Disregard Posted May 20, 2014 Share Posted May 20, 2014 How should we properly manage a lump sum check this sumer/fall? I'm expecting my CY14 AGI to be through the roof, so I'm switching the rest of this year's TSP contributions from Roth to Traditional. This should lower my taxable income by about 10K ($17,500 total max allowable Roth and Traditional TSP allowed this year, not counting combat pay contributions). What are some other moves to lower taxable income when expecting a lump sum? Also, where are some of the better places to park the separation payment, besides hookers and blow? Does anyone recommend a particular Vanguard fund or something similar? Link to comment Share on other sites More sharing options...
Infamous Posted May 20, 2014 Share Posted May 20, 2014 I'm not a VSP candidate but I invest heavily. Check out the Vanguard Admiral shares accounts. The fees are incredibly low and I've done well with the Total Stock Market index fund and the S&P 500 fund. Personally though I've beat both of those investing individually in companies I've picked... Those two index funds are just my conservative picks that I contribute to on the side after I max out the yearly 17.5k and 5500 ROTH IRA. Link to comment Share on other sites More sharing options...
matmacwc Posted May 20, 2014 Share Posted May 20, 2014 VSP is funny, I got the entire check without them taking out taxes, 2 weeks later my parents (home of record) got a letter saying I will owe 28K+ in taxes the next April. A few months of interest was nice. I did 10K (max at the time) in traditional IRA, oh yeah, no ROTH that year, 6K in debt, saved some and a very nice down payment on a house. FWIW, that's what I did.. Link to comment Share on other sites More sharing options...
BONE WSO Posted May 20, 2014 Share Posted May 20, 2014 (edited) In addition to maxing out my traditional TSP, I am also planning on opening a traditional IRA for my wife and putting $5000 in there. Edited May 20, 2014 by BONE WSO Link to comment Share on other sites More sharing options...
Magellan Posted May 21, 2014 Share Posted May 21, 2014 How should we properly manage a lump sum check this sumer/fall? Black or red... 3 Link to comment Share on other sites More sharing options...
Disregard Posted May 21, 2014 Author Share Posted May 21, 2014 I recharacterized this year's Roth IRA contribution to a Traditional IRA. Vanguard made it very easy to start a Traditional IRA. They have to move the funds on their side, but a quick phone call was all it took. However, Roth TSP contributions that have already been made this year cannot be converted to Traditional TSP. I highly recommend to switch to Traditional retirement plans instead of Roth for the rest of the year if you're expecting a windfall payment this year. If you can max both Traditional IRA and TSP, that's up to 23K that you can deduct which can save 5 or 6K in taxes, or even more if you also contribute to a spouse's plan. Link to comment Share on other sites More sharing options...
FUSEPLUG Posted May 22, 2014 Share Posted May 22, 2014 (edited) Along the lines of finance... How significant of a monetary loss does one realize when selling back leave versus going on terminal. Obviously it varies. My understanding is that when selling back, one loses out on BAH, BAS, incentive pay, etc. for those days. Is this correct, or have I been misled. Anything else I am not taking into account? I'm sure there's plenty of Air Force guidance on this, but I am looking for a legitimate perspective, not shoe-clerkese. ETA: Good info here. I'm also looking for other's insight as many of us are nearing a potential terminal start date quickly. Edited May 22, 2014 by FUSEPLUG Link to comment Share on other sites More sharing options...
Jughead Posted May 22, 2014 Share Posted May 22, 2014 I highly recommend to switch to Traditional retirement plans instead of Roth for the rest of the year if you're expecting a windfall payment this year. If you can max both Traditional IRA and TSP, that's up to 23K that you can deduct which can save 5 or 6K in taxes, or even more if you also contribute to a spouse's plan. That's assuming the "windfall payment" doesn't push you above the AGI at which you can no longer deduct IRA contributions.... Also, you may find your AGI is such that you cannot (directly) make a Roth IRA contribution at all. I'm a big fan of retirement accounts--I always max IRAs, TSP, 401(k), whether or not I can deduct/defer some/all of it. Just be aware that a significantly higher income in a given year may expose you to tax rules you haven't run into before, and your plan may not play out exactly as you intended. My understanding is that when selling back, one loses out on BAH, BAS, incentive pay, etc. for those days. Is this correct, or have I been misled. Correct. Leave days sold back are paid at your current basic pay (1/30th of base pay per leave day sold) ONLY. 60 days max over your whole career may be sold back. Only you can decide if selling back leave is "worth" it. If you need max dollars in-pocket and don't need the time off: work until your last day leaving 60 days in the bank & sell back 60 days, with the result that you get a full AD paycheck up until your official last day (which is true whether taking terminal or not), AND you get ~2 months basic pay added to your final paycheck. If you need max time off, save up as much leave as you can and take it all in terminal (requires CC approval; terminal leave is NOT guaranteed). Or any combination in-between.... Link to comment Share on other sites More sharing options...
