At Your Service

Financial Planning

At Your Service

Find financial advice for military families.

In many areas of their finances, military personnel deal with different rules than non-military families. Knowing the ropes can mean a big payoff:

  • New rules for IRAs and combat-zone pay: Members of the military receive tax-exempt pay while serving in a combat zone. Until recently, that tax-exempt money did not qualify as earned income when determining your eligibility to contribute to an IRA. As a result, if you served in a combat zone for a full year, you might not have qualified to contribute to an IRA at all. But on Memorial Day President Bush signed a new law that allows tax-exempt combat-zone pay to be included when determining IRA eligibility. The law is retroactive to 2004 and 2005, so you can contribute to an IRA for those years if you missed out because of the combat-zone exclusion.

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    It's generally better to contribute to a Roth IRA rather than a deductible IRA. You won't get a tax break now, but you'll be able to withdraw the money tax-free in retirement, when you're likely to be in a much higher income-tax bracket.

  • Capital-gains taxes on the sale of a home: Because military families tend to move frequently, they are subject to special tax laws on the profits they make when selling a home. Instead of having to live in the house for two of the previous five years to qualify for the tax exclusion on home-sale profits ($250,000 for singles, or $500,000 if you're married and filing a joint return), military families need to live in the house for just two of the preceding ten years. For more information on this and many other tax rules, see the IRS's Tax Information for Members of the U.S. Armed Forces, especially IRS Publication 3 Armed Forces Tax Guide.

  • Investments in the federal Thrift Savings Plan: The TSP, the federal government's version of a 401(k), is the best investment option for most military families. To make investing easy, the TSP now offers life-cycle funds that start out with a heavy allocation in stocks and become more conservative as you get closer to your target retirement date. That relieves you of the responsibility of changing your investment options over time. However, the long-term funds are more conservative than Kiplinger's generally recommends. For example, the 2040 fund still has 15% of its assets invested in fixed-income and stable-value funds. If you'd like a more aggressive portfolio while you're still decades away from retirement, you could invest in the TSP's stock funds instead. Go to the TSP Web site for more information about the TSP life cycle funds, and the TSP home page for other information about the Thrift Savings Plan.

  • Car insurance: Soldiers who dropped their auto insurance while deployed to Iraq sometimes had difficulty resuming their coverage when they returned home. Insurers like to see continuous coverage, so it's better to keep some insurance. Because you won't be driving while you're gone, you can save a lot of money by dropping collision coverage and lowering your liability limits to the minimums set by your state (or lender). Keep comprehensive coverage, which will reimburse you if your car is stolen or damaged while in storage, but raise your deductible to at least $1,000. And tell your insurer you won't be driving, for which you could get a low-mileage discount.

  • Records: Before you're deployed, write a will and draft a power of attorney so that a trusted family member or friend can handle your finances while you're gone. The JAG legal services office on base will generally handle this paperwork for free. You may need additional help if you have children from a previous marriage or any other complicating circumstances. You can also get a medical directive, which authorizes a family member to make medical decisions on your behalf if you're incapacitated.

    Patrick Beagle, a retired Marine who is now a fee-based financial planner, also recommends putting together a "brain book," listing your accounts and how to get access to them, plus your online accounts and passwords. Include a copy of your will, power of attorney, medical directive and a letter of instruction should anything happen to you. Also include a set of keys for things such as storage units you may have rented to hold you're belongings while you're away.

    Kiplinger's Your Family Records Organizer can help you get everything together.

For more information about finances for military families, see Finance section and the NASD's