area. There are a couple of rules to deal with here, and it can get confusing.

You are also correct that  TSP contributions are based on a calendar year. If you make the change today, you should be able to get it in for the December pay period. Because all military pay is calculated on a monthly basis (except for certain allowances), I don’t think there is any way to affect a change for November.

Then, there is the issue of maximum contributions. Without knowing what you’ve been contributing all year, I can’t do the math. There are three different contribution limits that apply to your situation: the maximum regular contribution limit (called the elective deferral limit) of $17,500 for 2014. This is the most you are able to contribute to your TSP from regular, non-CZTE income. There is also the overall limit to total contributions that can be made, $52,000 for 2014. I’m guessing that is not an issue because it is December already :) The last limit is that you can also only contribute a maximum of $17,500 to a Roth TSP account…if your total contributions are more than this, then you have to put any amount over $17,500 into a traditional TSP account.

If you are aged 50 or over, you can add $5,500 to each of the numbers listed above.

Also, remember that you can contribute up to $5,500 to a Roth Individual Retirement Arrangement (IRA). Tax-free in because of the CZTE, tax-free out because it is a Roth IRA. It is a beautiful thing.

Lastly, don’t forget the Savings Deposit Account available because you are in a CZTE. You can only put $10,000 in, but it earns 10% for the entire time that you are CZTE plus 90 days post CZTE. That interest is taxable, but it is still more than you’re likely making anywhere else.

I hope that helps, and let me know if you have any questions. I love this kind of question!”

Have you been able to store away some money while you’ve been in a CZTE area? How has that worked out for you?  Did you know all the benefits of contributing to a Roth TSP account while you’re in a CZTE zone?

UPDATE:  After a lot of research and discussion, here is the situation as best as my financial expert friends and I can figure.

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

    So we just went through this and just to clarify,” he last limit is that you can also only contribute a maximum of $17,500 to a Roth TSP account…if your total contributions are more than this, then you have to put any amount over $17,500 into a traditional TSP account.”

    If he has already put 17,500 in his regular TSP, he’s not eligible to put a dime of CZTE into the Roth option, it all has to go into the regular TSP, it goes in tax free, can be taken out without paying taxes, but unlike the roth option all the gains on that money are taxed. If he’s only contributed 1600 to the regular, he could put in 1500 to the Roth next month, but that is all.

    • Kate

      Guest, can you share what time of year your husband was in the CZTE. A fellow military financial blogger on Facebook shared that, in his experience, you’re fine if you are CZTE in the second half of the year. But if you are CZTE in the first half of the year, and you hit the $17,500 mark, and come out of the CZTE, you can’t contribute any more. I’m trying to find out the details of how this works, because it doesn’t seem right that the rules should be different depending on when you are CZTE.

      Thanks for sharing your experience and I’ll see what I can find out.

      • guest

        He was in from June to October, had contributed 8484 pre tax before leaving, while deployed he could only contribute about 9k to the Roth option. If we wanted to contribute anything above that, it would have to go into the pre tax account (which to us doesn’t make sense since the gains will be taxed, I’d rather put that money in an index fund). And you are correct in that he cannot contribute ANYTHING in Nov-Dec because he has hit the yearly limit and you can apparently only contribute above 17500 while in a CTZE area, once you are out you can’t contribute if you are at 17.5.

        I really wish we had known all this BEFORE he left because we thought he could contribute 17.5 to the Roth while deployed…aaaand now DFAS has “lost” 8 grand, they’ve been holding it since September when he hit the 17.5 cap.

        • guest

          PS it’s taken the two of us a month just to get a straight answer on the above, even the finance people were scratching their heads for a while.

        • Kate

          When you say “pre-tax,” do you mean traditional contributions? If so, here’s what I *think* is happening.

          It appears based upon several not-so-clear TSP documents, that I am still trying to verify, that the elective deferral limit ($17,500 for 2014) applies to the combined total of Roth contributions AND taxable traditional contributions. Any contributions after the total amount of those two type of contributions exceeds the elective deferral limit must be made with CZTE income into traditional contributions.

          Does that make sense?

          Here is the link: https://www.tsp.gov/PDF/bulletins/11-u-4.pdf

          This bulletin also gives the directions for recharacterizing mistakenly applied contributions. Do you think it’s possible that TSP is holding that money awaiting instructions to put it into a traditional account?

          I hate that we’re having this conversation via comment – feel free to email me at katekashman@usa.com if you want to take this private!

          • guest

            Yea that’s pretty much what they pointed us towards, the contributions are “supposed” to be coming back to us since I’d rather the money be taxed at capital gains rates vs regular income…it’s just a matter of when now. His finance office is handling it at the moment and they are usually pretty spot on but we all know just how slow the government can be when it comes to reimbursement.

            I just wish that while deployed he could have gone over the limit up to 17.5 in the Roth option. We explained to finance what we wanted to do and no one seemed to know that it was impossible.

          • T.J

            All correct above. I had 17500 in before deploying, say 8750 tax deferred and 8750 Roth. Deployed for 3 months. Contribution allocations were set up well in advance of deployment. LES showed 4k a month going to roth while i was deployed. Once i returned from deployment, the money all came back to me in my regular pay…that sucked. Wish it had been clear since i was trying to max the 52k i missed out hugely.

