As we have just celebrated Fourth of July, it’s important to remember this great day of independence and also those who have served so faithfully to help maintain that independence. In honor of the men and women who have served our country, I am providing advice for military personnel that will help you prepare for your financial future.
If you are a current or former member of the military, the following benefits and tips can help empower you to take control of your finances.
1. Use your education benefits wisely.
The Post-911 G.I. Bill provides up to 36 months of education benefits covering the full cost of public school in-state tuition and a capped amount for private college tuition for veterans who meet certain service requirements. Education benefits can be transferred to other family members, but you normally have to have served for six years and agree to serve an extra four years after signing up for this benefit.
2. Maximize your tax savings through residency.
Your state of residence can have a big impact on your taxes. Active-duty military personnel are allowed to maintain legal residence in one state even if they are transferred to another state. If you live in a state income tax-free place like Florida or Texas and later move to a state where you’d be required to pay state income tax, keeping your old state as your legal state of residence can make a big difference in savings.
3. Use your low-cost investment options.
Military service members can benefit greatly from using the Thrift Savings Plan, a defined contribution retirement plan for Federal employees and members of the uniformed services (like the Army, Navy, Air Force, Coast Guard, etc.). One of the lowest-cost retirement savings plans available, it lets you either invest your money in one of five index-based mutual funds or a target-date fund. Your contributions to the plan reduce your taxable income, which doesn’t include tax-free combat pay. In 2016 you can defer up to $18,000 to the Thrift Savings Plan, and if you’re deployed and receiving tax-free income, your annual additional contribute limit goes up to $53,000. https://www.tsp.gov/PlanParticipation/EligibilityAndContributions/contributionLimits.html
The deferral limit applies to the combined total of traditional and Roth contributions; although the deferral limit does not apply to traditional contributions made from tax-exempt pay earned in a combat zone, it includes all traditional and Roth contributions from taxable basic pay, incentive pay, special pay and bonus pay. An “annual addition limit” on the other hand, includes employee contributions (tax-deferred, after-tax and tax-exempt), Agency Automatic (1%) Contributions and Matching Contributions. Note: For 415(c) purposes, working for multiple Federal agencies or services in the same year is considered having one employer.
4. Get a boost on savings.
Deployed personnel who are serving in combat zones are eligible for the Department of Defense Savings Deposit Program, which allows you to invest up to $10,000 for each deployment. Members receive 10% annual interest, which continues to accrue for three months following your departure from a combat zone. Once your account reaches $10,000 you can withdraw funds above this amount quarterly, otherwise withdrawals are generally not allowed. Accounts can be closed after deployment. Be sure to consult with your benefits coordinator prior to selecting this option. Restrictions may apply as to the liquidity of this account while it is in use.
5. Take advantage of a Roth IRA.
Contributing to a Roth IRA is a good idea for many people, but it can be particularly beneficial if you’re currently receiving tax-free combat-zone pay. Those receiving tax-free combat zone pay are not required to report contributions to a Roth IRA on their individual tax returns. Although these Roth contributions are not deductible, they are usually tax-free upon retirement.
If you anticipate your tax rate to be the same or higher upon retirement, it is recommended that you select a Roth IRA over a traditional one, since the former allows you to settle your taxes now rather than later. Roth IRAs also offer greater financial flexibility, allowing holders to withdraw contributions without incurring penalties.
Military members can also capitalize on the many benefits of Roth IRA contributions. Benefits include the ability to receive extensions to make contributions and access to lower tax brackets. Also, the Heroes Earned Retirement Opportunities Act enacted in 2006 allows military members to contribute to a Roth IRA (even if they did not pay federal income tax on their income).
In 2016 you can contribute up to $5,500 (up to $6,500 if you are over 50) and all contributions are tax-free. Qualified withdrawals from the account are also tax-free, though some limitations and restrictions may apply. Speak to a financial professional to see if this option is right for you.
6. Understand tools for debt relief.
Military members have access to some unique programs and rights that can help with debt. For starters, the Service Member’s Civil Relief Act (SCRA) places a cap on the interest rates for any loans that you took out prior to active service. Unlike civilians, military members are also allowed to terminate a housing rental agreement if they have been permanently moved to a new station or will temporarily be assigned to a new base for 90 days or more. If you struggle with debt, find out what type of assistance you may be eligible for through the SCRA.
7. Simplify your home-buying experience.
One of the best benefits offered to military members is the Veteran’s Administration home-loan program. VA loan rates are competitive, and the VA guarantees up to 25% of the payment on the loan, often allowing you to get a home with no down payment and no private mortgage insurance.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Winnie Sun is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Sun Group Wealth Partners, a registered investment advisor and a separate entity from LPL Financial.