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Tuesday, April 2, 2013

Thank you Blogger!

I've relocated this blog to Yourmilitarymoney.com. I'd like to thank Blogger for four years of hosting this site. It was a great experience but it was time to move to the next level.

If you're a regular reader, please consider following me to the new location.

Thursday, March 21, 2013

Roth TSP Limitations

If you've deployed in the last 10 years to a combat zone you probably made some TSP contributions that were tax exempt. About 10% of my own TSP balance today is tax exempt. Earnings from that portion of my portfolio will be taxed as ordinary income when I take them out.  If I could move the tax exempt portion to the Roth TSP, however, the earnings might grow tax free. That's very attractive, particularly for military members still on active duty.

Unfortunately it isn't possible at this time. I spoke with a the TSP representative yesterday who informed me that today there isn't an option to convert traditional TSP contributions to Roth TSP. She advised me to continue to monitor the TSP website for updates and changes.

This brings us to the point of this article. I previously commented about contributing to a Roth IRA compared to the Roth TSP. In most cases you'll have more flexibility with the IRA.

NOTE: IRS Pub 590  reminds us that your traditional or Roth IRA contributions are limited to the taxable compensation for the year or $5,500 ($6,500 if 50 years old and older) whichever is lower (corrected per comment by Jonathan). Congress recognized that if you are deployed for the entire year you might not have any taxable compensation, so they passed legislation that still allows you to contribute to either a Roth of Traditional IRA. (See IRS.gov "Miscellaneous Provisions — Combat Zone Service" question 34 for the explanation.

Sunday, March 10, 2013

Markets Break New Records: Time to Rebalance Your TSP?

If you've been following the stock market for the past two weeks you already know that we're at all time highs on the Dow Jones Industrial Average. If you've been fully invested in the C-Fund in your TSP account, you might be asking yourself if you should take some profits at this level, or as Ray Lucia would say, "Scrape off some cream."

This may very well be a "be fearful when everyone else is greedy" moment, to quote Warren Buffett,  but on the other hand, we don't really know what the future will hold.

Short term I thinks it's likely that we'll see institutional investors do some profit harvesting at these levels, and offset gains with sales of some of their dogs for tax purposes. That mean some volatility for the markets in general, usually a good thing for those who dollar cost average.

One line of thinking suggests that you set a semi-annual or annual goal for your portfolio, say 8%, and if your returns exceed this target you sell shares to the point that the stock portfolio has the target value. In years where your portfolio lags your target, you add money to it to bring it as close to the growth target as possible. This is value averaging.

Value averaging works great if you have a sufficient cash reserve to backstop the portfolio in lean times. If, for example, You started contributing to your C-Fund in the TSP in 2002 and added $5,000 per year. By March 2007 you had steady and significant growth at or above the 8% target, but in 2008 you saw a decline of 38%. You would have had to have had about as much in your G-Fund, your cash fund essentially, to bring your balance up to the 8% target. In 2009-2012 you would have sold C-fund shares each year to reduce the growth to 8%, restocking your G-Fund for future lean years.


You can remain fully invested. I think this makes a lot of sense for those of us who are more than 15 years from retirement. The reason, as Mr. Lucia states so frequently on his podcast, is that there has never been a 15-year time period where the S&P 500 has lost money.

If you are a younger military member still with years ahead of you I believe that you can assume more risk than what you'll find the Value-Averaging model. It's also more simple, a set it and forget it process. There is still room for rebalancing to prevent becoming over-weighted in any one area (your C-Fund bulges while your I-Fund deflates) but this should be done very periodically, say once per year. Let your winners run.

Thursday, January 3, 2013

Max Out Your TSP in 2013

For the fourth year in a row we've calculated the required percentage of your military pay to max out your TSP. Here's the link.

Here's how you use it. In this example, a Major (O-4) with more than 18 years of service would go to MyPay.gov, select the TSP link, and select 20% as their monthly contribution.

Similarly, a Lieutenant Colonel with 16 years of service would contribute 18% of their base pay to max out their TSP for the year.

The contribution limit for 2013 is $17,500 for those under 50, and an additional $5,500 for older military members.

Saturday, December 29, 2012

5 Financial Moves for Military Families to Make in New Year

angela7dreams / Foter / CC BY-NC
With New Years just around the corner it's a great time to set goals and re-evaluate your financial plan. Here are five financial moves military families should consider making right now.
  1. Take the 8% Challenge. This is a great way to increase your emergency fund and prepare for life's eventual events. Simply save 8% of your pay each month in a savings account. At the end of the year you'll have a month's worth of take-home pay in the bank. After a three year assignment you'll have a fully funded emergency fund.
  2. Open a ROTH IRA. If you don't have a ROTH IRA account, take your annual pay increase and deposit that directly into the account. ROTH IRAs are not the same as ROTH TSP accounts. You have more flexibility and access to your money in the IRA version. 
  3. Re-balance your TSP savings. If you have a TSP account, the beginning of a new year is a great time to examine your accounts and determine if your money is allocated properly. One easy way to re-balance is to invest in the lifestyle funds.
  4. Update your will. If your circumstances have changed significantly in the past year, like a marriage, divorce, new baby, or change in state of residence, it's a great time to make an appointment with the legal office to update your will. While you're at it, update your power of attorney too.
  5. Set a goal for your financial life. Make the goal specific and achievable. The best goals are based on factors completely under your control such as increasing savings as a percentage of your income, or reducing debts by a dollar value each month. After setting the goal, set up automatic withdrawals to put your financial life on what David Bach describes as "autopilot."
If you have questions, please let us know. Good luck in the New Year!

Saturday, October 20, 2012

Get Ready for a Pay Raise

According to Government Executive magazine, military members will see a 1.7% increase in their paychecks in January 2013. While some may argue that this lags the true rate of inflation, it will provide some much needed cashflow in the new year.

What should you do with this raise? This site will always recommend that you add it to your retirement nest egg, beginning with your ROTH IRA until maxed out, then to your TSP and finally to your taxable investment accounts.