TSP and CZTE Rules Clarified

Note:  I am not an IRS agent, a TSP representative, nor an accountant.  None of this should be considered professional advice.  Please learn about this if it applies to you!

A few weeks ago, I wrote about contributions to a Thrift Savings Plan (TSP) account while serving in an area designated as Combat Zone Tax Exempt (CZTE).  While the original information was correct, it was also incomplete.  After much  intense discussion with readers, my accountant, and other military financial experts, we’ve clarified an important factor in a service member’s ability to use the annual addition limit, which lets service members in CZTE contribute more than the usual elective deferral limit.  These math shenanigans only apply if you are going to be in a CZTE and you expect to be able to contribute more than $18,000 to your TSP account in 2015 (with adjusted limits for future years.)

Two Limits

For review, there are two limits placed on contributions to TSP accounts:  the elective deferral limit, which is the regular limit on contributions, and the annual additional limit, which is a higher limit that can be used for contributions that come from non-taxable sources.

The elective deferral limit, $18,000 for 2015, is how much money an individual can contribute to their TSP account under usual circumstances.  This does not include any employer match (not available to military) or any other unusual situations.

If an individual has contributions from other sources, such as an employer match, the total amount put into the TSP account is limited by the annual addition limit.  This amount is  $53,000 for 2015.  This additional limit specifically includes contributions made from CZTE money, with some rules.

Combat Zone Contributions

The part that is confusing is the way that the elective deferral limit is calculated if you have both Roth and traditional contributions.  In my earlier explanation, I stated that the Roth contribution limit for the year is $18,000.  That’s not clear enough, and doesn’t explain the full picture.

Roth contributions, regardless of their source (CZTE or taxable income) are always counted towards the elective deferral limit.  Traditional TSP contributions made with taxable money are also counted toward the elective deferral limit.  This means that you have to be very strategic if you will be in a CZTE and you hope to take advantage of the opportunity to contribute beyond the elective deferral limit.  Which account receives money at which point in the year is important towards maximizing your overall contributions.

On the surface, it would seem that if you were trying to exceed the elective deferral limit, you would want to make traditional contributions with your taxable income, to take advantage of the tax benefits of taxable traditional TSP contributions.  It also seems as if you would want to make your Roth contributions from CZTE money, making it tax-free in AND tax-free out.  However, because any Roth contribution is considered an elective deferral, none of “what makes sense” is right at all.

Planning Your Contributions

If you are going to be in a CZTE for a portion of the year, and you hope to make contributions to your TSP that exceed the elective deferral limit, then you want to do the math this way:

Calculate how much you can afford to contribute to your TSP account for each month that you will be in a CZTE and each month that you will not be CZTE.

If your total contributions do not exceed the elective deferral limit, no problem.  You can make all your contributions to a Roth TSP account.  You don’t even need to read this post. Goodie for you!

If your total contribution exceed the elective deferral limit, then you need to strategize.  Keep in mind that once you hit the elective deferral limit (with either taxable traditional TSP contributions, or Roth contributions made with any type of income), you may only make future contributions IF you are in a CZTE and those contributions must be into a traditional TSP account.

The easy way is to put all CZTE contributions into a traditional TSP, and put the rest of the year into a Roth.  However, if you’re not going to max out the elective deferral limit with the Roth contributions put in during the time while you are NOT in a CZTE area, you can gain a little extra benefit by putting some of your CZTE into a Roth.  The amount that you can put into a Roth while CZTE is the total elective deferral limit for the year ($18,000 for 2015) minus the amount that you will contribute to either TSP account while NOT CZTE.

For example, if you are going to be CZTE for the entire year, you can put $18,000 into a Roth TSP account, and any additional amount up to $53,000 into a traditional TSP account.

Another example is my husband’s contributions in 2013.  He was CZTE in January, during which he contributed to a traditional TSP account.  For the rest of the year, he contributed the maximum elective deferral amount to his Roth TSP account, and that was all within the guidelines.  (And I didn’t even understand the rules then, we were just very lucky.)

I completely understand that is complicated.  Truly, it gives me a headache.  But if you’re going to try to take advantage of the awesome opportunity to dramatically increase your TSP contributions while deployed to a CZTE area, you have to understand the rules to make it happen.

I’m sure there are questions.  Fire away!

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.