The Thrift Savings Plan is the federal government’s version of a 401(k) retirement plan. Service members can elect as much pay as desired to be taken from their paycheck, including incentive pays, to be deposited into a TSP account. The annual limit is the IRS limit on contributions, which is $17,500, or $23,000 if you are age 50 or older and making catch-up contributions. Individuals deployed in a tax exclusion area are subject to different rules. The money contributed is tax deferred and reduces taxable income for the current tax year. A significant advantage of the TSP is the extremely low expense ratios. For 2013, it was 0.029 percent, meaning it cost $0.29 for every $1,000 invested in the plan. Additionally, if you have another type of retirement account, such as a traditional IRA, SIMPLE IRA or eligible employer plan such as a 401(k), you can roll the plan into your TSP account, provided the money is pre-tax money and certain other conditions are met.
Similar to having money taken from each paycheck and deposited into a TSP account, the military allows you to set up an automatic payment, called an allotment, which is subtracted from your monthly wages. The money is evenly divided between your semi-monthly paychecks. The funds can be set aside for family expenses, rent, loan payments, or deposits to a financial institution for investment, etc., allowing service personnel to establish solid saving habits. If you are serving in an eligible combat zone, you may be able to direct your allotments to the Defense Department’s Savings Deposit Program. The SDP pays 10 percent annual interest on deposits up to $10,000. The SDP allows personnel a unique opportunity to save while you’re deployed. Accounts are closed and funds are returned to you 120 days after you have left the combat zone, although your money can continue to draw interest for 90 of those days. Interest is compounded quarterly and is taxable.
Of course, one of the most notable benefits of serving in the military is the retirement plan. There are four basic retirement plans: Final Pay, High-36 Month Average, REDUX and Disability. All four military retirement plans take the member’s retired pay base and apply a percentage multiplier. Basically, if an individual serves on active duty for 20 years, the government offers between 40 percent and 50 percent of pay. Furthermore, after age 62, Social Security will likely provide additional retirement benefits.
The military also offers an array of health benefits for uniformed service members, retirees and their families; re-enlistment bonuses and higher education opportunities through the GI Bill, tuition reimbursement or college credit for military experience. Overall, the military provides a host of financially advantaged programs to counterbalance the service dedication our service men and women put forth for our nation. For all the active duty and former service men and woman reading this column, thank you for all do and have done to serve and protect our country.
William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.