Question: I’m in the Army, and I saw your column about 8 Smart Financial Moves for the New Year a few weeks ago. Is there anything special that military families should be doing now to make sure their finances are on track for the year?
Answer: This is Military Saves Week (February 27 to March 4), so it’s the perfect time for military families to take stock of their finances, make the most of special saving opportunities and prepare for the future. Here are eight moves that military families should make right now. You can also learn more about these and other special benefits and planning strategies in the new edition of Kiplinger’s Financial Field Manual: A Personal Finance Guide for Military Families.
1. Make the most of the Thrift Savings Plan. Your TSP is similar to a civilian 401(k), but the fees are extremely low and you have some extra benefits. As with a 401(k), you can contribute up to $18,000 to the TSP in 2017, plus an extra $6,000 if you’re 50 or older anytime this year. If you’re deployed and receiving tax-free income in a combat zone, you can contribute up to $54,000 for the year. Even if you can’t afford to contribute that much, you may still be able to boost your contributions a bit while you’re deployed and your income is tax-free.
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2. Consider making Roth TSP contributions. Many service members don’t realize that they now have a choice between two types of TSP contributions: traditional TSP contributions, which lower your taxable income now and grow tax-deferred until retirement, or Roth TSP contributions, which don’t give you a current tax break but do let you withdraw the earnings tax-free after age 59½. The Roth TSP can be particularly valuable for service members whose taxable income is much lower now than it will be in the future (especially because of the tax-free housing allowance and tax-free income while deployed). Note that contributions to the Roth TSP from tax-free pay in a combat zone will never be taxed.
3. Check up on your TSP investments. You have several investing options in the TSP, all with very low fees. You can invest in five index mutual funds that focus on large companies, small firms, international firms, bonds and government securities. Or you can choose a lifecycle fund (called the L fund), which builds a diversified portfolio of the other funds to match your time horizon. The L fund invests primarily in stock funds at the start, when you have more than a decade before you plan to tap the money, then it gradually becomes more conservative as your retirement date draws near. Pick the retirement date in the L fund that matches when you plan to stop working altogether (not just for the military) and need to start withdrawing the money. See Thrift Savings Plan’s investing section for more information.
4. Consider a Roth IRA, too. In addition to contributing to your TSP, you can contribute up to $5,500 to a Roth IRA in 2017 (or $6,500 if you’re 50 or older) as long as your modified adjusted gross income is less than $118,000 if you’re single or $186,000 if you’re married and filing jointly. (You can make partial contributions if your income is as high as $133,000 if single or $196,000 for married couples.) You don’t get a current tax break, but you can withdraw the money tax-free after age 59½, and you can withdraw your contributions at any time without penalties or taxes. See Why You Need a Roth IRA for more information about the benefits of a Roth IRA. Service members get an extra benefit: As with the Roth TSP, if you invest tax-free income while in a combat zone, it goes in tax-free and comes out tax-free, too.
5. Start thinking about your pension options. People who joined the military from 2006 to 2017 have to make a big decision about their military pension: They can stay with the old system, which means they need to remain in the military for at least 20 years to qualify for military retirement pay. That pay can be worth 50% (or more if you stay longer) of your basic pay. But if you don’t stay for 20 years, you get nothing.
Or you can choose the new “blended retirement system,” which reduces the pension amount but also provides matching Thrift Savings Plan contributions almost immediately. Under the new system, you’ll get 40% of your base pay if you stay for 20 years, and the Department of Defense will automatically contribute 1% of your basic pay to the Thrift Savings Plan after 60 days of service. It will also match your contributions up to the next 4% of your pay -– giving you up to 5% each year in free money that you can keep in your plan (along with the earnings) after completing two years of service.
If you don’t plan to stay in the military for 20 years, you’ll come out ahead with the new blended retirement system. You’ll have from January 1, 2018, to December 31, 2018, to opt into the new system. Otherwise, you’ll remain in the current retirement system. People who join the military on January 1, 2018, or later will automatically be enrolled in the blended retirement system (people who joined before 2006 are covered under the original system). See Big Changes Coming to the Military Retirement System for more information.
6. Check your estate planning documents and benefits. This is a good time of year to make sure your beneficiary designations on your retirement savings, life insurance and other accounts are up to date. Also check into special military benefits, such as the Servicemembers Group Life Insurance, which costs just 7 cents per $1,000 of coverage per month ($336 per year for the maximum $400,000). You can also get $100,000 in coverage for your spouse for as little as $60 a year if your spouse is under age 35 (coverage costs more for older spouses). See the VA’s SGLI page for details. Also consider creating a power of attorney for your spouse or other trusted person to handle your finances if you aren’t able to do so yourself, especially if you expect to be deployed soon, and a health-care proxy designating someone to make medical decisions on your behalf. Your base legal affairs office can help with these documents (see the legal services locator to find an office near you). Also learn the rules for the Servicemembers Civil Relief Act, which provides special legal protections and interest rate reductions for some service members who are deployed or called to active duty. See the SGLI page at Servicemembers.gov for more information.
7. Find out about your eligibility for the GI bill and whether your spouse and kids can benefit. The Post 9/11 GI Bill covers the full cost of in-state tuition and fees at public colleges for up to 36 months (four academic years) or up to $21,970 for the 2016-17 school year for private colleges and foreign schools, plus a housing stipend and money for books and tutoring. For the maximum benefit, you generally must serve at least 36 months on active duty (you’ll earn partial benefits if you serve at least 90 days). Longtime service members can transfer their benefits to their spouse or children – you generally need to have served for at least six years on active duty or selected reserve and agree to serve four more years. Spouses can use the transferred benefits right away; children must wait until you’ve served at least 10 years. For more information, see the VA’s GI Bill page.
8. Think about your next steps. If you plan to leave the military in the next few years, start planning your next move and career. When calculating how much income you’ll need, keep in mind that you’ll lose valuable military benefits, such as premium-free health care and your tax-free housing allowance, and you’ll need to pay state income taxes in the state where you actually live (active duty service members and their spouses don’t have to change their domicile every time they move).
Josh Andrews, USAA’s advice director for military life, recommends setting aside six to nine months’ living expenses as a “transition fund” that will cover your expenses if it takes awhile to find a new job or if you have extra expenses related to a move. Also make the most of resources available through the military community service office to help with your transition and job search. See the Department of Labor’s Veterans’ Employment and Training Service and Veterans.gov, and the Small Business Administration’s Veteran-Owned Businesses page.
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