As a service member, a family member to a service member or even a civilian considering the military. You might be unsure of the financial benefits you or your loved one can receive while serving. I have listed eight financial tips for military families. These are special benefits and legal protections that can make a huge difference in your family’s personal finances. Let’s get started and start growing your money!
1. Retirement Accounts
Service members have access to the lowest-cost retirement-savings plans under the Thrift Savings Plan (TSP). The Thrift Savings Plan charges 25 cents a year for every $1,000 invested. Compare this to the average of $4.40 a year for every $1,000 invested for other index funds.
Also, TSP lets you choose one of five index funds or a target-date funds. The index funds follow the market such as the TSP C Fund follows the Standard & Poor’s 500 (S&P 500). The lifecycle fund or L Fund will automatically diversify your holdings to become more conservative as you approach your retirement date.
You can invest up to $19,000 in the TSP for 2019 and you can boost your contributions to $56,000 for the year if you’re receiving tax-free income while deployed. Your contributions to a traditional TSP lower your taxable income and grow tax-deferred for retirement.
Since 2012, you have access to a Roth TSP which is similar but SHOULD NOT be confused with a Roth IRA. See the differences here! Money you contribute to a Roth TSP doesn’t lower your taxable income now, but you can withdraw the money (including the earnings) tax-free in retirement. That benefit is fantastic for service members who expect to earn much more money (and owe higher taxes) when they leave the service. See www.tsp.gov for details.
Of the financial tips for military families I list, the TSP is by far one of the most important. Have more questions about the TSP? See my complete guide here.
2. Savings Deposit Program
The Savings Deposit Program, or SDP guarantees a 10% return on your savings. Yes, you heard me correctly! Unlike most high-interest guarantees, this one is not a scam. The military’s Savings Deposit Program let’s deployed service members invest up to $10,000 in the program and receive 10% annual interest, compounded quarterly, for up to three months after their return.
Unless the service member deploys to an area where a Financial Officer or Disbursing is NOT available. Service members are only allowed to contribute monthly equal to their base pay. Let’s say you receive $5000 in base pay. You can only contribute $5000 each month to the SDP until you reach the max of $10,000. So it would take you two months of contributions to meet the max.
Even if you don’t reach the max, you are still earning 10% (compounded quarterly at 2.5%) interest. Which is the highest guaranteed investment. Even the S&P 500 only averages 7%. For more information, see my guide here for more information
3. Tax-Free Benefits
If you’re deployed or stationed in a tax-free zone — enjoy tax-free in, tax-free out. Contributing to a Roth IRA is a fantastic deal if you’re receiving tax-free combat-zone pay. So how does that benefit a Roth IRA?
Great question! Contributions to your Roth IRA are post-tax, therefore when you withdraw, it is tax-free. A 401k, such as the Traditional TSP, your contributions are not initially taxed. However, when you withdraw, it’s taxed. So to put it simply, you either get taxed on the front-end or the back-end depending on which investment vehicle you prefer.
So, when receiving pay in a tax-free zone, your contributions to a Roth IRA will not be taxed like usual, because you’re receiving tax-free pay. This is awesome and should be fully utilized to the fullest!
You can contribute up to $6,000 in a Roth IRA for 2019. And if your spouse doesn’t work, you can contribute up to the maximum on his or her behalf, too. You have until April 15, 2020, to make contributions to a Roth for 2019. To contribute to a Roth for 2019, your modified adjusted gross income must be less than $137,000 if you’re single or $203,000 if you’re married filing jointly.
Interested in starting a Roth IRA account? See my guide here!
4. Transfer your Education Benefits
Education benefits only consisted of the Montgomery GI Bill but now the Post 9/11 GI Bill is available and more robust. And the best part? Drum roll……..
The benefits can be transferred to dependents!
Members who have served for at least 36 months since Sept. 11, 2001, have access to the Post 9/11 GI Bill. The Post-9/11 GI Bill covers the full cost of tuition and fees for a public college for up to 36 months (four academic years) or up to $24,476.79 per year for a private college or foreign school.
If you don’t plan to use your education benefits, you can transfer the benefits to your family members. Such as your spouse and children. This is a fantastic way for you and your children to avoid unnecessary student loan debt when they attend higher education. The benefits can be evenly or unevenly distributed between dependents equal to the 36 months. If you as the service member used 15 months of the 36 month benefits. You can distribute 21 months of benefits to your dependents.
As service members we have access to Tuition Assistance (TA) while serving, which affords us to save our education benefits for our families. For more information, see Post 9/11 Benefits.
5. Life Insurance
As service members we have access to one of the lowest-cost life insurance programs available. Servicemembers’ Group Life Insurance (SGLI) costs only 6.5 cents per $1,000 of coverage per month, or $312 a year for the maximum $400,000. This is regardless of your age, health or likelihood of deployment which isn’t the case for our civilian counterparts. This doesn’t even include the additionally $100,000 received for funeral expenses.
You also get $100,000 in coverage for your spouse for as little as $60 a year if he or she is under age 35. See www.insurance.va.gov/sgli for more information.
6. State Tax Breaks
Service members can maintain legal residence in one state even if transferred to another state, as long as they are in the military. I am a resident of California and I was exempt from CA State Taxes when stationed in Virginia, Hawaii and Washington State. This doesn’t mean I don’t have to file state taxes each year, it just means I pay zero. If your state waives taxes while stationed out of state, select the option in the MyPay Portal.
This flexibility can help if you’re stationed in a tax-free state — such as Florida or Texas — and move to another state where you would otherwise have to pay state income taxes. And now your spouse can maintain that state of residency, too, even if you have to move.
For more information, see State Tax Breaks for Military Families.
7. Low Loan Rates
The Servicemembers Civil Relief Act, or SCRA, provides special legal benefits for service members. This includes an interest-rate cap of 6% on any loans you took out before called to active duty. You have to apply to the lender for this benefit and most offer it through their online portal.
The act helps you if your military service affects your ability to pay. This might occur if you take a pay cut when activated to the Reserves or National Guard. The law also gives you the right to terminate an apartment lease if you have orders for a permanent change of station (PCS) or deployed to a new location for 90 days or more.
These are just a few of the many SCRA benefits! For more information, see my guide to the Servicemembers Civil Relief Act.
8. Basic Allowance for Housing and VA Loan
Members of the military tend to move frequently, and often with little notice. But to offset this inconvenience we get some perks. Including a tax-free housing allowance and access to Veterans Administration loans.
The basic allowance for housing (BAH) allows you to receive tax-free housing allowance to cover your rent or mortgage. The rates determined by the geographic duty location, pay grade, and dependency status. Click here for the current BAH Rate Calculator.
VA Loans are now one of the only ways to get a house with no money down (and no private mortgage insurance). I used a VA Loan to buy our first home in Washington State and when we got orders to California we flipped it into a rental. We later sold it since the market had reached a peak.
Are you able to buy a home at one duty station and again at another duty station? Yes! Here are two fantastic articles how to use the VA Loan to buy your first, second and third homes.
For more general information about the VA loans, see the Veterans Administration site.
I hope you enjoyed my list of eight financial tips for military families. For each financial tip, I provided some general information along with some links for additional information. Please utilize these resources and continue to research based on your needs.
These eight financial tips for military families are special benefits and legal protections that can make a huge difference in your family’s personal finances. My goal in this article was to bring awareness to these benefits so you can utilize them to support your family now and in the future.