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Not sure what to do with the extra cash...
Old 09-23-2008, 01:11 AM   #1
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Not sure what to do with the extra cash...

I'm re-enlisting in the USAF sometime mid-2009, and there is a bonus. While I wasn't re-enlisting for the bonus (actually because I want to earn a Master's Degree and hopefully become an Officer) it is a nice perk. If I am not in a tax-free zone at the time of reenlisting then I have a problem...

I was planning on putting all of the cash ($35,000) into my TSP account to avoid paying taxes. The thing is the max is $15,000 I believe. I could contribute some of it to a traditional IRA, but I'm unsure on how that works. Would I have to link up the traditional IRA to my paycheck so they can pull out pre-tax money? Also is the contribution limit $5000/year for the Roth IRA and traditional IRA combined? Or is it $5000/year for a Roth IRA, and another $5000/year for the traditional IRA?

NOTE: Another problem is that I contribute to my TSP every month. In reality I might only be able to contribute about $10,000 out of the $35,000.

Even if I were able to max all of that out I'm still stuck with left over cash. What other pre-tax vehicles could I use to store the money? I've thought about a college 529 program for Texas, but I'm unable to find any information on pre-tax payments (if that is even an option). Figured I might want to think about saving up something for my future kid(s). My only problem with that would be if I were able to get a job at a local University would I be able to get that money back out of the 529 program. Figured my kid could go to school for free as long as I worked at the school, but I'm just speculating at this point.

Are there any tax-free shelters (long-term and short-term) that I could possibly look into?
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Old 09-23-2008, 01:02 PM   #2
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Max for any type of IRA is 5k, you can split that into different amounts for Roth or trad. but you can't go over 5k total.

I am just learning about Health Savings Accounts. Its like a Trad. IRA but the money has to go towards healthcare until 59.5 when you can take it out for whatever. It rolls over year to year, however the limit is $2900 per person/year or $5800 per family. If you qualify for it (must have high deductible heath insurance) you could look at it as another tax free growth tool.
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Old 09-23-2008, 01:29 PM   #3
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Originally Posted by Keyboard Ninja View Post
If I am not in a tax-free zone at the time of reenlisting then I have a problem...
The Navy's been clamping down on this free-for-all, but could you time the two to coincide? Would you have a chance to go TAD or even IA to a combat zone and re-enlist there? Would you be able to re-enlist even if you weren't at the end of your contract? Or would you be able to extend your current contract, wait until you hit a combat zone, and re-enlist then?

Keep in mind that going to a combat zone to re-enlist for a tax-free bonus could, in retrospect, be perceived to be a really really dumb idea. You're certainly going to have a difficult time getting civilian friends/family to focus on the tax advantages instead of the the "combat" aspect. Even if you hit the 15% tax bracket with all of that $35K you're only going to save $5250 on your taxes. It's possible that this whole exercise isn't worth the effort.

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Originally Posted by Keyboard Ninja View Post
I was planning on putting all of the cash ($35,000) into my TSP account to avoid paying taxes. The thing is the max is $15,000 I believe.
The IRS actually has another limit, 415(c) IIRC, that's around $45K. Because of this higher limit there have been persistent rumors that re-enlistment bonuses could be deposited into the TSP. I think the fact is that the enabling legislation may allow that but the services haven't implemented it.

If there's not something on your AF.mil sites or Military.com, then it may be worth talking it over with your command financial rep or even contacting the TSP people about the treatment of re-enlistment bonuses.

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Originally Posted by Keyboard Ninja View Post
I could contribute some of it to a traditional IRA, but I'm unsure on how that works. Would I have to link up the traditional IRA to my paycheck so they can pull out pre-tax money? Also is the contribution limit $5000/year for the Roth IRA and traditional IRA combined? Or is it $5000/year for a Roth IRA, and another $5000/year for the traditional IRA?
You set up an IRA account with a financial institution and give them money-- by wire, by EFT, or with a check. You don't have to worry about the money passing through your hands or whether it's pre-/post-tax. The "passing through your hands" issue is part of an IRA transfer/rollover process that doesn't apply to setting up your first IRA account. The identification of the nature of the contribution (deductible or non-deductible) is handled on your tax forms.

