Members of the military have a lot of special financial challenges that most people don't encounter. However, they have access to many benefits, tax breaks and legal protections that can make a huge difference in their families' personal finances.
Here are ten of the top financial benefits available to service members and how to make the most of them to manage your family's financial future.
Low-Cost Retirement-Savings Plan
Service members have access to one of the lowest-cost retirement savings plans around. The Thrift Savings Plan (TSP) charges an annual expense ratio that ranges from 0.049% to 0.068% of assets -- whereas annual fees and expenses for 401(k) plans range, on average, between 1% and 2%.
The TSP lets you choose one of five index mutual funds or a target-date fund, which automatically becomes more conservative as your retirement date gets closer. You can invest up to $20,500 annually in the TSP in 2022, and if you're receiving tax-free income while deployed you can boost your contributions to $61,000 for the year. And now you have access to a Roth TSP, too, which is like a Roth IRA but without the income restrictions. See www.tsp.gov for details.
10% Guaranteed Return on Savings
The military's Savings Deposit Program (SDP) allows deployed service members to invest up to $10,000 in the program each time they deploy. You receive 10% annual interest, compounded quarterly; the program lasts for up to three months after your return.
Your take-home pay increases while you're receiving tax-free income during deployment, which can help you afford to stash extra money in the SDP. For more information, see the Savings Deposit Program page at the Defense Finance and Accounting Services web site.
Tax-Free Roth Deposits
For most people, contributions to a Roth IRA are not shielded from taxes. But for service members receiving tax-free combat-zone pay, your money goes into the Roth tax-free, and your contributions as well as your earnings come out tax-free, a double tax benefit that's tough to beat.
You can contribute up to $6,000 to a Roth in 2022 if your income doesn't exceed certain limits. If your spouse doesn't work, you can contribute up to the maximum on his or her behalf, too.
Free College for Yourself or a Spouse or Kid
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), or up to $26,043 per year for private colleges and foreign schools. You'll also get a housing stipend and money for books and tutoring.
The money may be used for undergraduate or graduate programs, or for certain programs at vocational and trade schools. And one of the best features of the Post 9/11 GI Bill is that longtime service members may transfer their benefits to a spouse or children. Get more details on the Post-9/11 GI Bill at the Department of Veterans Affairs website.
Inexpensive Life Insurance
Service members have access to one of the lowest-cost life insurance programs available. Service members' Group Life Insurance costs only $300 a year for the maximum $400,000 in benefits -- regardless of your age, health or likelihood of being deployed. (The lowest rate that a healthy 40-year-old man could get for a private $500,000, 20-year term insurance policy would average nearly $500 a year).
Service members can also get $100,000 in coverage for a spouse for as little as $54 a year if he or she is under age 35 (more for older spouses). See the Department of Veterans Affairs site for more information.
State Tax Breaks
The law allows service members to maintain legal residence in one state even if they are stationed in another. So if your legal residence (also called domicile) is a state that has no income tax, you can be shielded from taxes if you move to another state while on active duty.
A spouse who has the same domicile as a service member can also maintain that legal residency if the couple moves to a new state under military orders.
Special Legal Protections
The Service Members Civil Relief Act provides special legal benefits for service members, including an interest-rate cap of 6% on any loans you took out before you were called to active duty. This cap is especially helpful for members of the Reserves who are called to active duty and have to take a pay cut when they leave their regular jobs.
You have to apply to the lender for this benefit, which is intended to help you if your ability to pay is affected by military service. The law also gives you the right to terminate an apartment lease if you have orders for a permanent change of station or are deployed to a new location for 90 days or more. The Armed Forces Legal Assistance Office can help with these requests.
No-Money Down Mortgages
Members of the military have access to Veterans Administration loans, which are now one of the only ways to get a house with no money down (and no private mortgage insurance). See the Veterans Administration site for more information. However, if you put little or no money down, you could end up being upside down on your home if prices drop and you have to move.
For help dealing with underwater homes, see Fannie Mae's advice at the KnowYourOptions.com Military Options page, the government's Home Affordable Foreclosure Alternatives (HAFA) program.
Tax-Free Housing Allowance
Another big perk for service members is the tax-free housing allowance, a monthly subsidy covering all or part of your monthly rent or mortgage payment as long as you're in the military. To see the value of the subsidy (which varies by your rank, where you live and whether you have dependents), check your Leave and Earnings Statement (your military pay stub) for your Basic Allowance for Housing and other special benefits, or look it up by rank and zip code at the Department of Defense's BAH calculator.
Each branch of the military has an emergency-relief fund that offers small, interest-free loans for emergencies. Contact the community-service office at your base for details, or visit Army Emergency Relief, Navy-Marine Corps Relief Society, Air Force Aid Society or Coast Guard Mutual Assistance.
Credit unions on base also offer short-term loans at reasonable interest rates. Some even offer small emergency loans to members of the military with little or no credit check.
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.
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.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. For information about specific insurance needs or situations, contact your insurance agent. This article is intended to assist in educating you about insurance generally and not to provide personal service. They may not take into account your personal characteristics such as budget, assets, risk tolerance, family situation or activities which may affect the type of insurance that would be right for you. In addition, state insurance laws and insurance underwriting rules may affect available coverage and its costs. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
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.
LPL Tracking #1-05225488