The U.S. Armed Forces Blended Retirement System

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cb7893

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DS, Army 2Lt (commissioned May 2015, AD end of Sept), sent this to me for comment/opinion/advice:

http://the-military-guide.com/wp-co...Blended-military-retirement-graphic-color.pdf

So now, I'm asking for the same.

My advice was simple--do your best at your job, contribute the max, worry about which retirement plan to use on about Dec 1, 2017. He is single, no children, no debt, soon to begin overseas deployment.

Did I read right that the DoD match starts at the beginning of the third year of service?

I am most curious about questions of pre-tax vs. after tax contributions. DS will be in a combat zone, therefore base pay will be tax free. I have read different schools of thought about when to or not to contribute pre-tax dollars to tax deferred savings accounts. Some say contribute nothing to a tax deferred account unless there is a matching contribution.

Let's please not turn this into a discussion about what is or isn't fair for those service members joining after Jan 1, 2018.
 
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Personally I would chose the blended retirement system as I would end up with something regardless of the vagaries if the service. Even if you intend to serve 20, you may not be able to.

If you do make 20 years then there is icing on the cake (assuming I read this all correctly)
 
cb7893 said:
Did I read right that the DoD match starts at the beginning of the third year of service?
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That is correct. The 1% auto contribution starts after 60 days, but the matching contribution does not start until the beginning of your third year, providing that you are contributing at least 1% of your base pay. If you do not contribute at least 1%, you do not get the matching but you would still get the 1% auto contribution.

Stealth_81
 
cb7893 said:
I am most curious about questions of pre-tax vs. after tax contributions. DS will be in a combat zone, therefore base pay will be tax free. I have read different schools of thought about when to or not to contribute pre-tax dollars to tax deferred savings accounts. Some say contribute nothing to a tax deferred account unless there is a matching contribution.
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My personal opinion is that the above advice is irresponsible. It's not simple. First, any saving for retirement is better than not saving. Based on what an individual makes, there are different tax implication.

First, contributing pre-tax dollars to tax deferred savings accounts is a method of reducing your taxes and paying it later. Simple example is if you are making $60,000 now, contribute $6000 to a tax deferred saving accounts, you only pay taxes on $54000. When you withdraw money from your tax deferred account, you will have to pay taxes on it. The idea is that when you withdraw from your tax deferred account, you should be in a lower tax bracket (i.e. retired, less income), so you will pay less taxes.

As for the advice, it nothing is to be contributed to a tax deferred account unless there is a matching contribution, what should the person do with the money - not save for retirement?
 
cb7893 said:
I am most curious about questions of pre-tax vs. after tax contributions. DS will be in a combat zone, therefore base pay will be tax free. I have read different schools of thought about when to or not to contribute pre-tax dollars to tax deferred savings accounts. Some say contribute nothing to a tax deferred account unless there is a matching contribution.
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While your son is deployed he should make sure he contributes the max to a Roth IRA since his income dollars will be tax free. Since the max for the ROTH is $5500. he can opt to invest more in either the TSP or other program, even if the contribution is not matched there is a tax savings. At this early age a ROTH is always a good move even when the income is taxable. This is just advice from a layman, I am in no way a financial advisor.
 
+1 Jcleppe.
I preach this concept about Roth IRA accounts heavily to new graduates. You will likely never be in a lower tax bracket as you are when you are a new grad. The Roth requires you to use after tax monies but the growth can be withdrawn at retirement tax free. Roths also offer more flexibility as their are no required minimum distributions at age 70 1/2. The TSP is beneficial too because of the matching contribution and also it works to reduce your income by pretax deferrals. You can also contribute more to the TSP.

With the Roth, the younger an investor is, the more time there is for the tax free growth to occur. This is very powerful mathematically.

Ideally, a young commissioned officer should be participating in BOTH the TSP and the Roth strategies. Some circumstances may adjust this strategy, such as heavy debt burdens, etc.
Full disclosure, I am a Certified Financial Planner.
 
