How to Maximize TSP Contributions in a Combat Zone

Table of Contents

1. Key Points
2. Taxes on TSP Contributions: Normal vs. Combat Zone Rules
1. 2024 Combat Zone TSP Contribution Limits
3. What Are TSP Annual Contribution Limits?
1. Why Would Anyone Contribute $69,000 Per Year to Their TSP?
4. Which Combat Zones Are Eligible?
5. How to Reach The Combat Zone TSP Annual Additions Limit
1. 1. Spread Out Your Contributions
2. 2. Adjust Your Contribution Amount in MyPay
3. 3. See If You’re Eligible for Bonus Pay
4. 4. Contribute More Money After You Leave the Combat Zone
5. 5. Sell Investments From Your Taxable Accounts
6. 6. Contribute Money From a Loan 
6. Combat Zone Annual Addition Limit Exceptions
1. The Roth TSP Annual Contribution Limit is Still $23,000 In the Combat Zone
2. BRS Members Should Leave Room For Monthly Contributions To The Roth TSP
7. BRS Member Example
1. Use a Spreadsheet to Model Your Contributions
8. What If You’re Still In The Legacy High 3 Pension System?
1. Note For Servicemembers 50 and Up
9. A Friendly Little Note From The IRS
10. Your Call To Action

Because so many military families have learned the basics of contributing to the Thrift Savings Plan (TSP), we’re getting a lot of questions about maximizing those contributions during deployments to combat zones.

Not only is military pay exempt from federal and state taxes for servicemembers deployed in a combat zone, but servicemembers are also eligible for much higher contributions to the TSP. 

I’ll get into the gory details during this post, but for now, I’ll mention that the annual additions limit of the tax code is $69,000 for the year 2024. That limit applies even when you’re not in the combat zone for the entire year! *

In this article, we’ll run through some examples to show you how to maximize your contributions while in a combat zone, and what you need to keep in mind to make sure you don’t max out your contributions and lose out on DoD matching contributions. 

[* Note: That last sentence means your higher limits are still available if your deployment is less than the full calendar year.]

Key Points

• The Thrift Savings Plan (TSP) is a retirement savings and investment plan designed specifically for military service and civil service members. Military members of the Blended Retirement System (BRS) receive agency and service matching contributions from the Department of Defense (DoD).
• The TSP has contribution limits set annually by the IRS, which allow members to contribute up to a specific dollar amount each year. One of the advantages that military members have, in particular, is the ability to contribute far more than the annual limit while deployed in a combat (tax-free) zone. 
• For 2024, the limit is $23,500 for regular contributions, with an additional catch-up contribution limit of $7,500. However, eligible military members can contribute up to the $69,000 Annual Addition Limit while in a combat zone. 
• I’ve created a free spreadsheet so you can see how this works with your pay. See the example below to see it in action.

Taxes on TSP Contributions: Normal vs. Combat Zone Rules

Under normal circumstances, contributions to a Traditional TSP are made with pre-tax dollars, meaning you defer paying taxes until you withdraw the funds. The contributions grow tax-deferred, but you will pay ordinary income tax on both the contributions and earnings when you withdraw them. For a Roth TSP, contributions are made with post-tax dollars, so while you pay taxes upfront, both your contributions and their earnings can be withdrawn tax-free if the distribution is qualified.

For servicemembers in a combat zone, the tax treatment of TSP contributions changes significantly. Contributions made to a Traditional TSP while in a combat zone are tax-exempt, meaning you don’t pay taxes on those contributions. However, the earnings on these contributions grow tax-deferred and will be taxed as ordinary income upon withdrawal. 

With a Roth TSP, contributions made in a combat zone are also tax-exempt, and both the contributions and their earnings can be withdrawn tax-free, provided the distribution is qualified.

What Are TSP Annual Contribution Limits?

IRS rules allow military members to contribute up to the annual addition limit of $69,000 when serving in a tax-exempt zone.

I’ll also answer the question that most of you are thinking about right now:

Hey Nords, I just checked my Leave and Earnings Statement, and, golly dude, I’m not getting paid $66K this *year*– let alone during this deployment. I have expenses, too. Where the heck are people getting the money for this?!?”

