Military Briefing
Long-awaited plan offers way for savings to grow
By Tom Philpott
Military Update focuses on issues affecting pay, benefits and lifestyle of active and retired servicepeople. Its author, Tom Philpott, is a Virginia-based syndicated columnist and freelance writer. He has covered military issues for almost 25 years, including six years as editor of Navy Times. For 17 years he worked as a writer and senior editor for Army Times Publishing Co. Philpott, 49, enlisted in the U.S. Coast Guard in 1973 and served as an information officer from 1974-77.
When the military Thrift Savings Plan finally begins in January, participants with cash to spare can be more aggressive in pumping up these tax-deferred savings accounts.
Thanks to recent changes in the tax law, active duty members and drilling reservists, along with federal civilian enrollees, will be able to divert up to 7 percent, rather than 5 percent, of basic pay or salary into Thrift Savings Plan accounts. There, the money can grow, tax deferred, either at money market rates or invested in one or more of five stock and bond funds. Two funds were added in May.
The ceiling on basic pay deferrals for Thrift Savings Plans will continue to climb after 2002, by a percentage point a year, reaching 10 percent of basic pay — or federal civilian salary — in 2005. The next year the ceiling will be removed entirely.
Another ceiling, this one on total annual Thrift Savings Plan deposits, will remain. But that one too is set to rise. Total deposits per saver, for military and federal civilian, will be $11,000 in 2002, up from $10,500 this year. After 2002, the maximum will rise by $1000 a year until it reaches $15,000 in 2006.
Most service members do not earn enough basic pay to take full advantage of rising Thrift Savings Plan ceilings. For example, 7 percent of basic pay for a mid-career enlisted member, an E-6 with 10 years of service, is $1,780 a year under current pay scales, far short of an $11,000 ceiling. However, military participants also will be able to shelter re-enlistment and retention bonuses, up to the plan ceiling. That will mean sheltering a large chunk of the $30,000 Career Status Bonus to be offered to careerists who reach 15 years of service on or after Aug. 1.
The $30,000 is to entice careerists to return to the less generous Redux retirement plan. Not all of it can be sheltered in a Thrift Savings Plan account, indeed not even a full $11,000. That's because, to qualify, savers by law have to divert at least 1 percent of basic pay into the savings plan. That sum then will count against the $11,000 Thrift Savings Plan ceiling for 2002 in determining how much of the Redux bonus can be sheltered.
Thrift Savings Plans cannot begin for service members until January, but enrollment will begin Oct. 9. To protect the plan's tax breaks for 4,000 officers and 15,000 enlisted members who will become eligible for the $30,000 Redux bonus after July 31, Defense officials are allowing them to defer bonus election until they can participate in Thrift Savings Plans in early 2002.
Those who defer the bonus election in this way will have until Feb. 28 to make that election. Otherwise, the two-month special window will close and they will remain under the High-3 retirement plan. Considering that plan's superior lifetime value, as discussed here previously, that's not a bad result.
The Federal Retirement Thrift Investment Board in Washington manages Thrift Savings Plans for federal civilians and will do so for the military. This month, the board will begin five-course training seminars for select service members. Those members, in turn, will conduct briefings on Thrift Savings Plans for military personnel around the world. Full details and answers to 20 common questions can be found at the government's Thrift Savings Plan Web site.
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