Contributing to the Thrift Savings Plan While Deployed

Michael Kothakota, Chief Investment Officer, WolfBridge Financial, was a guest on the BlogTalkRadio show YourMilitaryLife.com that Nancy Brown and I co-host two times a week. I was so impressed with the information that he had for military personnel, particularly personnel about to deploy, that I asked him to write a guest blog post.

You may email him at military@wolfbridgefinancial.com if you’d like more information after reading this blog post. And you can also listen to his interview on our show.

Uniformed servicemembers are faced with an almost overwhelming list of tasks before they deploy. In addition to their duties of getting ready for the deployment, they also have to take care of personal and legal issues such as powers of attorney and wills. And because there are so many things to do, it is often easy to avoid the subject of personal finance. Specifically, retirement planning.

I can say this because I’ve been there. Right there with you. I was in the infantry. I remember quite well the pains of deployment preparation. I remember that the last thing I wanted to think about was retirement. I hadn’t even heard of it before. Between the eye exams, the smallpox shots, chemical training and the ranges, I really just wanted to sleep.

And this is why I want to talk to you about the Thrift Savings Plan -- a retirement savings and investment plan offered by the U.S. government. Prior to 2001, the Thrift Savings Plan (or TSP) was offered only to civilian military personnel. Thus, if you have been in the service longer than eight years, you may not have heard of the plan or its benefits.

This plan allows for participants to place part of their earnings into a retirement account similar to what the private sector uses a 401K for. This money can accrue interest based on the various investments within the plan, and can be withdrawn without penalty once the participant reaches the age of 59 1/2. In addition, before retirement servicemembers still in the military may take an interest-free loan from their TSP should the need arise.

The TSP offers enormous benefits to servicemembers who deploy. Not only can soldiers, sailors, airmen and Marines contribute to their retirement tax-deferred, but while they are deployed to a combat zone they can contribute money tax-exempt into a separate account. This means, for example, in 2009 they can contribute into their normal TSP account up to $16,500 (or if they are over the age of 50, up to $22,000). This is the tax-deferred portion, meaning that servicemembers don’t pay taxes on the money going into the account now, but they will pay taxes on the money that comes out when they retire.

Now, during deployment to a tax-exclusion zone, the Internal Revenue Service allows uniformed servicemembers to contribute up to $49,000 in tax-exempt earnings for 2009. This money goes into a separate, tax-free portion of the TSP. What this means is that this money will go into the account tax-free, grow tax-free, and -- here’s the best part -- when you withdraw the money it comes out tax-free!

Therefore, when servicemembers retire, they would have two accounts. One where withdrawals are tax-deferred, and one where the funds are tax-free. This is in addition to any pension they have earned from having 20 or more years of service.

While there are few people in the military who can put this large amount of money away in any one year, you should check to see how much you can put away if you’re deploying. This is especially true for members of a Reserve component, who can use their deployment as an opportunity to enhance their nest egg. This is an opportunity available only to uniformed servicemembers and should not be wasted.

There are three questions that servicemembers need to ask themselves at this point. How do I set up my TSP account? How much should I put away? How should I allocate the money I do invest across the different investment options?

Unfortunately, the military is not equipped to handle these questions on an individual basis. There are guidelines provided at www.tsp.gov. However, these guidelines do not take into account personal preferences, risk tolerance, and return expectations. The guidelines also only take time horizon into account on a limited basis.

This is where a financial planner or advisor comes into play. There is a myth that financial planning is for extremely wealthy people. What is true is that extremely wealthy people tend to have financial planners or advisors. They did not get that way by accident.

Our firm, WolfBridge Financial, specializes in helping military personnel and their families become financially knowledgeable. In fact, we have an entire department dedicated specifically to the military. I started the company in part because there was a need for financial advice for the military. And it needed to be affordable. We do not charge thousands of dollars in commissions, nor do we charge a large hourly fee.

Normally, for setting up an investment plan, we charge $250. But for military personnel, that rate is reduced to $150. For this $150, we will help you set up your TSP, figure out how much you can put in it, and we will show you how to allocate your investment funds given your risk tolerance, time horizon, return expectations and personal preferences.

By contacting us approximately three months before your deployment, we will walk you through the process of getting started on your TSP account. We will help you determine how much you can contribute while deployed. Finally, we’ll ascertain your investment profile by conducting a review of your risk tolerance and return expectations. From that, we’ll formulate investment recommendations for your TSP using the investment options allowed by the government within the plan.