Ask The Experts: Money Matters

By Mike Miles

Combat pay, TSP and 401(k)

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Q. I am retiring from active duty in about six months. Almost one-third of my Thrift Savings Plan balance is from combat-zone tax-exempt contributions. I am looking to possibly roll my TSP into my next employer’s 401(k). What happens to the CZTE amount? How do I keep this amount tax exempt, and what are my options for this amount at retirement?

A. Given that the TSP is the best retirement investment environment you will find, I urge you to consider maintaining your TSP account and maximizing its use for as long as possible. Unless there are some extraordinary circumstances, you will probably be better off maintaining your TSP account and then transferring your 401(k) balance into it later, after you’ve left your private-sector job.

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Combat-zone tax-exempt contributions

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Q. I have both a civilian and military Thrift Savings Plan account because I was mobilized for part of 2011-12. Because I was in a combat zone, much of my income was tax exempt (CZTE). The military allowed me to contribute that tax-exempt income into my TSP. It is not a tax deduction because the income wasn’t taxable in the first place.

However, they also made contributions from my taxable income. I thought it was all from my CZTE. When I returned to my civilian job, I began to contribute and maxed out my contributions, not knowing about the earlier tax-deductible contributions.

Obviously, I over-contributed and just paid the income tax on the “overage.” But that overage is still in the TSP account.

Military: $7,450
CZTE: $13,464
Civilian: $17,540
Catch-up: $5,474 (Roth)

1. How is that taxable (and taxed) overpayment treated within TSP?
2. Can I combine my military and civilian accounts?
3. If combined, can I move the CZTE money into my Roth TSP?
4. Can I move the “overage” that I have now paid taxes on into the Roth, as well?

Both of the amounts I want to move into the Roth have been taxed or were tax-exempt when earned.

A. The usual limits do not apply to TSP contributions from CZTE pay; they only apply to contributions from taxable basic pay, incentive pay, special pay and bonus pay. The Annual Additions Limit under IRC 415c does apply, however, and it limits the total contributions from all sources to $51,000 for 2013. My guess is that the money was just rearranged in the TSP to fall under the applicable limits for the various types and that you do not, in fact, have excess contributions in your accounts. You may combine your military and civilian accounts as long as you are separated from service covering at least one of the accounts and there are no CTZE contributions left in the military account. Those must be withdrawn first, or they money will be distributed to you when your request to combine the accounts is processed. The CTZE money in the traditional TSP account cannot be transferred to the Roth TSP.

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Military service and Roth TSP

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Q. I am 25 and now have the option to contribute to a Roth TSP. I have four years left on my military contract before I have the opportunity to get out. Seeing that my future with the military is somewhat questionable, would the Roth TSP still be a favorable option?

A. Except for tax-free pay earned in a combat zone, I don’t see any reason to expect that contributions to the Roth TSP are somehow better than contributions to the traditional TSP. In fact, I recommend that you favor the traditional TSP over the Roth TSP unless your circumstances make the Roth contribution more attractive.

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TSP loan for retired active duty

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Q. I retired from active duty in December 2011. I accepted an appointment to a government service position in October 2011 and established a FERS Thrift Savings Plan account. I did not move any of my TSP account balance accumulated during my time on active duty into my FERS TSP account, so I currently have two accounts. Am I eligible to take out a loan against the TSP account balance still residing in my [previously] active-duty account? If not, can I transfer all or part of my [previously] active-duty account into my FERS TSP account with the goal of taking out a loan against my FERS TSP balance?

A. You must be in pay status to request a loan. Since you are no longer in pay status with respect to your uniformed services account, you cannot request a loan from your uniformed services account.

You may transfer your active-duty TSP account to your FERS TSP account subject to the following rules:

(a) An account balance can be combined with another once TSP is informed (by the participant’s employing agency) that the participant has separated from government service.

(b) Tax-exempt contributions may not be transferred from a uniformed services TSP account to a civilian TSP account.

(c) A traditional balance and a Roth balance cannot be combined.

(d) Funds transferred to the gaining account will be allocated among the TSP Funds according to the contribution allocation in effect for the account into which the funds are transferred.

(e) Funds transferred to the gaining account will be treated as employee contributions and otherwise invested as described at 5 CFR Part 1600.

(f) A uniformed service member must obtain the consent of his or her spouse before combining a uniformed services TSP account balance with a civilian account that is not subject to FERS spousal rights. A request for an exception to the spousal consent requirement will be evaluated under the rules explained in 5 CFR part 1650.

(g) Before the accounts can be combined, any outstanding loans from the losing account must be closed as described in 5 CFR Part 1655.

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New Jersey TSP tax questions? Please resend

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Q: I have tried to solicit your opinion several times concerning the taxation of Thrift Savings Plan distributions to individuals who had their contributions taxed going into TSP (because New Jersey doesn’t recognize the tax-exempt status of TSP), but have never received any response.

A: I apologize if you did not receive the response you were looking for. I was not aware that I had overlooked any questions. Please submit your question again and I will respond promptly.

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