You can almost always make a non-deductible contribution to a conventional IRA. If you meet the income limits then your contribution may even be deductible. You can also make a non-deductible contribution to a Roth IRA, which has fairly high limits that probably won't impact you.

The total limit to annual IRA contributions is $5000, although it may be raised in future years. There are caveats for spouses & those aged 50+ but those probably aren't applicable to you. So you could put any combination of contributions into conventional & Roth IRAs, but the total contribution can't exceed $5000 in any year.

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Originally Posted by Keyboard Ninja View Post
NOTE: Another problem is that I contribute to my TSP every month. In reality I might only be able to contribute about $10,000 out of the $35,000.
Yep. Bummer. The "good" news is that the TSP's computers keep an eye on the $15,500 limit and would probably kick back any excess through DFAS, which would show up in your next direct deposit.

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Originally Posted by Keyboard Ninja View Post
Even if I were able to max all of that out I'm still stuck with left over cash. What other pre-tax vehicles could I use to store the money? I've thought about a college 529 program for Texas, but I'm unable to find any information on pre-tax payments (if that is even an option). Figured I might want to think about saving up something for my future kid(s). My only problem with that would be if I were able to get a job at a local University would I be able to get that money back out of the 529 program. Figured my kid could go to school for free as long as I worked at the school, but I'm just speculating at this point.
Are there any tax-free shelters (long-term and short-term) that I could possibly look into?
Again, even if the entire $35K is taxed at the 15% bracket, you're talking $5250 in taxes. Manipulating it into a tax-free or tax-deferred account may cost more than the tax savings, especially if there are extra fees or higher expense ratios.

529s are a great option, but you're right that they restrict the money to educational purposes. The money can't be used to start a business or buy a house unless you're willing to pay a tax penalty upon withdrawal.

When you do get that whomping bonus, you want the tax on the bonus to be either deducted on your LES or you'll need to determine whether you're required to pay estimated taxes. If you don't pay sufficient estimated tax at the time you receive the bonus, then your next tax return will have a nasty surprise for accumulated interest & penalties. Not that I care to discuss how I learned about this.

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Originally Posted by Keyboard Ninja View Post
Are there any tax-free shelters (long-term and short-term) that I could possibly look into?
Well, you could donate it to charity for one heckuva tax deduction... but it might not exceed your standard deduction.

One option would be to put the leftover bonus money into CDs of various maturities to ensure that you'll be able to max out IRA contributions for the next few years. Another option would be to pay off any possible debt that you have-- vehicle loans or credit cards. A third would be to put it into a longer-term PenFed CD as a down-payment fund on your first home. When you buy the home, you could break the CD as needed to pay down payment/closing costs.
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Old 09-23-2008, 10:46 PM   #4
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Quote:
Originally Posted by Nords View Post
The Navy's been clamping down on this free-for-all, but could you time the two to coincide? Would you have a chance to go TAD or even IA to a combat zone and re-enlist there? Would you be able to re-enlist even if you weren't at the end of your contract? Or would you be able to extend your current contract, wait until you hit a combat zone, and re-enlist then?
That is what I'm hoping for. I have been tagged for another deployment in 2009 regardless of my feelings (believe me I'd rather not do it). My concern is more about timing, and so far none of my supervisors know for sure. I'm hoping that the career counselor could answer my questions, but right now I'm just waiting on a response to my email since I'm deployed right now.

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Originally Posted by Nords View Post
Keep in mind that going to a combat zone to re-enlist for a tax-free bonus could, in retrospect, be perceived to be a really really dumb idea. You're certainly going to have a difficult time getting civilian friends/family to focus on the tax advantages instead of the the "combat" aspect. Even if you hit the 15% tax bracket with all of that $35K you're only going to save $5250 on your taxes. It's possible that this whole exercise isn't worth the effort.
Well the multiplier is actually at 6, and the initial $35k would be on my first year. The rest as you know would be spread out through the next 6 years of my enlistment (unless I get picked up for another program). This could potentially end up being a $70k bonus.