    • Kate

      Guest, I’m talking with other experts on this issue, plus my accountant, to try to sort out what happened with your situation. We think we’ve got it worked out but I want to consult one or two more resources. Thanks for bringing up this point so that we can make sure it is clarified for everyone.

      • guest

        Awesome! yea he’s in the kind of unit that he’s no longer in MyPay, so he couldn’t even deal with it until he came home and went to the finance people…and the 4 of them in that office had no clue, apparently no one really tries to max the roth and go over while in an exclusion zone because the deployments are short due to the nature of their work and the capital required over the short term isn’t feasible for most of the guys in the unit since they are sole income earner families.

  • Chris

    Kate, nice article about CZTE! Just wanted to clear two things up for your fellow readers though. The maximum contribution limits for a Roth IRA (and traditional IRA, for that matter) are $5500 now. And the benefits of the SDP last for up to 90 days once you’ve returned from a deployment.

    • Kate

      Chris, thanks for those catches. I have corrected it in the original copy. This CZTE makes my brain so full, I can’t think at all. I am thankful for my readers, who always kindly straighten me out!

  • John Willcockson

    Great article. To clarify, elective deferral limit (EDL) of 17,500 (18,000 for 2015) applies to non-CZTE income that service member (SM) contributes to TSP. If you want to contribute more than EDL of 17,500 those “above the limit” contributions must go to the traditional TSP sub-acct …you cannot put $s in excess of the EDL into the Roth sub-acct. If you have already reached the EDL for this year your contributions are suspended — you are locked out — and excess contributions are returned to your pay acct. Therefore if you want to exceed the EDL because you are (or will be) in the combat zone you need to plan out your contribution strategy. Remember that at least 1% of your pay needs to go to your traditional TSP sub-acct; if base pay is $4000/mo, that 1% = $40/mo, or $480/yr. While NOT deployed you can contribute to your Roth sub-acct. When getting ready to deploy you need to switch your TSP contributions to your Traditional sub-acct. If you make the switch (say, using MyPay) before the mid-month cutoff, your switch to traditional should be effective the first week of the following month …and cause your TSP contributions which occur at the end of that following month to go to your traditional sub-acct. Confused? Example: make the switch on MyPay by 12 Oct and your pay record should reflect your change by 2 Nov, your end of Nov contribution then goes to your traditional sub-acct, and your TSP statement shows that contribution coming into your traditional sub-acct around 3 Dec.

    If you are deployed to a combat zone early in the year you should be able to make “above the limit” contributions to your traditional TSP sub-acct, and still be able to make deferred TSP contributions after you return from deployment …as long as you have not yet hit the EDL. Since Roth contributions always count toward the EDL, even when you in the combat zone, you can easily hit the EDL too early by increasing your monthly TSP contributions but leaving them set to go to your Roth sub-acct.

    Also, even if you do all the right things, you could still see your TSP contributions go to the wrong place. When I was in uniform I had all hostIle fire pay from a 4-month deployment drop into my pay acct the month after re-deployment. I had 100% of HFP going to TSP, which maxed me out for the year: the pay system did not automatically code the late HFP as tax-exempt. It took a senior pay officer at my home installation, working with an expert at DFAS, to straighten out my pay record and manually deposit my HFP into my TSP acct. Most reps at the local pay office are not trained to handle these types of issues, so you need to ask that they elevate your issue to a DFAS expert. Good luck

  • JDC

    Here is a thought: Usually you can make tax changes in the same year in an account without penalties. For example, if you contribute an excess amount to an IRA, you can remove it before the end of the tax year and have no tax penalties.

    Perhaps the “guest” could have pulled that $8484 from the regular TSP, made the combat contribution of $17.5k to the ROTH TSP in the CZTE and if they wanted, redeposit the $8484 into a regular TSP acct when he returned.

    Not 100% sure this would work as I’m no expert on removing TSP funds once deposited.

    However, I do know that wealthy folks are using creative accounting to get around IRA rules, putting $ into regular IRA’s then re-characterizing them into Roth IRA’s at the same time even though they are well beyond the income limits to contribute to ROTH IRA’s.

    • guest

      hhmmmm that really is an interesting idea, I never thought of doing an in fund transfer while in a tax free zone.

      He still wouldn’t have been able to contribute when he came home because the 17.5 cap would have been reached but it possibly could have moved that other 8 grand to roth, tax free. Kate, do you know if this is possible? That would be a TSP hack worth sharing with the guys he works with if so.

      JDC what you are referring to in the last paragraph is a back door roth, we do that to contribute to our standard roth IRAs in years our (mine) income puts us above the phase out limit. Your can no longer be employed by the company that issued the original 401k/IRA, it has to be rolled to a traditional IRA, then you can roll X portion a year to the Roth

  • John Willcockson

    If you are deployed to a combat zone early in the year you should be able to make “above the limit” contributions to your traditional TSP sub-acct, and still be able to make deferred TSP contributions after you return from deployment …as long as you have not yet hit the EDL. Since Roth contributions always count toward the EDL, even when you in the combat zone, you can easily hit the EDL too early by increasing your monthly TSP contributions but leaving them set to go to your Roth sub-acct.

