Military Money: A Financial Checklist for Big Life Events
Service members and their families can receive valuable financial benefits at every stage of their lives. Here’s what you need to know to make the most of these opportunities.
Make the Most of Your Benefits When You Join the Military
One of the smartest financial decisions you can make when you join the military is to start setting aside money in the Thrift Savings Plan. This low-cost retirement savings plan helps you build tax-advantaged savings for the future — no matter how long you end up staying in the military. Signing up to make automatic contributions from each paycheck — even just a small amount — can add up significantly over time. You have several investing choices that can help the money grow even more, including a lifecycle fund (L Fund) where the investments are automatically adjusted based on your retirement date.
And there’s an especially valuable bonus for new service members: People who join the military in 2018 or later get matching contributions from the Department of Defense — that’s free money. To get the full match, you need to contribute at least 5% of your pay to the TSP.
Also make the most of low-cost life insurance. The Servicemembers Group Life Insurance program provides up to $400,000 in life insurance for just $288 per year, regardless of your health or risk.
You also receive special legal benefits under the Servicemembers Civil Relief Act (SCRA) when you join the military, including an interest rate cap of 6% on loans taken out prior to military service. If you had any high-interest loans from before you joined the military — such as car loans, credit cards or student loans — you can have the interest rates reduced to 6% after your service begins. Ask your lender or bank about your SCRA rights, and you can also get help from the base legal affairs office. This benefit only applies to loans you took out before you joined the military or went on active duty.
When You Start a Family
The military also offers valuable benefits to the family of service members, too. Enroll your spouse and children in DEERS, the Defense Enrollment Eligibility Reporting System, so they can access military healthcare and health insurance, the commissary and other benefits on base.
Also update the beneficiary on your Thrift Savings Plan and life insurance coverage. Your spouse can also get up to $100,000 in low-cost life insurance through Family Servicemembers Group Life Insurance, with premiums based on age (just $54 per year for spouses under 35), and $10,000 for each dependent child for free.
Learn about education benefits for your spouse kids. The Post 9/11 GI Bill covers the full cost of in-state tuition and fees and public colleges for up to 36 months, or up to $25,162 for the 2020-21 school year for private colleges. Servicemembers are eligible for some benefits from the Post 9/11 GI Bill after serving on active duty for at least 90 days, and they can receive full benefits after 36 months. But if they stay in the military for even longer — generally if they serve for at least six years and agree to serve for four more — they can transfer their GI Bill benefits to their spouse and/or children. Keep these benefits in mind as you’re making your future military plans.
When You Move
One of the toughest things for military families can be the frequent moves. But you can get some special benefits, too. Service members receive a tax-free housing allowance with the amount adjusted based on the cost of living where they move. They are also eligible for the VA loan, a low-cost home loan that doesn’t require you to make a 20% down payment when you buy a house.
Deciding whether to rent versus buy is an important financial decision. If you only plan to live in the area for a few years, you may be better off renting. However, you could buy a home and then rent it out for income if you have to move again, especially in an area with a lot of service members who are looking for temporary housing.
You can also get special tax benefits. Service members and their spouses can maintain their state of residency for tax purposes even if they move to another state. Some people keep the state they lived in when they joined the military as their domicile for the entire time they’re in the service. But you can take advantage of special tax benefits if you’re stationed in a state with little or no income taxes, such as Florida or Texas. If you move to a low-tax state when you’re in the service and plan to make that your permanent residence, find out what steps you would need to take to make it your domicile for tax purposes — and then you can keep that as your state of domicile for tax purposes until you leave the military, even if you have to move again.
When You Get Deployed
If you’re deployed for several months or a year, automate your bills as much as possible and give your spouse or another trusted family member a power of attorney so they can be your legal representative while you’re gone. The base legal affairs office can complete these documents for you.
Also take advantage of special benefits for deployed service members: If you receive tax-free income while in a combat zone, you’ll be able to contribute even more to your Thrift Savings Plan — the contribution limit jumps from $19,500 up to $58,000 in 2021 for deployed service members. It may be difficult to afford to contribute that much, but even boosting your contributions a bit can help you in the future; and since your pay is tax-free while you’re deployed, you may have more money available to save. When you’re deployed, the money will go into the TSP tax-free and come out tax-free, too.
Before you leave for deployment, find out what you need to do to take advantage of the Savings Deposit Program, a special program for deployed service members that pays 10% per year guaranteed while you’re deployed and for up to 90 days afterwards. You can invest up to $10,000 in the SDP. You need to deposit the money by cash, check or through allotment after you are deployed — talk with the finance office about what you need to do to set up the account.
Make the most of special legal protections. The Servicemembers Civil Relief Act (SCRA) lets members of the military get out of certain leases when they are deployed or have to move. For example, you have the right to terminate a residential lease if you receive permanent change of station (PCS) orders or if you receive orders to deploy for 90 days or more. You can terminate a car lease if you receive orders to deploy for 180 days or longer. You can get help from the base legal affairs office.
The Transition Out of the Military
If you plan to leave the military and get another job, be sure to factor in the value of the military benefits you’ll be losing when comparing the pay and other benefits for your new job.
“Evaluating the impact of a transition from the military to civilian life should be part of every transition checklist,” said Patrick Beagle, a retired Marine Corps helicopter pilot and now a certified financial planner in Springfield, Virginia. “Understanding how your pay will change, post-military tax issues, healthcare, education for your children and integrating into a non-military community all need to be considered.”
You may need to receive higher income to maintain the same standard of living with your new job because you’ll no longer receive a tax-free housing allowance when you leave the military, you’ll probably have to pay a lot more for health insurance and other benefits and you may have to pay new state income taxes in the state where you actually live.
You also may not have the same job stability as you had when you were in the service, so it’s even more important to build up an emergency fund to help you cover unexpected bills or weather a job loss.
Retiring From the Military
If you stay in the military for 20 years or longer, you’ll receive a valuable benefit: retirement pay that provides guaranteed income for the rest of your life.
Depending on when you joined the military, the retirement pay may be based on 40% to 50% of your base pay. If you’re married, you’ll need to make a key decision about your payouts. You’ll need to decide whether or not to take the Survivor Benefit Plan, which reduces your monthly payouts in return for guaranteeing that your spouse will continue to receive payouts for life, and can be a valuable benefit. Also find out about the cost and coverage under TRICARE, which can provide retired service members and their families with health insurance after they leave the military.
Decide what to do about your Thrift Savings Plan. By the time you leave the military, you may have amassed a lot of money in this retirement savings plan. You can either keep your TSP where it is after you leave the military or you can roll it over into another retirement plan, such as an IRA. If you roll it into an IRA with a brokerage firm, bank or mutual fund company, you’ll still receive the tax benefits, and you will have more investing options. But you may have lower fees if you keep it with the TSP, and the withdrawal options for TSPs changed recently, giving you a lot more flexibility to tap the account.
You may be tempted to cash out the TSP after you leave the military, but that is usually the worst option — you may have to pay penalties and taxes, and you lose the future tax deferral on the money.
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Last updated: May 13, 2021