3 Valuable Benefits for Military Families

Here's how to make the most of these programs to improve your family's financial future.

Members of the military have a lot of special financial issues that most people don’t experience: They have to move frequently -- sometimes with very little notice -- and they can be deployed to war zones for months or years. But they also have access to some valuable benefits that can help with their family’s personal finances.

My husband has been an Army doctor for 17 years, and he recently returned from his third deployment, where he was stationed at a combat-support hospital in southern Afghanistan for seven months. We’ve had firsthand experience with the financial challenges that military families face, but we’ve also been able to take advantage of some special benefits offered to service members. Here are three of the top financial benefits available to members of the military and how to make the most of them to improve your family’s financial future.

Low-fee retirement savings. Service members can invest in the Thrift Savings Plan, the retirement-savings program for federal employees. Similar to a 401(k) plan, the TSP offers a low-cost, tax-advantaged way to save for the future. But surprisingly few members of the military take advantage of this opportunity -- perhaps because they think the military’s pension will be all they will need.

But counting on a military pension as your sole source of retirement income is a mistake: There’s no partial vesting under the current pension program, which means you won’t get anything unless you stay in the military for at least 20 years -- and most people don’t stay that long. Even if you qualify for a pension, it probably won’t be enough to cover all of your bills. Usually, you’re entitled to 50% of your base salary if you retire at 20 years (and an extra 2.5% for every year you stay beyond 20 years). And in light of the current debate about potential changes to the military pension system, it’s even more important to supplement your pension with your own savings.

You can invest up to $16,500 in the TSP in 2011 (the contribution limit rises to $17,000 in 2012), and you can contribute even more when deployed. If you receive tax-exempt pay while serving in a combat zone, you can contribute up to a total of $49,000 in 2011 (or $50,000 in 2012). We bumped up our contributions when my husband was in Afghanistan, taking advantage of the extra money we had because of his tax-free combat-zone pay.

You can invest your retirement-plan contributions in up to six different mutual funds offered only to TSP participants, including funds that invest in large-company U.S. stocks, small-company stocks, government securities, bonds, and international stocks, plus the L Fund. The L-Fund is a series of a target-date funds based on your age and prospective retirement date. It invests in a diversified portfolio of funds and automatically adjusts your asset allocation to grow more conservative as you near retirement. The TSP fund fees are extremely low compared with most retail mutual funds. The 0.025% fee means it costs you just 25 cents per $1,000 invested.

TSP contributions lower your taxable income and grow tax-deferred until you withdraw the money in retirement, and you won’t ever be taxed on contributions from tax-exempt combat-zone pay. For more information see the Thrift Savings Plan Web site.

A savings plan that guarantees 10% returns. When you hear the words “guaranteed 10% returns,” you might automatically assume that the investment touted is a scam -- especially in this low-interest-rate environment. But the military’s Savings Deposit Program is no scam. Deployed service members can invest up to $10,000 in the program, which earns 10% annual interest, compounded quarterly, while you are deployed and for up to three months after you return.

It can be tricky to get started in the SDP because you can’t contribute money to the plan until you’re deployed. Talk with your finance office before you leave to find out what you’ll need to do to get started. And because it’s so unusual to have an opportunity to earn 10% interest these days, it’s a good idea to stockpile some money a few months before you’re deployed so you can contribute as much as possible and make the most of this program while you’re gone.

For more information, see the Savings Deposit Program page at the Defense Finance and Accounting Web site.

Free college for your kids. The Post 9/11 GI Bill, which was passed in 2009, can provide valuable education benefits for anyone who served for at least 90 days in the military, reserves or National Guard since September 11, 2001. The GI Bill pays up to the full cost of in-state tuition and fees for public colleges for up to four academic years, or up to $17,500 per year for private colleges and foreign schools. To qualify for the maximum benefit, you must serve (or have served) at least 36 months since 9/11.

And one of the biggest differences from the previous Montgomery GI Bill is that long-serving members of the military can transfer the benefits to their spouse and/or children. To qualify to make the transfer, you generally need to have six years of service and agree to serve four more years in the armed forces. Spouses may use the transferred benefits immediately; children must wait until you’ve served at least ten years. Service members and veterans (and spouses) must use the benefits within 15 years after leaving the military. Children have more than 15 years, but must use the benefits by age 26. We’ve already transferred my husband’s benefits to our 8-year-old son, and this gives us a huge boost to our college savings. For more information about transferring benefits, see the VA’s benefits transfer page and the Department of Defense’s Transfer Web site. Also see Now the GI Bill Is For Families, Too.

The GI Bill won’t pay the full cost if you attend a private college or go to a public college as an out-of-state student, but the $17,500 will make a big dent in the bills. And you could get additional help from the Yellow Ribbon program: More than 1,000 colleges have signed up to provide additional scholarships that cover some of the extra costs for a certain number of students, and the Department of Veterans Affairs matches the school’s contribution. To qualify for the Yellow Ribbon scholarships you must be eligible for the maximum GI-bill benefits and apply for the extra awards through the college. See the VA’s Yellow Ribbon Program page for more information.

For more information about the GI Bill, see the VA’s GI Bill Web site.

Certain members of the military have access to special legal protections that can reduce the interest rate on their outstanding loans and credit card bills to 6% (see Lower Loan Rates for the Military). Service members also have access to low-cost life insurance, special tax breaks and mortgages with no down payment. For more information about these and other benefits and financial strategies for military families, see our Military Families special report.

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