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- What Contributions to an IRA Count for Federal Tax Deductions?
- Charitable Contributions & Tax Deductions for the Self-Employed
- What Deductions Can I Use if I Am in the Military?
- Tax Deductions for Contributions to 401(k) Plans
- Are Contributions to a 529 Plan Tax Deductible?
The Thrift Savings Plan, or TSP, is a retirement savings plan for members of the U.S. military and for federal civilian employees. It operates in a manner similar to the 401(k) retirement plans offered by private sector employers to their workers. Members of the military can make tax-deductible contributions to their TSP account, but a May 2012 change added a Roth option to the TSP program.
Prior to May 2012, the traditional tax-deferred TSP was the only choice a military member had. Since that time, the traditional TSP has become one of two options. Regular contributions to a traditional TSP account are tax deductible up to a maximum annual limit, set at $17,000 for 2012. Military members over age 50 can make an additional tax-deductible TSP contribution of $5,500 for a total limit of $22,500. Taxes on contributions and TSP earnings are deferred until the money is withdrawn at retirement.
Combat Pay Treatment
The contribution limit doesn’t apply to tax-exempt combat pay. A military member can contribute combat pay to his traditional TSP even after he has reached the contribution maximum. A military member doesn’t get a tax deduction for contributing tax-exempt combat pay, but when he withdraws his combat-pay contributions at retirement, he won’t owe income tax on that money. However, earnings on combat-pay TSP contributions to a traditional TSP will be taxed when withdrawn.
Effective in May 2012, the TSP program was expanded to allow a Roth TSP option. With a Roth TSP retirement account, contributions are made after income taxes are taken out of pay. This means Roth TSP contributions are not tax deductible. But withdrawals of Roth TSP contributions and earnings at retirement will be tax free provided the account has been open for at least five years.
A military member who has a traditional TSP can also open a Roth TSP. With both types of TSP in force, the military member must designate the proportions of his retirement contributions that go to the traditional and Roth TSPs. He can change that proportion at any time. If he has both a traditional TSP and Roth TSP, any withdrawals or rollovers will include a proportional amount from each balance. He can’t take money from one type of TSP account and leave the other type untouched, even at retirement.