01-19-2015 07:00 AM
Content provided courtesy of USAA.
by Tim Kiesow, CFP®, ChFC®
If you’re in the active-duty Army, Navy or Air Force and contributing to a Roth TSP account, here’s a worthwhile New Year’s resolution: Do a little paperwork in January so you can keep putting away money for retirement.
These service branches will change Roth Thrift Savings Plan payroll deductions from a specific dollar amount per pay period to a percentage of pay. Affected soldiers, sailors and airmen must switch to a percentage between January 1 and January 31, 2015. Those who miss that deadline will see their Roth TSP deductions stop until they make a payroll election.
The Army, Navy and Air Force already use the percentage deduction method for traditional TSP accounts, so this change brings the Roth TSP into alignment. Navy reservists who serve more than 30 days on active duty are also affected by this change. Marines and Coast Guard personnel are not affected — their Roth and traditional TSPs were previously switched to percentages.
Here are the basics for making your election online: On your myPay page under “Traditional TSP and Roth TSP,” click on “Contribution to Roth TSP” and enter your pay percentage, then hit “Save.” You also can make your election on paper using the TSP Election Form (Form TSP-U-1). There is a 1% minimum Roth TSP deduction from basic pay to be eligible to make contributions from incentive or special pay.
While the paperwork may be a bit of a pain, it also presents an opportunity to review your current payroll deductions and make sure you are saving enough to reach your retirement goals. You should revisit your retirement elections and beneficiaries at least once a year anyway, so you also can do that while taking care of the Roth TSP choice.
We recommend enlisted personnel and officers consider saving at least 10-15% of basic pay for retirement. For junior enlisted, this works out to roughly $200-$300 per month. For an E-6 with more than six years of service, the monthly deduction would be $300-$450, while an O-4 with more than 12 years of service would set aside $700-$1,000 monthly.
If 10-15% of basic pay seems like too much to muster right now, consider starting out small when you convert your dollar contributions to a percentage. The important thing is staying committed to saving for retirement. You also can contribute a larger percentage of incentive or special pay, as long as you meet that 1% minimum deduction from basic pay.
It’s important to keep in mind that the Roth TSP contribution is calculated based on gross pay, but the deduction is taken from net (after-tax) pay. The great appeal of a Roth account is that, because you pay taxes on contributions, you generally won’t pay taxes on your account’s earnings when you make qualified withdrawals during retirement.
Also worth knowing: For uniformed services participants, the 2015 TSP contribution limit (traditional and Roth combined) is $18,000 from basic, incentive, special and bonus pay. Traditional TSP contributions made from tax-exempt pay earned by those in a combat zone are not included in that limit. Program participants age 50 and over can put away up to $6,000 more in “catch-up” contributions.
More information about TSP is available at tsp.gov.
The contents of this document are not intended to be, and are not, legal or tax advice. The applicable tax law is complex, the penalties for non-compliance are severe, and the applicable tax law of your state may differ from federal tax law. Therefore, you should consult your tax and legal advisers regarding your specific situation.
Financial planning services and financial advice provided by USAA Financial Planning Services Insurance Agency, Inc. (known as USAA Financial Insurance Agency in California, License # 0E36312), a registered investment adviser and insurance agency and its wholly owned subsidiary, USAA Financial Advisors, Inc., a registered broker dealer.