The TSP annual addition limit is the maximum total amount that can be contributed to a participant’s account in a given year from all sources, including you and the matching contributions from the DoD.

In other words, that $69,000 limit includes your DoD BRS agency/matching contributions. You’re not actually contributing all of that limit from your pay. 

If you’re not part of the Blended Retirement System, you don’t receive matching contributions from the government, so this number won’t apply to you. But, you can still personally contribute up to your elective deferral limit of $23,000.

Finally, you’ll be surprised at how much the DoD and the IRS will help you reach that goal, and this post includes the links to ensure it applies to you.

Why Would Anyone Contribute $69,000 Per Year to Their TSP?

Short answer: the TSP has some of the world’s largest passively managed index funds with some of the world’s lowest expense ratios. You can get tax-deferred compounding and tax-free withdrawals depending on how you contribute. 

You don’t even have to wait until age 59.5 to tap your TSP.

The TSP is one of several investing answers, but it should be a big part of every military family’s asset allocation plan. (Some might decide it’s the best part.) In the combat zone, you’re putting tax-free pay into the TSP. This offers a huge compounding advantage and means you have more money to contribute to your TSP account instead of “contributing” it to the U.S. Treasury’s income-tax fund via withholding and tax returns.

Finally (stay with me here), combat deployments are not exactly fun. (Not even submarine deployments.) We, personal finance bloggers, talk boldly about frugality versus deprivation and work-life balance, but let’s not kid ourselves: this deployment will be more work than life and a lot more deprivation. As long as you’re embracing the suck, you can still extract some value from the pain by investing as much as possible toward your financial independence life goal.

For a few of us, maximizing TSP contributions *during* a deployment is a great way to minimize lifestyle expansion *after * a deployment. Yeah, you worked hard, and you deserve a nice reward. Instead of a dollar-gobbling depreciating pile of a pickup truck, how about sleeping better at night knowing you’re on track for financial independence? Sure, give yourself a small victory lap party, but avoid the temptation of the hedonic treadmill by putting most of that money where it’s hard to frit away.

No worries, this post includes a detailed year-round example. I also have a spreadsheet for you to edit with your own numbers.

Next question: where are these combat zones?

Surprisingly, they don’t all involve actual combat. I hope.

Which Combat Zones Are Eligible?

The DoD and the Internal Revenue Service work with Congress to define combat zones. 

Here’s the text straight from the IRS press release:

The term ‘combat zone(s)’ is a general term used on IRS.gov and includes all of the following hostile areas where military may serve: actual combat areas, direct combat support areas, and contingency operations areas.”

I was surprised to learn that Djibouti, the Philippines, and even the Sinai Peninsula are eligible for combat zone benefits. The distinction is not whether you’re shooting but rather whether you could be shooting or whether you’re helping other people shoot. 

According to the IRS, if you are receiving imminent danger pay or hostile fire pay and your service falls under one of the three scenarios then you are eligible for Combat Zone pay rules:

1. Service in an active combat area as designated by Executive Order, and receive special pay for duty subject to hostile fire or imminent danger as certified by DoD.
2. Service in a support area as designated by DoD in direct sustainment of military operations in the combat zone, and receive special pay for duty subject to hostile fire or imminent danger as certified by DoD.
3. Service in a contingency operation as designated by DoD, and receive special pay for duty subject to hostile fire or imminent danger as certified by DoD.
   

Read the fine print in the IRS notice, but if you’re getting that pay on deployment, then you’re probably eligible for the tax code’s annual additions limit to your TSP.

How to Reach The Combat Zone TSP Annual Additions Limit

1. Spread Out Your Contributions

Because the annual addition limit ($69,000) includes government matching contributions, you must dial back your contributions to allow for DoD’s 5% match of your base pay. 

To make things even more complicated for BRS members, you’ll need to spread your 5% contributions across all 12 months of the calendar year, or you’ll miss some of the match. We touch on this more in the section below. 