FUSEPLUG Posted May 22, 2014 Share Posted May 22, 2014 Thanks Jughead. Your response sent me 180 degrees on what I thought was best. I have no problem working (and getting paid) until the 29 Sep DOS then collecting the 1/30th base pay for 60-ish days of leave. Will I get taxed on that sold back leave (about $11K in my case)? Link to comment Share on other sites More sharing options...
BONE WSO Posted May 22, 2014 Share Posted May 22, 2014 FWIW, I considered working until the very last day and then selling back 30 days for $6500. However, they will take taxes out of that, and I'm not sure if it will be the same rate as the VSP, which will be a huge chunk. I decided that I am going to take half the leave and spend the summer off with my family. I know that I will never again get the chance to take off a large portion of the summer to spend with them so I am opting for that, plus I am ready to mentally checkout. According to the AFI, you cannot take PTDY on consecutive M-F so I plan to take it one week M-F, followed by leave M-F and keep that rotation for about seven weeks. I am going to come back in for a couple weeks at the end to outprocess, so its really not terminal and only uses 15 total days of leave. Link to comment Share on other sites More sharing options...
stick Posted May 22, 2014 Share Posted May 22, 2014 Your leave sell back and VSP payout are taxed as income, period dot. The AF withholds 25% in anticipation of you owing that much in taxes, which maybe the case or may not be the case depending on your personal situation. If you own real estate and touch down overseas often, then you could easily end up with a much less than 25% effective tax rate and you would get a huge refund when you file your 2014 taxes. If you don't go to a combat zone at all during 2014 and you don't have any way to take capital losses or significantly reduce your income, (and you are an high rolling officer who already makes 80-100k) then you could end up owing more than 25% on your VSP payout and/or leave sell back. Your April could be painful if you haven't budgeted for the additional tax owed! Either way, selling leave puts more money in your pocket, but deprives you of your time. Like Jughead said, it's completely dependent on your personal needs at the time you separate. I'm working until the end because I don't know what else I'd do with my time and I'll still have several months to goof off after I get out. Link to comment Share on other sites More sharing options...
Shut up 'n color Posted May 22, 2014 Share Posted May 22, 2014 Are there any TRICARE options available for those accepted for VSP? I read on their site that you are no longer covered after your DOS, but heard from someone that there is an option available to pay for 6 or so months after separation....and it's cheaper than Obamacare. Link to comment Share on other sites More sharing options...
Sierra Hotel Posted May 22, 2014 Share Posted May 22, 2014 Health Care after VSP and before civilian jobs: http://www.tricare.mil/Welcome/SpecialPrograms/CHCBP.aspx Link to comment Share on other sites More sharing options...
flyjetz Posted May 22, 2014 Share Posted May 22, 2014 (edited) Thanks Jughead. Your response sent me 180 degrees on what I thought was best. I have no problem working (and getting paid) until the 29 Sep DOS then collecting the 1/30th base pay for 60-ish days of leave. Will I get taxed on that sold back leave (about $11K in my case)? Don't forget the third option, which is double-dipping in your new civilian job while on terminal. This third option makes the most sense monetarily. In other words, don't sell your leave unless you have to. This all depends on whether or not you can actually line up employment that fast. There are some limitations to this. I believe you can't take a DoD Civilian position while still on terminal, but I believe working for a contractor is fine. Someone will correct me if I'm wrong. I'm not a VSP'er, but will go terminal for a 20 yr retirement this coming February. If I can get on with an airline in early February, I'll have nearly four months of airline pay and FULL USAF pay. Edited May 22, 2014 by flyjetz Link to comment Share on other sites More sharing options...
