Most military personnel don’t have the time to pay attention to their finances. They are simply too busy, with families, friends and jobs. When servicemembers do have to make a financial decision, they don’t always feel secure. There’s too much to choose from – too many stocks, mutual funds and retirement plans, let alone all those mortgages and insurance products. It’s hard to determine what’s best and it’s easy to potentially overlook a good investment.
Federal Thrift Savings Plan
The Thrift Savings Plan (TSP) is a qualified retirement plan that provides a low-cost, tax-advantaged way for federal employees and service members to invest. You can select your own mix of investments, from a short-term U.S. Treasury bond to index funds to a life-cycle fund, the last of which automatically rebalances your assets as you near retirement.
You can choose between two tax treatments for your TSP contributions:
- Traditional TSP—With this pretax plan, you get a tax break in the year when you make the contribution and pay taxes when you withdraw funds during retirement.
- Roth TSP—You don’t get any up-front tax benefits from this after-tax plan, but qualified withdrawals are tax free in retirement.
If you’re unsure which option makes the most sense for you, check out TSP.gov’s contribution comparison calculator.
For 2021, you can contribute up to $19,500 to a TSP (rising to $20,500 in 2022. That figure jumps to $26,000 in 2021 if you’re age 50 or older (rising to $27,000 in 2022).If you’re part of the Federal Employees Retirement System (FERS) or the Blended Retirement System (BRS), you can earn up to 5% more in matching contributions from the military. You’ll get a dollar-for-dollar match on the first 3% of your paycheck that you contribute to the TSP, with 50 cents on the dollar for the next 2%. The more you save, the greater the match, so it pays to max out your contributions if possible.
Like a 401(k), you can set up automatic deposits that come straight out of your paycheck, so it’s easy to “set it and forget it.” It’s a good idea to set up automatic deposits before you get your first check—that way, you’ll never miss the money.
Individual Retirement Accounts (IRAs)
Even if you max out your contributions to the TSP, you can still stash away money in an individual retirement account (IRA). An IRA can be a great way to supplement your TSP and help ensure a secure retirement.
Like the TSP, IRAs are available in traditional (pretax) or Roth (after-tax) varieties. In general, IRAs offer greater flexibility than TSPs due to the vast number of investment choices. However, the contribution limits are much lower. For 2021 and 2022, you can contribute up to $6,000 to your IRAs ($7,000 if you’re age 50 or older).
529 College Savings Plans
If you have children and anticipate education expenses in your future, then a 529 plan can be a tax-advantaged way to save. Under tax laws passed in 2017 and 2019, you can use a 529 plan to pay for K–12 expenses—not just college and other postsecondary education. While contributions are not tax deductible at the federal level, more than 30 states offer a full or partial tax deduction or credit.9 A 529 plan grows tax free, and withdrawals are tax free if used for qualified education expenses.
You can contribute any amount to a 529, but anything over $15,000 per individual—the annual 2021 gift tax exclusion—can trigger federal gift taxes (the gift tax exclusion rises to $16,000 in 2022).1112 Most plans let you set up automatic investments, which make it easy to stay on track.
Savings Deposit Program
The U.S. Department of Defense’s Savings Deposit Program (SDP) gives deployed military personnel serving in designated combat zones a guaranteed 10% annual return on deposited amounts of up to $10,000. To qualify, you must be receiving Hostile Fire Pay and be deployed for either 30 consecutive days or at least one day per month for three consecutive months. You continue to earn 10% interest for 90 days after you redeploy home, unless you request to withdraw your money sooner.
While an extra $1,000 can be helpful, keep in mind that income from the SDP is reported on a 1099-INT form in the year when you withdraw funds, which means that you could owe taxes on the earnings.
Real estate can be an excellent way to diversify and achieve higher returns. The tradeoff is that it involves more risk (and effort) than lower-risk investments. Still, real estate investments offer numerous advantages, including tax benefits and ongoing passive income. A common way to invest in real estate is to buy a house and convert it into a rental property (some service members buy property near their bases to make managing the rentals easier).
Real estate investment trust (REITs) are another popular option. A REIT is a company that owns, operates, or finances income-producing properties. Investors buy shares of publicly traded REITs using a taxable brokerage account or an IRA. By law, REITs must pay out 90% of their profits each year in the form of dividends, which can result in high dividend yields for investors.
Investing Help from the SEC
The U.S. Securities and Exchange Commission (SEC) encourages service members to reach out with questions about investing or for information on how to check the license or registration of an individual or a firm. To do so, call the SEC’s toll-free investor assistance line at 1-800-732-0330 (dial 1-202-551-6551 if calling from outside of the United States) or email [email protected]. The SEC participates in the Department of Defense’s Financial Readiness Network and regularly conducts investor education briefings at military bases. If interested, email [email protected].
The Bottom Line
Keep in mind that there are many other ways to save and invest, such as U.S. Savings Bonds (Series I Savings Bonds are paying 7.12% through November 2022) and Servicemembers’ Group Life Insurance.1617
Service members also have access to programs that, while not investments, can save you money. For example, the VA Home Loan program offers mortgages with no down payment, low interest rates, limited closing costs, and no need for private mortgage insurance (PMI).
Also, the Post-9/11 GI Bill pays the full cost of in-state tuition and fees at public colleges for up to 36 months and up to $26,042.81 per year for private colleges and foreign schools. You can also get money for housing (if you’re in school more than half time), books, supplies, and moving costs if you move from a rural area to attend school. Longtime service members can transfer their benefits to a spouse or child.