2. Adjust Your Contribution Amount in MyPay

Here’s another good deal: by the definition of the combat zone, you’re getting more special pay (at least hostile fire or imminent danger pay). You lived without that money when you were in the U.S., and you can probably live without spending it in a combat zone. 

Since it’s tax-free, you can set your contribution percentage to 100% to contribute all of it to the TSP. You can do this through MyPay or TSP.gov. 

3. See If You’re Eligible for Bonus Pay

Some of you have planned for the next good deal: bonus money. I am not a lawyer or a CPA or a CFP, and you’ll have to read your bonus contracts very carefully to make sure you’re eligible, but here’s the link: if you sign a bonus contract in a combat zone eligible for CZTE pay, then it’s not taxable.

Let’s be clear: I would not volunteer to re-enlist or sign a bonus contract in a combat zone just for the tax-free pay. (Yes, I get reader questions about how to volunteer for this.) I would not even do it to pay off student loans or consumer debt. Yet if you’re planning to obligate the service anyway, or if you’re eligible to sign up for the BRS Continuation Pay bonus between 8-12 years of service, then as long as you’re in the combat zone, you might as well make the most of your pay advantages.

Suddenly, that annual addition limit might be within your reach.

4. Contribute More Money After You Leave the Combat Zone

Here’s another fine-print point that the BRS has highlighted: these annual addition limits are per calendar year, not just for the duration of deployment. When you deploy to a combat zone, you’re eligible for the annual additions limit for the rest of the calendar year. You’re contributing tax-free pay when you’re in the combat zone, yet you can continue to contribute taxable pay to the TSP after you leave the combat zone.

5. Sell Investments From Your Taxable Accounts

Here’s another method that readers have shared with me: sell some investments from your taxable accounts. 

Here’s the theory: You’d raise your TSP contributions as high as possible. Meanwhile, you’d sell some of your investments in taxable accounts and use that money for living expenses. The net result? You’ve shifted a huge amount of money to the TSP and avoided a whole bunch of capital gains taxes.

This is possible because your combat-zone income is tax-free, so your taxable income for the year is very low. Additionally, when you’re in a low-income tax bracket, your tax rate on long-term capital gains is zero. 

You’ll want to seek professional tax advice from a CFP or a CPA, but this can save you a lot on capital-gains taxes.

6. Contribute Money From a Loan 

One more idea, although it borders on irresponsibility: if you’re a junior officer who’s taken out a career starter loan during college, you can ideally maximize your TSP contributions and live off the balance of that loan. You’d essentially be borrowing money at 1%-2% per year to invest in the TSP and then paying it back over a longer term. This is extraordinarily risky (high volatility, loss of principle, leveraged debt) but potentially profitable over a decade or longer.

During my research for this post, I learned that you may even be able to contribute to last year’s IRA. Seek professional advice from a CFP or a CPA before you do this.

Let’s cover some important exceptions to meeting the annual additions limit before we get to the examples.

Combat Zone Annual Addition Limit Exceptions

There are a couple of catches to maximizing your combat zone contributions, and after I published this post, it took me a few more e-mails with the TSP to confirm them:

1. You can not exceed $23,000 of contributions in the Roth TSP at any time during the calendar year. 
2. When you return home, any further contributions for the rest of the year are subject to the elective deferral limits. 
3. If your traditional TSP account has already exceeded $23,000 of contributions during the calendar year, you can’t contribute more taxable pay to it.
   

[See the bottom of this post for the verbatim details of the TSP staff’s interpretation of the tax law.]

The Roth TSP Annual Contribution Limit is Still $23,000 In the Combat Zone

Even when you’re eligible for the higher annual additions limit, Roth TSP contributions still count toward the elective deferral limit. 

Here’s that crucial fine print:

“Tax-exempt contributions made to the traditional balance of a uniformed services account while deployed to a designated combat zone do not count toward the tax code’s elective deferral limit. However, any Roth TSP contributions are subject to the Internal Revenue Code limit even if they are contributed from tax-exempt pay.”

When you’re contributing to your Roth TSP (and you should), you must stay below the Internal Revenue Code limit ($23,000) until December’s contribution. 

