Smart Financial Moves to Make If You're in the Military
take stock of their finances, make the most of special saving opportunities, and prepare for the future.
Here are seven moves that military families should make right now.
1. Make the most of the Thrift Savings Plan.
Your Thrift Savings Plan (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 $20,500 to the TSP in 2022, plus an extra $6,500 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 $61,000 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.
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 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.
4. Consider a Roth IRA, too.
In addition to contributing to your TSP, you can contribute up to $6,000 to a Roth IRA in 2022 (or $7,000 if you're 50 or older) as long as your modified adjusted gross income is less than $144,000 if you're single or $214,000 if you're married and filing jointly. 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. 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. 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.
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 Service Members Civil Relief Act, which provides special legal protections and interest rate reductions for some service members who are deployed or called to active duty.
6. 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) 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.
7. 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).
USAA 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.
Important Disclosures
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing in mutual funds involves risk, including possible loss of principal. The funds value will fluctuate with market conditions and may not achieve its investment objective. Upon redemption, the value of fund shares may be worth more or less than their original cost.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by The Kiplinger Washington Editors.
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