Quote:
Originally Posted by Nords View Post
You set up an IRA account with a financial institution and give them money-- by wire, by EFT, or with a check. You don't have to worry about the money passing through your hands or whether it's pre-/post-tax. The "passing through your hands" issue is part of an IRA transfer/rollover process that doesn't apply to setting up your first IRA account. The identification of the nature of the contribution (deductible or non-deductible) is handled on your tax forms.
So Fidelity (or whoever I would go with) would give me a tax-form stating my contributions were placed into a traditional IRA, and that would lower my taxable income for the year? If that is the case then I've got nothing to worry about on that end. I always assumed that a traditional IRA had to be funded in the same way as the TSP.

Quote:
Originally Posted by Nords View Post
When you do get that whomping bonus, you want the tax on the bonus to be either deducted on your LES or you'll need to determine whether you're required to pay estimated taxes. If you don't pay sufficient estimated tax at the time you receive the bonus, then your next tax return will have a nasty surprise for accumulated interest & penalties. Not that I care to discuss how I learned about this.
Whoa. I didn't know that could happen. Thanks for the heads up!

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One option would be to put the leftover bonus money into CDs of various maturities to ensure that you'll be able to max out IRA contributions for the next few years. Another option would be to pay off any possible debt that you have-- vehicle loans or credit cards. A third would be to put it into a longer-term PenFed CD as a down-payment fund on your first home. When you buy the home, you could break the CD as needed to pay down payment/closing costs.
I don't have any debt right now since I pay off my credit cards at the end of each week. I have the cash to make my very small purchases, but I only use my credit card for the bonus points.

As far as the CD's go could they be funded with pre-tax dollars?

Ultimately my goal is to save the money for my kid's education. I just earned my BA in Liberal Studies, and I'm on pace to finish my Master's before spring of 2010. I know I'll stay in at least 10 years so I can transfer my educational benefits to my kids (if I'm ever brave enough for the responsibility), but the transfer requirements haven't been written out yet. If I am only able to transfer the benefits to one child, and I happen to have 2...how do I justify only giving benefits to one but not the other? That is the main motivation for trying to keep the money in a tax free shelter so that I could pass them on to the other child for their education.

Yeah it seems dumb to some degree for me to think about it, but there are times out here I can just sit down and think. There aren't many distractions and I seem to just create scenarios in my head that may or may not happen later on in life. It does not cause me any undue stress at all because I have places to ask questions. I'd just like to know that I at the very least thought about this sort of situation before I am blind-sided by it. There are plenty of other things I can never prepare for, but I'd like believe that if I can avoid a "deer-in-the-headlights" situation then I would.

Thanks!
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Old 09-24-2008, 11:59 AM   #5
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I just earned my BA in Liberal Studies, and I'm on pace to finish my Master's before spring of 2010.
Well, the heck with the re-enlistment!

Have you applied for officer training yet?
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Old 09-24-2008, 09:45 PM   #6
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Well, the heck with the re-enlistment!

Have you applied for officer training yet?

I was going to wait until I got back to my homestation (Jan 09) to work on the package, and hopefully go into the UAV program since they badly need officers there. Thats just under the assumption that I'd stand a better chance to get accepted into a critically manned career field.

I also didn't want to put all my eggs into one basket so I'm signing up for classes towards my Master's since it seems like you need one to become an 0-4. Figured I might as well knock that out while I can. Until then I'm gonna have to do something since I have no idea how long that process takes, and figured re-enlisting was a necessary evil lol .

