Combat Pay

Submitted by Jennifer Poole on Fri, 2024-02-09 17:29

We have a client that has combat pay that he earned in a tax-free zone in a TSP. He is wanting to roll it over but the plan said that he would need to wait thirty days in between rolling over his Roth and Traditional amount to roll over this tax exempt amount to prevent possible confusion. They said if he rolled it all over at one time that he would receive a 1099 showing the combat pay but then he would have to use form 5498. Does this sound correct?



Submitted by Alan - IRA critic on Sat, 2024-02-10 03:00

  • Makes no sense to me. If combat pay is contributed to the TSP it’s an after tax contribution to the pre tax TSP. In doing a direct rollover to an IRA of the entire TSP balance, the TSP would issue an H coded 1099R for the TSP Roth balance, and probably would combine the direct rollover of pre tax plus gains on the combat pay to a TIRA with the post tax combat pay to a Roth IRA on a single G coded 1099R. There should be no current tax due on these direct rollovers.
  • If the TSP after tax account holding the combat pay includes gains, the client would want the gains to go to the TIRA or the gains would be taxable. Yet, according to Notice 2014-54 for the after tax and the gains to be split off to different destination IRA accounts (Roth and TIRA), the direct rollover must be requested as a single distribution, and a 30 day wait would appear not to qualify.
  • All that said, all the IRS cares about is the 1099R and the taxable amount indicated in Box 2a. The client will want 2a to be 0.
  • Taxpayers do not file Form 5498. They are issued by the IRA Custodian and the taxpayer should check that the rollover contributions shown for the Roth 5498 and the TIRA 5498 are consistent with the 1099R forms. The IRA custodian will not be reporting any combat pay since the combat pay was made to the TSP. The Roth 5498 should just show the total amount of direct rollovers to the Roth IRA. The client is then responsible for tracking their Roth IRA basis which will be tricky since the Roth IRA will also be receiving the Roth TSP funds. The only situation where client would not need to keep track of the additional Roth IRA basis is if their Roth IRA has been held 5 years and they are either age 59.5 or disabled. In that case the Roth IRA is qualified, and totally tax free. 
  • Client could agree to the 30 day delay as long as the TSP confirms that any gains from the combat pay will be rolled to the TIRA, and therefore would not be taxable as Box 2a would be 0. Client should attempt to find out what these 1099R form will look like since it’s too late once they are issued next Janaury.

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