There are many financial benefits associated with a career of serving in the U.S. military. If you’re a veteran, then you should know how many benefits are waiting for you, and even consider tapping into them as soon as possible.
The whole purpose is to create a consolidated synopsis as the majority of programs, so the members of the military and veterans can efficiently optimitize the benefits. The United States military retirement system is meant to provide service members with financial security after their dedicated years of service.
However, it’s highly complex and quite difficult to navigate. For plenty of years, the military had only one retirement plan, known as High-36 Retirement Plan, or High 3. This required service members to serve a minimum of 20 years before becoming eligible.
But plenty of individuals didn’t serve the full amount of years (20), leaving without any retirement savings. The Thrift Savings Plan (TSP) was officially expanded in 2001 from federal civilian employees, so it could include members of the uniformed services.
Now, the TSP serves as the cornerstone of the United States military retirement system, hence offering to service members and federal employees a very clear contribution retirement savings plan. And just like a 401(k), the TSP offers a tax-advantaged way for military personnel to save for retirement. Until 2018, there wasn’t any match in the defined contribution portion of the retirement plan, hence not as much of an incentive for service members to contribute.
We introduce you to the blended retirement system!
Ever since the Blended Retirement System (BRS) appeared, service members can easily receive up to a 5% match of their base pay. Anyone who joined the army after January 1, 2018, is automatically considered for BRS. Besides, they are also opted in a 5% of their basic pay.
Even if they change their contribution rate to 0%, they still need to receive a basic pay automatic contribution from the government of 1%. The only vesting requirement is that any member who serves for two years is also eligible for matching and automatic contributions.
There’s one thing that needs to be specified: those who joined before January 1, 2018, and opted into the BRS, are instantly vested in the matching contributions but still need to serve two years to be fully vested in the automatic contributions.
A service member is vested right away in all the other TSP funds, including their own contributions and their afferent earnings. The plan needs to have the same age requirements and deferral limits as other workplace 401(k) plans. And just for the sake of this conversation, let’s focus on the TSP and how it applies to the BRS.
About military pay
Service members have three different types of pay: basic pay, allowances, and special and incentive pay. The allowances, which also include housing and subsistence, are completely tax-free and can represent a significant portion of take-home pay, for as much as $60,000 per year!
All these types of pay are also established by pay grade, where a service member is then stationed, their rating and specialty, and whether they have any other dependents or not.
TSP contributions are then selected through the service members’ myPay online account (or even NP2, as soon as it becomes active). Then, they can elect to contribute as much as 92% of their base pay, or even up to 100% of special, incentive, and bonus pay.
They can even make any combination to traditional (pre-tax) or even Roth (post-tax) too, and TSP will instantly stop contributions as soon as they reach the contribution limit ($23,000 for 2024, and an additional $7,500 in catch-up contributions for those who are 50 or older).
And just as a reminder, there aren’t any income limits to contribute to a Roth 401(k) like for Roth IRAs. No matter the amount of the elected contribution type (traditional or Roth), matching contributions will always be in pre-tax dollars.
The match that we just described applies only to base pay contributions, not allowances or any other type of incentive pay. And since the government’s match to someone’s TSP is calculated depending on the contributions of each pay period.
It doesn’t benefit participants to maximize or front-load their contributions too early in the year. In such a case, they would be missing out on additional matching contributions a bit later in the year.
The good, the bad, and the ugly of TSP
The TSP is a defined contribution retirement savings and investment plan, which automatically means that the employee and employer can equally contribute to the plan, which is sometimes known as a pension.
Probably one of the most significant advantages of the TSP is its low-cost structure. The plan has a wide range of investment funds with very low expense ratios (or fees, for that matter), which can greatly impact the long-term growth of retirement savings.
All these funds include a certain mix of stocks and bonds, which allows service members to tailor their investments to their risk tolerance and financial goals. The TSP’s fund options also include G Fund (Government Securities Investment Fund), F Fund (Fixed Income Index Investment Fund), C Fund (Common Stock Index Investment Fund), and I Fund (International Stock Index Investment Fund).
The expense ratios which are made to show how much an investor might pay annually to cover operating expenses could differ from 0.048% to 0.079%. And besides the automatic 5% enrollment of basic pay, those who served are also automatically enrolled into the Lifecycle Fund, or even target-date fund, as they get closer to their retirement age.
After retirement or a temporary separation from service, the TSP funds will be eligible to be transferred to your IRA or even Roth IRA. Naturally, a veteran can leave the dollars in the TSP, but there are many other advantages to rolling the funds into an actual IRA.
Besides having more investment options in an IRA account, the holders can also perform Roth conversions and even make qualified charitable distributions. Two years ago, TSP started offering a brand new Mutual Fund Window (MFW) option, to complete the limited offering of funds.
This also gives participants full access to thousands of other funds. But, we also need to consider administrative fees, annual fees, and trading fees besides the expense fees that are quite specific to the mutual fund chosen.
These fees amount to a total of $150 annually and $28.75 per trade. Moreover, there are other minimum account balances needed to start investing in such mutual funds and a maximum percentage of an account that can be easily allocated to this portion. All in all, even if TSP has a limited investment option, it is generally a much better choice for you than other costly alternatives.
In 2022, TSP managed to pull a huge revamp of its website and make it easier to navigate. But, as the majority of government websites, there are still many issues. Statements before June 2022 aren’t available online anymore, and too many participants discovered that their beneficiaries didn’t carry over to the new system.
The famous pension
The second component of military retirement for veterans and service members alike that so many people have heard about is the defined benefit plan portion or pension. Service members need to serve a minimum of 20 years, either on active or reserve duty to fully qualify.