If you've got some ideas help me out here

P.S. Anyone know anything about Creech AFB? I've been to Las Vegas for a weekend and it is wicked hot there.
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Old 09-24-2008, 09:58 PM   #7
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I was going to wait until I got back to my homestation (Jan 09) to work on the package, and hopefully go into the UAV program since they badly need officers there. Thats just under the assumption that I'd stand a better chance to get accepted into a critically manned career field.
I also didn't want to put all my eggs into one basket so I'm signing up for classes towards my Master's since it seems like you need one to become an 0-4. Figured I might as well knock that out while I can. Until then I'm gonna have to do something since I have no idea how long that process takes, and figured re-enlisting was a necessary evil lol .
If you've got some ideas help me out here
Those are good ideas. From what I've seen with officer selection & training, let alone the assignment process, I'd suggest applying right now. The sooner the better. You might get a good MOS/billet since it's almost the beginning of the new fiscal year. There'll be plenty of money and no worries about end-strength numbers, unlike next spring/summer. And if there's going to be any delays or re-applications then you'd rather know that now rather than when you're up against a re-enlistment deadline.

A shipmate who was just selected for Supply Corps ensign (at the age of 39!) tells me that the Navy is cutting back on FY09 Supply Corps commissionings and age waivers. No one's announced a withdrawal timeline yet, but the Navy seems to feel that the Army isn't gonna need much more help.

Graduate school is always a good idea. The more you do on your own time (and the military's money) then the easier it is for them to send you to a nice service school like Monterey. The worst that happens is you end up with a degree you can use if you transfer to the Reserves.

I've read about the UAV pilots, and I think Robert Kaplan profiled them in his "Bluewater Grunts, Hog Pilots" book. Sounds like they're dealing with some PTSD burnout even 12 time zones away from the battlefield.
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Old 09-24-2008, 10:26 PM   #8
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I was going to wait until I got back to my homestation (Jan 09) to work on the package
Get that officer package going, don't delay while you work on your education, etc. Take a look at the pay tables and see what a difference that last promotion makes in your retired pay--it can be a lot. You are burning daylight. There'll be plenty of time to get your MA/MS once you are commissioned. Heck, I was lucky enough to get paid a salary to go get mine, it could easily happen to you.

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P.S. Anyone know anything about Creech AFB? I've been to Las Vegas for a weekend and it is wicked hot there.
It used to be known as Indian Springs airfield, and it used to be a God-foresaken little hellhole about 40 miles from Las Vegas. I haven't been there in 15 years, and I'm sure it's much nicer now, as it is "UAV-central" and that is big business now. Plus, the way LV has grown, it's probably in the suburbs! I was assigned to Nellis for 3 years--a good job in a nice location, but not a great place to raise kids older than about 8 (in my opinion).
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Old 09-25-2008, 11:24 AM   #9
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I was going to wait until I got back to my homestation (Jan 09) to work on the package, and hopefully go into the UAV program since they badly need officers there. Thats just under the assumption that I'd stand a better chance to get accepted into a critically manned career field.

I also didn't want to put all my eggs into one basket so I'm signing up for classes towards my Master's since it seems like you need one to become an 0-4. Figured I might as well knock that out while I can. Until then I'm gonna have to do something since I have no idea how long that process takes, and figured re-enlisting was a necessary evil lol .

If you've got some ideas help me out here

P.S. Anyone know anything about Creech AFB? I've been to Las Vegas for a weekend and it is wicked hot there.
I hope you like Cannon AFB in Clovis NM. They are moving alot of the SOC UAV program and personnel there from Vegas.

I am moving there after I retire (going on terminal leave in 14 days!!!!).

I have seen some job opportunities for UAV type work for civilians at Cannon.
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Old 09-27-2008, 09:39 PM   #10
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Sorry if some of this is a repeat. I didn't read the entire thread.
Normal year TSP contributions for Active Duty military are $15,500. During a deployment, it's around $45k. Call TSP to double check those figures, but I'm almost certain that's right.
Once you max TSP out for the year, why not do a Roth instead of Traditional? I think I remember that you are newER to the military, and if you're not married, then you live in housing/barracks right? So you are probably not paying a high tax rate, right?
If you put it in a traditional IRA, the way it works is that when you file taxes, THEN your adjusted gross income would be reduced by the amount that you put into the IRA. I would just do a Roth. If you put it in a traditional IRA, you will figure out later, that it should have been in a Roth all along, and will most likely roll it over to a roth anyway, and pay the taxes that you didn't originally pay at that time.
This is a good problem to have, wouldn't you agree!
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Old 09-28-2008, 01:26 AM   #11
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