    • Kate

      This is absolutely do-able, my husband did it in 2013. His early in the year contributions were traditional and CZTE, and his later contributions were not CZTE and were put into the Roth. He went over the EDL and his contributions were NOT returned. Even though it was inadvertant on our part, that ended up being one of the keys that we all used to figure out how it can be done.

      • John Willcockson

        Congrats! I’m glad you were able to sock so much away for the future. There’s just nothing that beats TSP. Good luck!

  • John Willcockson

    Also, even if you do all the right things, you could still see your TSP contributions go to the wrong place. When I was in uniform I had all hostile fire pay from a 4-month deployment drop into my pay acct the month after re-deployment. I had 100% of HFP going to TSP, which maxed me out for the year: the pay system did not automatically code the late HFP as tax-exempt. It took a senior pay officer at my home installation, working with an expert at DFAS, to straighten out my pay record and manually deposit my HFP into my TSP acct. Most reps at the local pay office are not trained to handle these types of issues, so you need to ask that they elevate your issue to a DFAS expert. Good luck

  • Pete

    I was excited to see this thread, but now I’m even more confused than before. So if one deploys in the second half of the year, wouldn’t it then make the most sense just to wait to contribute to TSP until deployment, then max out the Roth TSP to the Elective Deferral Limit with CZTE dollars, and then stop? It doesn’t seem to make sense to contribute to traditional TSP with tax-exempt dollars, since earnings are taxed at your marginal tax rate (like “guest” above said). What am I missing?

    • John Willcockson

      When you reach 59 & 1/2 and begin withdrawing money from your traditional TSP acct, a portion of each withdrawal will be tax-exempt, and a portion will be taxable. The total of all your tax-exempt TSP contributions stays tax-free when withdrawn. However, all earnings inside the traditional acct, and all tax-deferred contributions when you are not in the combat zone, are taxed when you withdraw them in retirement. The tax-free portion of each withdrawal is the same portion represented by the tax-exempt balance in your traditional TSP acct. For example, a retiree has a traditional TSP acct with $100,000, of which $15,000 is the tax-exempt balance when our retiree makes a withdrawal: 15% of the withdrawal is tax-exempt, and 85% is taxable. Keep in mind the taxes are incurred at withdrawal, which is usually in retirement, maybe decades after he contributed the money to his TSP acct. There were no taxes in between contribution and withdrawal. A couple decades of tax free growth can do wonderful things. Now, if you max out contributions to your Roth TSP acct, that will be $18,000 in 2015, a big chunk of money for most people. But if you want to put even MORE in your TSP acct (because CZTE lets you contribute more than $50,000 to TSP for the year), contributions exceeding $18,000 in one year must go into your traditional (tax-deferred) sub acct. When the total of your tax-deferred (non-combat) and Roth contributions hits $18,000 for the year you will be locked out from making further TSP contributions …even if you want to make contributions only from CZTE tax-exempt pay. So try not too max out your Roth acct until December. For example: in April you are notified that you will be deployed for 10 montgs starting 1 July. You had been contributing $1400/month to your Roth TSP acct (1% of base pay had also been going to your traditional acct). You talk with your spouse and decide you will boost your TSP contributions to $2100/month during your deployment). If all your contributions go to your Roth acct, however, you will hit the annual $18,000 contribution limit on November, and be unable to make a contribution in December. You could instead change your TSP contribution strategy so that $1500 or less goes to your Roth sub-acct each month, and the rest of your $2100 monthly target goes to your traditional sub-acct. In this way the total of your Roth and tax-deferred (non-combat) contributions would not exceed $18,000 any time that year, and your traditional TSP sub-acct would carry the excess (CZTE) contributions as a tax-exempt balance. Just remember to reset your TSP contribution strategy when you redeploy home …and double check that the changes actually occur inyour pay system: put a reminder in your calendar! Hope this helps.

      • Rob M

        Thank you for the detailed info John. I’m in this exact situation…deploying in July and wanted to maximize my TSP contributions for the year.

    • Kate

      If I understand your question, what you’re missing is the ability to contribute more than the elective deferral limit to your TSP account. If you can find the money, time in a CZTE allows you to contribute nearly 3x as much to your TSP account in one calendar year. Sure, it’s a traditional contribution, which is less than ideal, but it’s still tax-advantaged and a way to sock away a lot more cash.

  • John W

    Good luck on your deployment; hope you and your team all stay safe. For TSP remember that once the total of your Roth and tax-deferred contributions hit $18,000 you will be blocked from any further TSP contributions for the year. The math can seem straight-forward: just add up your pre-deployment contributions for the year, subtract them from $18,000 and the remainder is all the more you can put into Roth TSP while you are deployed. Just remember that any changes you make in MyPay will be effective after the 1st of the next month, so the change really won’t take effect until the end of that month — that can put an entire month of contributions into a different column than you were thinking, so just be careful with the accounting. Good luck!