RASH Posted May 22, 2014 Share Posted May 22, 2014 You can double dip GS while you're on terminal, but no working for a govt contractor until officially retired or separated... Posted from the NEW Baseops.net App! Link to comment Share on other sites More sharing options...
stract Posted May 23, 2014 Share Posted May 23, 2014 RASH, I don't think that's the case. I've known several folk begin working for a contractor while on terminal leave. Link to comment Share on other sites More sharing options...
ChkHandleDn Posted May 23, 2014 Share Posted May 23, 2014 Don't forget the third option, which is double-dipping in your new civilian job while on terminal. This third option makes the most sense monetarily. In other words, don't sell your leave unless you have to. This all depends on whether or not you can actually line up employment that fast. There are some limitations to this. I believe you can't take a DoD Civilian position while still on terminal, but I believe working for a contractor is fine. Someone will correct me if I'm wrong. I'm not a VSP'er, but will go terminal for a 20 yr retirement this coming February. If I can get on with an airline in early February, I'll have nearly four months of airline pay and FULL USAF pay. This is the issue I'm debating on so please help me with my math. If I work all the way until my separation date and then sell 30 days of leave, I'd get roughly $4300 after 25% is taken out for taxes. If I do terminal instead and do a corporate contract flying job at $200/day, I'd have to fly 22 days to break even and/or come out ahead. To me it seems like the best option is to sell my leave back, rather than hope to fly 22+ days as a contract pilot which is not guaranteed. Is my math off, or is there something I'm missing? Link to comment Share on other sites More sharing options...
stract Posted May 23, 2014 Share Posted May 23, 2014 you're still getting the AD paycheck which includes BAH, BAS, and Flight Pay, until your DOS. So you can double dip Link to comment Share on other sites More sharing options...
ChkHandleDn Posted May 23, 2014 Share Posted May 23, 2014 (edited) Yeah I guess I was looking at it from the standpoint of a guaranteed $4300 check, or maybe earning close to that if I take terminal and try and fly. If I sit instead of fly I make zero, but if I sell it back I make $. Either way, while I work or take terminal I'm getting my BAH, etc, but it's the total amount I could earn at the end of the day that has be scratching my head. For example, if I take terminal and fly say for 10 days, I only earn roughly $2K on top of my normal pay check by the end of Sep. However if I sell my leave back, I get $4300 on top of my normal pay at the end of Sep. I can definitely understand if someone has full time lined up w/ a set pay check, but for the contract gig I don't have that. Edited May 23, 2014 by ChkHandleDn Link to comment Share on other sites More sharing options...
Shaft34 Posted May 23, 2014 Share Posted May 23, 2014 What are you going to be flying for $200/day? Do you get an hourly rate + the daily rate? Link to comment Share on other sites More sharing options...
nunya Posted May 23, 2014 Share Posted May 23, 2014 You could open a 529 plan for your kid's college to tax shelter part of your VSP. https://personal.vanguard.com/us/funds/529portfolios Link to comment Share on other sites More sharing options...
ChkHandleDn Posted May 23, 2014 Share Posted May 23, 2014 What are you going to be flying for $200/day? Do you get an hourly rate + the daily rate? Right seat gear monkey in the PC-12, Phenom 100 or 300. I believe it goes up to $250 for the Phenom. No hourly rate unless full time. But hotels, rental cars and food are all covered by the company even as contract. Link to comment Share on other sites More sharing options...
Disregard Posted May 23, 2014 Author Share Posted May 23, 2014 From what I've seen, 529 contributions are not deductible for federal income tax, but may be deductible for state income tax. 529s seem to operate similar to the Roth concept of paying the tax upfront and having tax-free earnings. Link to comment Share on other sites More sharing options...
ThreeHoler Posted May 23, 2014 Share Posted May 23, 2014 http://www.irs.gov/uac/529-Plans:-Questions-and-Answers Not federally deductible. Link to comment Share on other sites More sharing options...
Shaft34 Posted May 23, 2014 Share Posted May 23, 2014 Right seat gear monkey in the PC-12, Phenom 100 or 300. I believe it goes up to $250 for the Phenom. No hourly rate unless full time. But hotels, rental cars and food are all covered by the company even as contract. Thanks ChkHandleDn! I'm starting a part 135 charter job in a few weeks and still learning a lot about the pay structure. Link to comment Share on other sites More sharing options...
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