MemberLG said:
First, contributing pre-tax dollars to tax deferred savings accounts is a method of reducing your taxes and paying it later. Simple example is if you are making $60,000 now, contribute $6000 to a tax deferred saving accounts, you only pay taxes on $54000. When you withdraw money from your tax deferred account, you will have to pay taxes on it. The idea is that when you withdraw from your tax deferred account, you should be in a lower tax bracket (i.e. retired, less income), so you will pay less taxes.
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Quite right, however, he will have very little taxable income during the next year, being in a combat zone. I don't know about the taxability of income beyond base pay. If its not taxable, then he should have less than $10k in taxable income.

MemberLG said:
As for the advice, I[f] nothing is to be contributed to a tax deferred account unless there is a matching contribution, what should the person do with the money - not save for retirement?
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For this Scottish Presbyterian son of children of the depression, the question was never whether to save for the long term, but rather what kind of account to put it in beyond Roth and TSP, until the match begins in Oct 2017.
 
Jcleppe said:
While your son is deployed he should make sure he contributes the max to a Roth IRA since his income dollars will be tax free. Since the max for the ROTH is $5500. he can opt to invest more in either the TSP or other program
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Is there a program beyond Roth and TSP that makes sense for low taxable income situation?
 
Our son will be deploying again this year. His squadron has an entire section of their spin-up briefings dedicated to finances and much of it has to do with maximizing the tax benefits of the CZE, especially relating to retirement contributions and Roth IRAs. Hopefully those resources are available in every unit.

Stealth_81
 
Stealth_81 said:
His squadron has an entire section of their spin-up briefings dedicated to finances and much of it has to do with maximizing the tax benefits of the CZE
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I am now an expert on all things related to the Czech military, but I couldn't find CZE. Does that mean Combat Zone Exclusion? Or something like that?

Thanks Stealth.
 
cb7893 said:
I am now an expert on all things related to the Czech military, but I couldn't find CZE. Does that mean Combat Zone Exclusion? Or something like that?

Thanks Stealth.
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Yes, that's correct.

Stealth_81
 
I agree with Stealth, at least for the AF they do that prior to any long deployment. Not only finances, but also legal for power of attorneys.
 
aggie83 said:
Our son is deploying. My nephew (active duty AF) made us aware of the following. I don't know where else you would get guaranteed 10% interest rate with no risk on $10,000. If only applies if you are deployed to an eligible combat zone.
http://www.dfas.mil/militarymembers/payentitlements/sdp.html
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My DD's husband is an Army combat medic currently deployed. They have invested the max of $10,000 in this account.

It is simply a no brainer.

It's too bad it is a maximum of $10,000 per deployment.
 
This is extremely helpful and I am so grateful for the information! I am sure that DS hasn't thought this far ahead. Secondarily, I can't imagine that our "financial guy" has much experience with this unique line of work and all of its nuances. I am relieved that counseling and advisory services are available!
 
cb7893 said:
Thanks Go!

Are TSP contributions pre tax like IRA/401k or post tax like Roth?

Edit: Never mind. Just finished reading the link
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For SA readers....Your TSP actually can be EITHER pre tax OR post-tax.

In 2012, TSP's began allowing a Roth style tax treatment option. The 2016 maximum contribution (not including age 50 catch-up provision) is $18,000 which is much higher than the Roth IRA limit of $5,500.

A good initial mix would be to split half of your deferral pre-tax and half Roth.

For details see Page 6 of this link:
https://www.tsp.gov/PDF/formspubs/tspbk08.pdf

and here is an article regarding the Roth option.
https://www.futureadvisor.com/content/blog/traditional-vs-roth-thrift-savings-plan-tsp-contributions
 
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gokings814 said:
A good initial mix would be to split half of your deferral pre-tax and half Roth.
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Go,

Please forgive mydimwittedness.

If the income while deployed is not taxable, does it make sense to contribute to TSP in the first two years when there is no match? Does the tax-deferred compounding of gains make it worthwhile?

Thanks in advance for plying your trade here for free. I'd be happy to advise you on soybean production prospects for Northern/Central Brazil.
 
Probably should start a new thread and I am jumping the gun. But, does any of this apply to SA or ROTC students?
 
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