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Financial Planning

Assets Deployed

Military personnel enjoy unique opportunities.

Frustrated that so much financial advice doesn't apply to them, military personnel bombard Kiplinger's with questions -- including many e-mails from members of the armed services who are serving in Iraq. As the wife of an Army doctor who has been deployed to Iraq twice in the past three years, I can appreciate that military families have unique needs when it comes to such things as tax rules, retirement and estate planning.

Patrick Beagle, a former helicopter pilot, retired from the Marines as a lieutenant colonel and opened a fee-based financial-planning practice that specializes in helping military families. Below, we offer financial advice from Beagle, along with words of wisdom from military personnel who are doing a heroic job of managing their money while serving their country.

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Taxes. When you're in the military, you can keep your home state as your official domicile, even when you're stationed elsewhere, or switch your residency to benefit from lower taxes. For example, many of Beagle's colleagues who went to flight school in Florida switched their residency to that state, which doesn't have an income tax.

Chris Carlson, who will soon retire as a major in the Marines, shifted his residency from Wisconsin to Virginia when he was stationed at the Pentagon in 2002. Virginia has a state income tax, but Carlson got a big tax break by contributing to Virginia 529 college-savings plans for his two children.

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To establish residency in a state, Beagle recommends that you register to vote there, get a driver's license and register your car. One caveat: Civilian spouses who work generally must pay taxes in the state where they live.

Estate planning. Shipping out for weeks at a time or going off to war has a way of focusing your attention on your family's future. David Kless, a supply officer on the aircraft carrier U.S.S. Nimitz, based in Coronado, Cal., was deployed to the Persian Gulf from May to November last year and is away from home about 40% of the time. Before he left for the Mideast, he wrote a will to benefit his wife, Teresa, and their young children, Joshua and Katie.

Kless also gave Teresa power of attorney so she could manage the family's finances in his absence. He drafted another, special power of attorney for major transactions -- such as when Teresa sold a camping trailer titled in David's name -- and set up a special arrangement so that he could get part of his pay in cash while aboard ship. The base legal-services office will usually handle this paperwork for free.

Pension benefits. Military personnel can enjoy a retirement paycheck for life, starting as young as age 38. But it's an all-or-nothing deal, with no partial vesting. Leave just shy of 20 years and you don't get anything -- and most people don't stick around that long.

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Beagle recommends not factoring a pension into your planning until you've been in the service at least six years and think you might stay. You're usually entitled to 50% of your base salary after you retire, adjusted for inflation (for calculators, go to www.defenselink.mil/militarypay). Note that pension benefits are tied to your base pay. Specialty bonuses, paid in fields such as law and medicine, aren't included.

Carlson didn't count on a pension until he had served for 13 years. When he retires from the Marines this year at age 42, he'll use the money as a backup while he starts a law practice. He'll also be eligible for lifetime health insurance. "Without that cushion, I'd be hesitant to start my own business," he says.

Retirement savings. Even without a pension, you can save for retirement through the government's Thrift Savings Plan. Similar to a civilian 401(k), the TSP is open to federal and military employees. Military participants can invest 100% of their pretax base pay, up to $15,000 per year, plus all of their tax-exempt pay while serving in a combat zone. Total contributions can't exceed $44,000 in 2006. When you withdraw the money, you won't be taxed on contributions from tax-exempt pay (for information, see www.tsp.gov). But if you roll the money into another employer's 401(k), you'll need to track that money separately.

Taurean Washington, an Army staff sergeant, is socking away money while deployed to Iraq for a year as a maintenance chief for unmanned aerial vehicles. At age 25, he has already accumulated more than $37,000 in his TSP account -- all of it invested in stock funds -- by maxing out his regular contributions and adding most of his bonuses and special pay. "There's little to spend money on when you're deployed, and what is available usually doesn't qualify as a need," says Washington. The parents of two children, ages 5 and 1, Taurean and his wife, JoAngela, "still live on the same amount as when I was a specialist and she was a full-time student."

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Taurean and JoAngela, who has a civilian job in Wiesbaden, Germany, also try to max out their Roth IRAs. Most military personnel are in a much lower tax bracket than they will be after they leave the service, so it makes sense to pay tax on Roth contributions now and enjoy tax-free income later.

Housing. A tax-free housing allowance helps military families cover all or part of their monthly rent or mortgage payment. Military personnel are also eligible for a VA loan, which allows them to borrow up to $417,000 with no down payment or private mortgage insurance (see www.homeloans.va.gov or www.military.com).

But if you have a good credit rating, you might get a better deal on a standard mortgage, says Beagle. And because the VA requires an additional appraisal, a standard mortgage with fewer contingencies would also give you a better shot at competing against other prospective buyers in a tight market.

Life insurance. If you need life insurance because you have dependents who rely on your income, you can buy Servicemembers' Group Life Insurance (SGLI) for 6.5 cents per $1,000 of coverage per month -- $312 per year for the maximum $400,000. You can also get coverage of up to $100,000 for your spouse (see www.insurance.va.gov/sglisite/default.htm).

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But you lose your SGLI coverage when you leave the military, and you may need more than the maximum anyway. So it's smart to buy extra insurance on your own while you're on active duty. Get a policy that doesn't have a war exclusion, from a company such as USAA or MetLife.

Don't be talked into buying a high-fee, cash-value insurance policy as a tax-advantaged way to save. You have plenty of better choices.