This means that your overall annual additions limit will stay just under the elective deferral limit in the Roth TSP (with your last contribution of the year coming in December), and the rest of your contributions will go into the traditional TSP. 

Of course, the DoD BRS agency/match contributions are always going into your traditional TSP (see paragraph 7.b.(12) of that link), so between you and DoD, you’ll end up with the rest of your contributions in your traditional TSP account.

When your Roth TSP contributions hit $23,000, no matter where you are or when it is during the year, the TSP computer system will cut you off. Any excess contributions from your pay will be used to reach the limit, but the TSP will kick the rest of the excess back to DFAS. Even worse, the TSP will shut you down at the elective deferral limit ($23,000) and lock you out of contributions for the rest of the calendar year. Which is why you need to leave room for monthly contributions. 

BRS Members Should Leave Room For Monthly Contributions To The Roth TSP

The TSP agency has confirmed that when you’re home from the combat zone, you can only contribute to your traditional TSP up to the elective deferral limit. 

That means if you contribute more than the elective deferral limit to your traditional TSP while in the combat zone when you get home, the TSP computers will lock out any further contributions.

If you’re locked out of TSP contributions before the end of the year, you will lose your DoD BRS matching contributions for the rest of the year.

The solution: when you set up your plan for your year of TSP contributions, start by contributing 5% of your monthly base pay to the Roth TSP. That ensures you’ll have 12 months of Roth TSP contributions and 12 months of DoD BRS matching contributions.

BRS Member Example

The DoD BRS office also asked me to pass this on:

“Individual service members who are impacted by this should contact the TSP call center or a tax adviser for guidance on the impacts of IRS regulations on their contributions.”

Please feel free to refer to this post with the DoD BRS office, DFAS, the TSP, and your pay/personnel office. This example is how the system is supposed to work.

Here’s a scenario for a servicemember who:

1. Opted into the Blended Retirement System.
2. Contributes at least 5% to their TSP every month (for the full DoD matching contributions).
3. Deploys to a combat zone to receive combat zone tax-exempt pay.
4. Their deployment is from March to September 2018 and they’re back home on 1 October 2018.

Here’s the FRTIB response, edited for easier blog post reading:

I think there are many ways that a service member can do this, and I’ll give an example.

Disclaimer: This is not advice but merely an example of one service member contributing while in a combat zone.

Assumptions:

1. A servicemember makes $48,000/year in basic pay and receives a $30,000 retention bonus while in a combat zone.
2. The elective deferral limit is $18,500, and the annual additions limit is $55,000.
   

Using these numbers, if the service member contributes 5% in January-February and 5% again in October-December, they will have contributed $200 per month of their own money and received agency/matching 5% of $200 per month.

If that happens, the service member will have contributed $1,000 towards the elective deferral limit (their own contributions) and $2,000 towards the annual additions limit (their own contributions and employer contributions).

That leaves seven months in the combat zone to figure out how to contribute.

In this exact scenario, it likely makes sense to contribute to Roth up to the elective deferral limit less contributions made in January-February and October-December because those contributions will be tax-free going in and tax-free coming out so long as all of the other tax requirements are met.

In that case, there is $17,500 left towards the elective deferral limit ($18,500 minus the $1,000 contributed in the months while not in a combat zone). That divided over seven months is $2,500 per month of which there will be an additional agency/matching 5% contribution of $1,400.

This brings the total contribution to the TSP to $20,900 meaning the service member can contribute an additional $34,100 of tax-exempt money to their traditional account. That amount over a seven month period is $4,871 per month.

These amounts will allow for both the elective deferral and annual additions limit to be reached and the maximum amount of matching to be reached (5% of $48,000).

Of course, this service member could adjust the numbers to increase the contributions while not in a combat zone and decrease the amount while in a combat zone.

However, if the service member reaches the elective deferral limit before they leave the combat zone, they will not be permitted to make any contributions when they return.

Use a Spreadsheet to Model Your Contributions

As you may have concluded by now, that has to be added to a spreadsheet to be clearly understood.

