In a previous post we discussed how the actual annual TSP (Military 401K) contribution limit is $18,000.
Most military folks, and indeed the general public, don’t know you can max out your contributions at work and continue to save for retirement by using IRA’s, with all the tax benefits that come with these methods. This got even more confusing when the TSP instituted the “Roth Option.”
For years I have seen the “Roth” part of the TSP and conflated it with the Roth IRA. The TSP’s website and the IRS are not very clear as to whether you can contribute to both. Most American’s are never told to save more that 10% of their income, which is why there are no IRS examples for people trying to save 50%+ of their income from a full time job. Let me help dispel the confusion.
Subject to certain rules, you can contribute $18,000 to your TSP and $5,500 to your IRA, in either Roth or Traditional fashion.
HOW to use the TSP and IRAs
The TSP is classified by the IRS as a 401k, which falls into the broader category of Employer Sponsored Plans. These broadly include the 457, 403b, etc. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-sharing-plan-contribution-limits. Contributing to the Roth TSP is not subject to income limit phase-outs, which is explicitly noted on the TSP’s website.
IRA stands for Individual Retirement Accounts; they are sponsored by you, not your employer.
For IRAa, the annual limits for those under 50 is $5,500. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
However, while you may be able to contribute to an IRA after your TSP, at AIG’s approaching and over 118K ($186K married) your ability to go Roth IRA decreases and is eliminated.
I think where the confusion arises is when people consider tax-deferability. Most individuals on the military’s payroll will almost certainly be able to contribute to the TSP and an IRA. You may run into issues deferring your traditional contributions not made to an employee sponsored plan. If your Spouse works you may become income-limited for the Roth IRA option.
While contributing to an IRA after maxing your TSP may not be tax efficient due to income phaseouts, I think people have taken this to mean you cannot contribute to both. https://www.irs.gov/retirement-plans/amount-of-roth-ira-contributions-that-you-can-make-for-2017
IRS Pub 590A gives may clear examples of when your deferrals are limited by your coverage at work. These limits will likely come into play if you AND your spouse work, maximize your work sponsored plan, and still wish to use IRA’s. https://www.irs.gov/pub/irs-pdf/p590a.pdf
Don’t take my word for it:
What does our family do?
Taking the most tax efficient path is a major goal for our family, especially since for the first two years of our marriage we will be dual income, with no kids. While I’ll break out our strategy in a later post, here is how I am structuring my 2017 contributions:
- Contribute the Maximum to our TSP and 403b ($18,000, or total compensation)
- Drive AIG to a level equal to deductions and credits using traditional contributions
- Use Roth Contributions after achieving Zero Federal Tax, and Zero State Tax
- Catch our additional retirement savings in Roth IRA’s
- Catch any additional savings in a taxable brokerage account (taxes = bummer, but possibly being able to save more than $47,000 = win!)
Here is my handy excel code for figuring if your AIG prohibits or limits taking an IRA deduction. Modified AIG is in cell Q5. Married filing jointly. Use tables in 590A to fill in your own values. Update by tax year.
For example, for AIG of 75,000:
Disclaimer: I am not a licensed tax or financial counselor of any sort. The opinions contained here are my own. Investing has implicit risk, past gains are no guarantee of future returns. You may lose money, including the principal. These opinions are my own, and are not endorsed by any of the armed services or the US Government.