If they retire from active duty, pension starts right away, and if retiring from reserve duty, pension pay begins at 60 years old. To efficiently calculate the amount of pay one should receive depends on a series of factors.
For most under the BRS, it could be 2% x number of years of service x member’s highest 36 months of basic pay. After 20 years of service, members need to receive 40% of their eligible pay.
The silver lining to deployments
As for military personnel who are serving in combat zones, as mentioned by the executive order, other tax considerations need to be set into motion. The IRS has some tax benefits that could greatly impact retirement savings.
One notable provision is the capacity to exclude combat zone pay from taxable income for the entire month, even if one day was spent in the zone. This type of exclusion also applies to active-duty military and civilians who are supporting military operations in those zones.
Service members are also entitled to other incentive pay, like hostile fire or even imminent danger pay. Even if these deployments also bring stressors to individuals and their own families, with the right financial planning, it can prove to be a beneficial silver lining.
As all income earned is also tax-free while in a combat zone if you contribute to a Roth TSP, you will never have to pay taxes on that income or its earnings. But if you are contributing to a traditional TSP bucket, then things might get a bit trickier due to the earnings – like any other traditional 401(k), because they are taxable upon distribution.
Now, they have commingled tax-free income (which will never be taxed) with other taxable earnings, but also as any previously contributed taxable contributions from non-combat income. This sets the basis on a similar note to having non-deductible contributions in a traditional IRA. TSP keeps records of tax-free contributions, but it can still become too complicated when it’s time to withdraw the funds.
And even if you are deployed in a combat zone, the elective deferral limit also increases to the IRS maximum of $69,000 (for this year). This could represent a huge savings perk, especially since the pay increased by the amount would be paid in taxes with the capacity to allocate the majority of it to the retirement account.
Special planning should also be taken into consideration, especially since this limit is the total between participant contributions and any other agency matches. Besides, any excess contributions above the limit of $23,000 need to be traditional (pre-tax), not Roth (post-tax) contributions.
Other deployment benefits
The Savings Deposit Program (SDP), is a lesser-known gem within the military retirement system. It’s basically a savings account available to all service members deployed to designated combat zones.
The SDP has a unique opportunity to earn an attractive interest rate, which is often higher than prevailing civilian interest rates (10% as of 2023), on up to $10,000 of savings during every deployment.
This program is efficient for short-term, low-risk options for service members that need to accumulate funds while being deployed in high-risk environments. Well, this savings vehicle is quite similar, except for a bunch of minor differences, to a certificate of deposit that most banks offer, including a much higher interest rate than even most risky investments can offer.
The SDP’s main interest compounds monthly, and it is fixed at a specific rate established by the Department of Defense. It still accrues for up to 90 days after you left the combat zone. After those 90 days, the interest rate significantly drops to 0%, and after 120, all funds are officially returned.
This makes it a much safer haven for all service members who are looking to grow their money without the whole volatility associated with investment markets. Upon deployment, service members have the option to contribute to the SDP through direct deposit, and the funds then become available for withdrawal upon their return.
Continuation pay
If you served between eight to twelve years, you are eligible for a one-time bonus payment in exchange for additional obligated service, also known as continuation pay. The whole amount wildly differs on a series of factors, including active duty or reserve status, current pay grade, specialty skills and other things. The service member needs to be covered under the BRS, and the bonus can be as high as 13 times the monthly basic pay.
And now…what?
The U.S. military retirement system is basically a multifaceted structure with one purpose: providing financial security to those who served their country. TSP, with its wildly diverse investment fund options and a very low-cost structure, empowers service members to start building their retirement savings wisely.
Other tax considerations in combat zones also offer opportunities for tax-efficient growth, as the SDP provides a very secure method for short-term savings accumulation.
Understanding all these components and making the needed informed decisions about fund allocations, tax strategies and utilization of programs such as SDP can greatly impact the long-term financial well-being of military personnel. It’s also very important to remember that just because one leaves the military, this doesn’t mean their career is automatically over.
Service members can also serve a full 20 years, retiring from the military in their 40s with highly sought-after skills, and have another series of successful, 20-year careers while also living on a military pension.
As service members navigate their own careers and plan ahead for retirement, seeking advice from financial pros who are already in the know when it comes to military benefits can enhance the financial security and peace of mind.
Are you a veteran? Here are some hobbies you should try
Fishing
According to Army Times, fishing is known to be a hobby that veterans always focus on after returning from service. Even if they try it for the first time, being alone with someone you love on a tranquil body of water could truly serve as a great stress reliever, especially during times of high anxiety.
Catching a fish is also a very rewarding experience. It even provides a fresh and tasty meal veterans might not have received on base while being deployed.
Reading
Let’s be honest: nothing takes one’s mind off of their problems than getting lost in a good novel. Catching up on your favorite author’s series is definitely a very fun and stimulating activity. There are even some books published by veterans that document their full experiences while serving.
Enjoying someone else’s story is a wonderful way to find a balance between staying connected with old deployment memories and also adapting to civilian life.
Hiking
Taking in Mother Nature might help veterans their minds off of their worries. Moreover, going on a wilderness hike at least once a week and camping every other weekend might encourage veterans to enjoy the simple aspects of life.
Doing all these activities alone can prove to be quite therapeutic, especially for retired service members. But depending on their preferences, it can also be beneficial to do them with your friends and family members.
Yoga
Yoga is the perfect hobby, because it keeps people in tip-top shape in a stress-free environment, while also encouraging them to relax and let go of all their worries. This is also why it’s frequently used by veterans with PTSD.
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