Service members face financial issues that most people don’t experience: They have to move frequently—sometimes on short notice—and they can be deployed to combat zones for months or years. But they also have access to valuable benefits and investing options not available to the general public. Exploring the opportunities can help secure your family’s financial future.
Taking Charge of Your Savings
Even though those who stay in the military for 20 years or more can qualify for a pension, it’s still important to save on your own. In truth, few people actually stay in the military long enough to claim a pension, and, unlike civilian pensions, there’s no “partial vesting” to guarantee that workers who leave “early” get something. With the military, if you leave before 20 years, you get nothing. Even if you qualify, pension payments probably won’t be enough to cover your bills. Instead of worrying about what might happen, take charge of something you can control: your own savings.
Putting Savings on Autopilot: Thrift Savings Plan
Men and women in the military can invest in this low-cost, tax-advantaged retirement-savings plan for federal employees, which is similar to a private company’s 401(k) plan. You can contribute up to $17,000 to the TSP in 2012, and even more if you receive tax-exempt pay while serving in a combat zone—up to a total of $50,000 in 2012. Because contributions from your regular pay escape taxes, they don’t lower your paycheck nearly as much as you might expect. And your contributions grow tax-deferred until you withdraw the money in retirement.
You can keep money in the TSP after you leave the military, or you can roll it into an IRA or another employer’s 401(k), where it will continue to grow tax-deferred. If you take the money and spend it, you’ll face an immediate tax bill and, if you’re younger than 55 in the year you leave the military and tap the account, you’ll generally pay a 10% penalty, too. For more information about the rules, visit tsp.gov. You’ll also find a calculator there to help you project your future account balance and see the power of long-term compounding of earnings.
Take Advantage of Tax-Free Earnings From a Roth IRA
Unlike contributions to a traditional IRA, which can earn a tax deduction to lower today’s tax bill, contributions to a Roth IRA offer no instant gratification. But the delayed gratification of doing without today’s tax deduction is sweet: All withdrawals from a Roth in retirement will be tax-free, whereas withdrawals from a regular IRA are taxed in your top tax bracket. Another advantage of the Roth is that you can withdraw contributions at any time tax- and penalty-free if you get in a pinch.
You can contribute up to $5,000 to a Roth IRA in 2012 (or $6,000 if you’re 50 or older) as long as your adjusted gross income is less than $110,000 in 2012 if single or $173,000 if married filing jointly. (The opportunity to make contributions gradually phases out as income rises above those levels.) You can contribute to a Roth IRA with a single payment or sign up to have money automatically shifted from your bank account or paycheck.
Tips in this article are from the experts at Kiplinger’s. You can get more information on savings strategies for service members here: http://www.kiplinger.com/features/archives/how-military-families-can-invest-in-financial-future.html