Wednesday, July 27, 2011

Military Talk: Thrift Savings Plan (TSP)

I know that most of my readers are fellow military spouses. My question is: are you contributing to the Thrift Savings Plan (TSP)? When Dustin and I were first engaged, he had just begun contributing 1% of his basic pay each month. It was hardly anything, but I think he just thought it was a good idea to get started saving. Fast forward to the next April as he and I sat in front of my laptop, plugging numbers into TurboTax to file our federal taxes. That's when I learned about this really neat thing called the Retirement Savings Tax Credit, and how it can save us lots of money on taxes if we plan carefully! I'm not sure if this tip will benefit ALL military families, but I think it could really help a lot of people. Also, with the recent talks about the federal debt and possible cutting of some Social Security benefits over the long-term, it may be wise for us young people to really become more proactive in planning for their own retirement.

So here's the jist of the tax credit. The government will actually pay you back money (in your tax refund) for simply putting money away for retirement. If your taxable income is less than $55,500, then you can get up to $200 as a tax credit (10% of the amount you save, up to $2,000). However, the really big savings comes if your taxable income is below $33,500 (which most enlisted service members may fall, if their spouse is not working). Then up to $2,000 in TSP/retirement contributions, per working taxpayer, can receive a tax credit of 50% the money saved, or $1,000

So think of that. If your servicemember saves $166 a month, then when April 15 rolls around, you could find your tax refund $1,000 larger. Because this money is pre-tax, it means that this $2,000 put away in a retirement account, will actually lower your paychecks by only about $140 - $150.

Just one word of caution: once you put money in the TSP, you shouldn't plan on taking it out until you are at least 59 + 1/2 years old. If you take any money out before then, you will have to pay a hefty 10% penalty. I don't know how this works when deployed, because I know that there is a combat zone tax exclusion. I guess I will find out through first-hand experience when Dustin has his first deployment!

Disclaimer: I am no accountant by any means, but by some careful tax planning, Dustin and I are looking at saving $400 on our tax return by making sure that we put at least $2,000 apiece away for retirement :) Now to start thinking of what to spend that refund on!

If you want more information about the tax credit, check out this IRS informational site. Also, if you are like me and enjoy toying around with numbers and trying to be fiscally responsible, even though we are only in our 20's, then you might enjoy checking out CNN's retirement calculator, that helps you get a shocking picture of how much you theoretically need to start saving if you don't want to work until you are 80! Eeks! We are definitely going to be restructuring our budget a little bit in 2012 to try and get closer to the amount this calculator popped out for us. 

I hope that my research and learning about this will be helpful to some other families out there! Are you contributing to a TSP account, or even thinking about retirement yet?


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