Operation Financial Freedom
Harnessing TSP Benefits in the National Guard & Reserve
The Gulf War in 1991, colloquially known as Operation Desert Storm, showcases a remarkable display of strategic military prowess and logistical preparation. In this context, we draw parallels between the detailed strategic planning of the Gulf War and the financial planning National Guard and Reserve members can implement in their lives. Just like in military operations, careful strategy and planning can significantly affect outcomes in financial well-being. In this regard, the Thrift Savings Plan (TSP) plays a crucial role.
Understanding the TSP
The TSP, established by the Federal Government, is essentially a 401(k) for military and civil service members. Known for its lower costs than many private sector plans, the TSP offers two options: the Traditional and the Roth TSP. Both provide unique tax advantages that can significantly impact a service member’s financial landscape (1).
Tax Advantages in a Non-Deployment Scenario
Much like the logistical planning before a mission, careful planning of your finances is critical. The Traditional TSP allows contributions to be made pre-tax, thus reducing your taxable income for the year of contribution. This results in lower taxes in the present while your contributions and their earnings grow tax-deferred. Upon retirement, withdrawals are taxed as ordinary income, offering benefits to those who expect to be in a lower tax bracket post-retirement (2).
On the other hand, the Roth TSP follows an after-tax contribution structure. While this does not provide immediate tax deductions, it promises significant long-term benefits. Once qualified distribution rules are met, all withdrawals during retirement, including earnings, are tax-free. This can be a strategic advantage for those who predict a higher tax bracket during their retirement years (3).
Tax Advantages in a Deployment Scenario
Deployment scenarios, much like Operation Desert Storm, often present unique challenges and opportunities. For National Guard and Reserve members, deployments to combat zones qualify them for the Combat Zone Tax Exclusion (CZTE). This allows income earned in the designated combat zones to be exempt from federal income tax. If this CZTE income is invested in a Roth TSP account, it has the potential for triple tax advantages: tax-free contributions, tax-free growth, and tax-free withdrawals, providing a significant benefit for service members serving in combat zones (4).
Strategically Utilizing the TSP: A Tactical Approach
Drawing lessons from the strategic and logistical planning of Operation Desert Storm, National Guard and Reserve members can maximize their TSP benefits through thoughtful planning. Understanding and leveraging the tax advantages of both the Traditional and Roth TSP can result in a robust financial strategy, especially beneficial in deployment scenarios where additional tax benefits can significantly boost retirement savings.
In addition to the TSP, under certain deployed situations, National Guard and Reserve members are also entitled to the Savings Deposit Program, the topic of our next blog.
As is always the case, if you have questions about your personal situation, feel free to reach out to us. Avery Rock Financial, LLC is a fiduciary investment advisory firm, which means we put your needs ahead of of our own. Until the next time, thank you so much for joining us.
References:
- Thrift Savings Plan. (2021). Summary of the Thrift Savings Plan. [online] Available at: https://www.tsp.gov/PDF/formspubs/tspbk08.pdf
- Thrift Savings Plan. (2021). Traditional TSP: Contributions. [online] Available at: https://www.tsp.gov/making-contributions/traditional-contributions/
- Thrift Savings Plan. (2021). Roth TSP: Contributions. [online] Available at: https://www.tsp.gov/making-contributions/roth-contributions/
- IRS. (2021). Combat Zones. [online] Available at: https://www.irs.gov/newsroom/combat-zones
- Military.com. (2021). The Blended Retirement System Explained. [online] Available at: https://www.military.com/benefits/military-pay/blended-retirement-system-explained.html
Avery Rock Financial, LLC is a registered investment adviser. The information in this material is for educational purposes only, is not intended to predict or guarantee future market performance, and is not intended to act as individualized tax, legal, financial, or investment advice. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. Please consult a qualified attorney or tax professional for individualized legal or tax advice. Please contact a financial advisor for specific information regarding your individualized financial and investment planning needs.
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