10 Financial Tips for Military Families

Members of the military have access to special benefits and legal protections that can make a huge difference in their family's personal finances.

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In honor of Veterans Day, here are ten financial tips for military families to help you make the most of the special benefits and tax breaks available to servicemembers.

1. Take advantage of low-cost investments. Servicemembers are lucky to have access to one of the lowest-cost retirement-savings plans around. The Thrift Savings Plan charges just about 25 cents a year for every $1,000 invested, and it lets you choose one of five index mutual funds or a target-date fund (called the lifecycle fund, or L Fund), which automatically becomes more conservative as your retirement date gets closer. You can invest up to $17,000 in the TSP in 2012 (or $17,500 in 2013), and you can boost your contributions to $50,000 for the year ($51,000 in 2013) if you’re receiving tax-free income while deployed. Your contributions to a traditional TSP lower your taxable income and grow tax-deferred for retirement.

And now you have access to a Roth TSP, too, which is like a Roth IRA but without the income restrictions. Money you contribute to a Roth TSP doesn’t lower your taxable income now, but you can withdraw the money (including the earnings) tax-free in retirement. That can be a particularly good deal for servicemembers who expect to earn much more money (and owe higher taxes) when they leave the service. See www.tsp.gov for details. With potential changes to the military pension program under discussion, and because most servicemembers don’t stay the 20 years required to qualify for a pension anyway, it’s important to do some saving on your own. See TSP.gov for details.

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2. Get 10% on your savings, guaranteed. Unlike most high-interest guarantees, this one is not a scam. The military’s Savings Deposit Program lets deployed servicemembers invest up to $10,000 in the program and receive 10% annual interest, compounded quarterly, for up to three months after their return. For more information, see the Savings Deposit Program page at the Defense Finance and Accounting Web site


3. Benefit from tax-free in, tax-free out. Saving in a Roth IRA can be a particularly good deal if you’re receiving tax-free combat-zone pay. In that case, your money goes into the Roth tax-free and your contributions as well as your earnings come out tax-free, a double tax benefit that’s tough to beat. You can contribute up to $5,000 to a Roth for 2012 ($5,500 in 2013). And if your spouse doesn’t work, you can contribute up to the maximum on his or her behalf, too. You have until April 15, 2013, to make contributions to a Roth for 2012. To contribute to a Roth for 2012, your modified adjusted gross income must be less than $125,000 if you’re single or $183,000 if you’re married filing jointly. Those income limits rise slightly in 2013. See 2013 Retirement Account Contribution Limits for details.

4. Transfer your education benefits. People who have served for at least 36 months since Sept. 11, 2001, have access to a very valuable benefit: the Post-9/11 GI Bill, which can cover the full cost of in-state tuition and fees for a public college for up to 36 months (four academic years) or up to $17,500 per year for a private college or foreign school. And now longtime servicemembers can transfer their benefits to their spouse or children. For more information, see Best College-Savings Options for Military Families.

5. Sign up for inexpensive life insurance. Servicemembers have access to one of the lowest-cost life insurance programs available. Servicemembers’ Group Life Insurance (SGLI) costs only 6.5 cents per $1,000 of coverage per month, or $312 a year for the maximum $400,000 – regardless of your age, health or likelihood of being deployed. You can also get $100,000 in coverage for your spouse for as little as $60 a year if he or she is under age 35. See www.insurance.va.gov/sgliSite for more information.

6. Maximize your tax breaks. Servicemembers can maintain legal residence in one state even if they are transferred to another state, as long as they are in the military. This flexibility can help a lot of you’re stationed in a tax-free state -- such as Florida or Texas -- and move to another state where you would otherwise have to pay state income taxes. And now your spouse can maintain that state of residency, too, even if you have to move. For more information, see State Tax Breaks for Military Families.

7. Take advantage of low loan rates. The Servicemembers Civil Relief Act provides special legal benefits for servicemembers, including an interest-rate cap of 6% on any loans you took out before you were called to active duty. You have to apply to the lender for this benefit, which is intended to help you if your ability to pay is affected by military service -- as it may be if you take a pay cut when activated to the Reserve or National Guard. The law also gives you the right to terminate an apartment lease if you have orders for a permanent change of station or are deployed to a new location for 90 days or more. The Armed Forces Legal Assistance Office (http://legalassistance.law.af.mil) can help with these requests. See Lower Loan Rates for the Military for details.

8. Make the most of housing breaks. Members of the military tend to move frequently, and often with little notice. But they also get some perks – including a tax-free housing allowance and access to Veterans Administration loans, which are now one of the only ways to get a house with no money down (and no private mortgage insurance). For more information about the VA loans, see the Veterans Administration site. If you put little or no money down, though, you could end up being upside down on your home if prices drop and you have to move -- as happened to many military members over the past few years. For help dealing with underwater homes, see Fannie Mae’s advice at the KnowYourOptions.com military page, the government’s Home Affordable Foreclosure Alternatives program (at MakingHomeAffordable.gov) or the Homeowners Assistance Program for a special program for members of the military who have to move.

9. Calculate a comparable salary. When you are thinking about leaving the military, you need to do some careful calculations to figure out how the new job stacks up financially next to your military career. Not only do you need to compare military and nonmilitary salaries, but you also need to add in the value of the military benefits you’re giving up. For instance, you’ll no longer have free health care, low-cost life insurance or a tax-free housing allowance, and you’ll have to pay taxes in the state where you actually live after you leave the service, even if you had been able to maintain residency in a tax-free state while on active duty. And if you leave before 20 years, you’ll forgo your entire pension and won’t be eligible for retiree health insurance. See Leave the Military for a Civilian Job for more information about the calculations if you’re leaving before 20 years. And see http://www.kiplinger.com/magazine/archives/when-to-retire-from-the-army.html When to Retire From the Army for information about deciding whether to stay for 20 or 30 years.

10. Make the most of resources for finding a new job. When you are ready to leave the military, you may find it difficult to translate your military skills into the civilian job market. You can get help from the military community-service office on your base and the www.acap.army.mil Army Career and Alumni Program. There are similar programs for the other branches. And the Department of Labor’s Veterans’ Employment and Training Service program and Veterans Career OneStop Center are packed with resources to help veterans find jobs.

For more information about personal finance issues for military families, see our Military Finance Special Report and the Financial Field Manual: Personal Finance Guide for Military Families.

Kimberly Lankford
Contributing Editor, Kiplinger's Personal Finance

As the "Ask Kim" columnist for Kiplinger's Personal Finance, Lankford receives hundreds of personal finance questions from readers every month. She is the author of Rescue Your Financial Life (McGraw-Hill, 2003), The Insurance Maze: How You Can Save Money on Insurance -- and Still Get the Coverage You Need (Kaplan, 2006), Kiplinger's Ask Kim for Money Smart Solutions (Kaplan, 2007) and The Kiplinger/BBB Personal Finance Guide for Military Families. She is frequently featured as a financial expert on television and radio, including NBC's Today Show, CNN, CNBC and National Public Radio.