Here’s the link to that Google Sheet for maximizing BRS contributions to the Thrift Savings Plan from a combat zone.

Please note that to edit this spreadsheet, you’ll have to copy it (“File | Download as…”) to your device and then edit your copy.

What If You’re Still In The Legacy High 3 Pension System?

If you’re apart of the High 3 pension, the rules are still the same for your combat zone contributions; only you don’t have to worry about DoD’s BRS agency or matching contributions.

Just, remember to stay below the Roth TSP contribution limit, as mentioned in the BRS section. 

If you don’t, your government matching contributions will be cut off, something well illustrated by this reader example. 

[Reader question:

“Hello, I read your article about maximizing TSP in a combat zone. I ran into an issue earlier in 2018. Before deploying in June, I had contributed about $18,300 to traditional TSP and $200 to Roth. When I arrived, I was unable to make any more contributions to Roth, but I was able to contribute to Traditional. Why is this?”

My response:

If you contributed $18,500 to the TSP before deploying, you’d already hit the elective deferral limit ($18,500 in 2018) before arriving in the combat zone. The TSP computers and DFAS would have locked you out of further contributions.

Now that you’re deployed, neither the TSP nor DFAS would have automatically restarted your contributions. Perhaps someone from your pay office (or DFAS) noted your combat-zone status and restarted the contributions. Since you had already reached your annual contribution limit (and they had to turn it back on), for some reason, the TSP system wouldn’t accept new contributions to the Roth TSP.

I’m sorry this happened. Servicemembers who’ve opted into the new Blended Retirement System are advised not to front-load their TSP contributions so that they can receive the monthly DoD BRS match all year long. This appears to be a similar issue with the TSP computer system.

Note For Servicemembers 50 and Up

If you’re 50 or older, you can include a $6,500/year “catch-up” contribution.

You active-duty folks shouldn’t smirk at this clarification– you’d be surprised how many Reserve and National Guard servicemembers are in their 50s. That should tell you something about how challenging & fulfilling the Reserve & Guard can be if you’re feeling a little burned-out on active duty.

A Friendly Little Note From The IRS

[19 December 2018 update: see a sample IRS letter a few paragraphs below, at the end of this section.]

Several servicemembers (and their frustrated spouses) have mentioned receiving IRS letters asking the servicemember to verify their deployment to a combat zone. One family was still receiving IRS letters about a 2016 deployment while the servicemember was deployed again in late 2017.

This letter is automatically generated by an IRS computer, which tries to match the tax return to some sort of report that the servicemember has deployed to a combat zone. (Pro tip: this report to the IRS does not seem to come from DoD.) You’re welcome to call the IRS to confirm, but getting a human to help you respond to the letter is not always easy. I’m not sure an IRS human even sees the letter before it’s mailed to you.

Your best response to the letter request for your combat zone service dates is a written letter. If you want to be proactive, you can send the letter as soon as you return from deployment. (No operational security issues there!) You can also notify the IRS by e-mail about your combat zone service, but again, I’d wait until you’re home for OPSEC. 

Spencer over at MilitaryMoneyManual also has more suggestions about documentation and tracking the deployment dates. As he suggests, save copies of your Leave and Earnings Statements which cover the duration of the deployment.

The whole point of volunteering this information to the IRS is to give them your information to create an entry in your taxpayer account database telling the agency that you deployed to a combat zone. That way when your tax return arrives at the IRS months later, the computer will already have a flag in the system to confirm your service. Ideally, it won’t spit out a form letter.

Here’s the IRS’s explanation:

Thank you for your e-mail dated Dec. 10, 2018 and the information you sent in response to a 2761C letter.

The Department of Defense (DoD) is supposed to send us a Combat Zone Indicator (it converts to a Combat Zone Extension in our system) for every member of the military that is in a combat zone. The DoD is also supposed to send us a “spousal” indicator if the military member is married. When the military member exits the combat zone the DoD is supposed to send us the exit date.

This system worked well for a couple of decades. Over the past several years the DoD computer system and our computer system have had communication issues. Sometimes we get no indicator when a military member is in a combat zone, sometimes we get the entrance indicator and not the exit indicator, and sometimes we only get a spousal indicator.

The Internal Revenue Service is tasked with keeping accurate records for all taxpayers. To do so, we sometimes have to ask our taxpayers for help.

We apologize for any inconvenience we have caused you and sincerely thank you for helping us clean up our records.

You may be interested in Publication 3 Armed Forces’ Tax Guide. You can view it on our website or order it through our toll-free forms line at 1-800-829-3676 Mon – Fri 7:00 am – 7:00 pm your local time.

Your Call To Action

Once again, if you’ve opted into the BRS, ensure you contribute at least 5% of your base pay to the Thrift Savings Plan for the BRS match. Even if you’re still paying off debt, it makes sense to contribute to your TSP to at least get DoD’s free money in your TSP.

When you know your deployment dates, download that spreadsheet and make your TSP contribution plan. It’d be great to have the income or assets to reach the annual additions limit but do your best.

Whatever you decide to contribute, make sure you stay below an annual contribution of $23,000 in 2024 in the Roth TSP, or you’ll be locked out of additional contributions for that calendar year. When you’re in the BRS, that limit lockout will keep you from earning DoD BRS matching contributions for all 12 months of the year.

[The rest of the story:

The FRTIB’s policy is not clear in the tax code or in the TSP’s pamphlets and website.

I formed this opinion when an AFC and at least three other CFPs could not find a clear reference to the FRTIB’s policy in the tax code or the TSP’s public materials. (Despite one of them having seen the TSP’s training materials about the limits.) However, two servicemembers were already locked out of further TSP contributions in 2018. We knew they’d followed the rules on their Roth TSP limits. That meant there still could have been a glitch in the TSP computer system’s BRS software or that there’d been another mistake with implementing the legislation. Or… the TSP’s guidance on the annual additions limit was ambiguous.

The FRTIB says that it’s not a computer glitch. DoD’s BRS office (and Congress) can decide whether this is the way they want the TSP to work. There’s already been at least one proposal to change the tax code for Reserve/Guard servicemembers in the BRS who have highly-paid civilian jobs with 401(k) plans. My confusion over the annual additions limit would appear to be yet another unintended consequence of the BRS legislation on TSP contributions.

The good news is that the TSP training team has taken aboard our feedback and is updating their Blended Retirement System training materials. I’ll stay in touch with the TSP and with the DoD BRS office.

Here’s the FRTIB’s verbatim interpretation from one of their TSP Training & Liaison Specialists– one of the people handling the TSP’s Education and Outreach program.

“The answer is “no,” this individual already met their 402(g) elective deferral limit, and therefore would no longer be allowed to make contributions to their TSP (contributions that apply to the 415(c) limit and NOT the 402(g) limit are only CZTE pay contributions, so therefore if you are no longer receiving CZTE pay, any contributions apply to the 402(g) limit, which again, was already met).”

Let me break down that 65-word sentence into smaller clauses.

When you return home from the combat zone, you can still contribute to your TSP accounts– but only up to the elective deferral limit ($18,500 in 2018, $19K in 2019) in each account. The TSP’s website and pamphlets are clear on only being able to contribute combat zone tax-exempt pay above the elective deferral limit in the traditional TSP when you’re in the combat zone. However, they’re not so clear on how you can contribute taxable pay to your traditional TSP after you return home.

One of my smarter friends (a military retiree and a CFP) suggested thinking of it this way: when you’re home, count down from the limits instead of counting up. “How much have I reduced my elective deferral limit in each of my TSP accounts? How much room do I have left to contribute to each one?”

Alert readers will note that the servicemember in the contribution spreadsheet example received a $30K retention bonus while in the combat zone. If they signed that contract in the combat zone, then every one of the subsequent annual installments of that bonus is also tax-free… even if they’re not in the combat zone. Could they contribute the next few years’ installments of that CZTE pay to their traditional TSP up to the annual additions limit?

My answer: I don’t know. I’m going to let the FRTIB and the BRS office clarify those interpretations of the tax code. The good news is that DFAS already knows the bonus contract is tax-free and will reflect it on your W-2.]

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