If you serve in the military -- or have served in the past -- you have access to special financial benefits for yourself and your family. And new rules make these programs even more valuable. But many people don't make the most of these important financial perks and may not even realize that they're eligible. The following strategies can help you take advantage of special military benefits to save for the future, protect your income, pay for college for yourself and your kids, save money on mortgages, reduce the interest rates on your debt and make the most of legal protections for the military.
-- New rules for retirement savings.
-- Guaranteed 10% interest for deployed service members.
-- Lower life insurance costs.
-- Longer-term education benefits for you and your family.
-- Larger mortgages with no down payments.
-- Legal protections for service members.
New Rules for Retirement Savings
Members of the military have access to one of the lowest-cost ways to save for retirement -- the Thrift Savings Plan -- and new rules make the TSP even better. You can contribute up to $19,500 to the TSP in 2020 (or $26,000 if 50 or older) or up to $57,000 if you're receiving tax-free income in a combat zone.
The TSP never provided an employer match for service members in the past, but that changed in 2018. People who join the military in 2018 or later, or who joined from 2006 to 2018 and opted into the Blended Retirement System, can now get matching contributions from the Department of Defense. To get the full match, you'll need to contribute 5% of your income to the TSP. That's free money. And the TSP can still be a valuable way to save even if you aren't in the Blended Retirement System and don't get the match. "It's such a well-managed, low-cost way to save for retirement," says Ted Digges, a retired Navy captain and executive director of the American College of Financial Services's Penn Mutual Center for Veterans Affairs. "Everyone on active duty should consider putting money aside in the TSP."
You can either make tax-deductible contributions to the TSP, which grow tax-deferred and are taxable when withdrawn, or you can make Roth TSP contributions, which don't reduce your taxable income now but can be withdrawn tax-free in retirement. Many long-time service members don't realize they're eligible to make Roth contributions, which became an option in 2012.
"I strongly feel that our servicemembers should consider the Roth," says Digges. "You pay the tax now, but you will be thankful in the future because most people on active duty are in a lower tax bracket now than they will be later, and all of that growth will be tax-free." Unlike Roth IRAs, there's no income limit to be able to make Roth TSP contributions.
You can choose from six investing options in your TSP, including funds that invest in large or small companies, international companies, bonds, government securities, or a lifecycle fund that creates a diversified portfolio based on your investing time frame.
"Some of the most common missteps I see are people not contributing to their TSP at all, not contributing enough to get the full match, or leaving all of their money in the G Fund, which is the most conservative," says Shay Cook, financial readiness manager for the FINRA Investor Education Foundation. The G Fund invests in government securities and has the lowest risk, but misses out on the long-term growth potential from stock funds. Cook tends to prefer the lifecycle fund (L Fund), which is a target-date fund with a portfolio based on your investing timeframe. The L Fund starts out with most of the money in stock funds when you're young, and gradually becomes more conservative when you get older and closer to retirement.
The TSP recently changed its rules to provide more L Fund options. You choose the fund with the date closest to the time you plan to start withdrawing the money in retirement, which may be much later than the year you retire from the military if you take a civilian job before you stop working. In the past, the TSP only offered L Funds in 10-year increments, such as L 2050, L 2040, L 2030 and L 2020, which could make it difficult to match the fund with your time frame. Starting on July 1, 2020, you now have L Fund choices for every five years.
The TSP withdrawal options were also changed recently. In the past, the withdrawal rules for TSPs were much more limited than they are for 401(k) and other retirement-savings plans. After taking one partial withdrawal, you either had to cash out the entire account or convert the money to an income stream. Many people would roll over their TSP to an IRA when nearing retirement to have more withdrawal options. But the rule changed in September 2019 to make TSP withdrawals more flexible, eliminating the restriction on partial withdrawals and making the withdrawal choices much more like 401(k)s.
Guaranteed 10% Interest for Deployed Service Members
Service members who are deployed to a combat zone can contribute to the Savings Deposit Program, which sounds too good to be true: You can deposit up to $10,000 in this account while you are deployed and for up to 90 days after you return, which earns 10% annual interest. Patrick Beagle, a retired Marines helicopter pilot who is now a certified financial planner in Springfield, Virginia, has worked with several young service members who knew they were being deployed to the Persian Gulf within a year and worked toward building up $10,000 in savings so they could take advantage of the maximum investment in this program.
The procedure to get started is tricky because you have to deposit the money by cash, check or through allotment after you are deployed. The finance office in theater can help you set up the account. See the Savings Deposit Program fact sheet for more information.
Lower Life Insurance Costs
Members of the military have access to low-cost life insurance through Servicemembers' Group Life Insurance, or SGLI, and the premiums were reduced even more in July 2019. You can now get up to $400,000 of life insurance for 6 cents per month per $1,000 of coverage, bringing the annual premiums for the maximum coverage down from $336 to $288. These premiums apply regardless of your health and risk. See the VA's life insurance page for details.
Service members can also get up to $100,000 of coverage for their spouses, with premiums of $54 per year for spouses under age 35, and higher for older spouses.
You can only keep SGLI while you're in the military, but after you leave you can sign up for Veterans' Group Life Insurance. The premiums for this coverage are much higher and increase as you get older. It's a good idea compare the costs to buying coverage on your own before you leave the military. If you're healthy, you may find a better deal with private insurance, but VGLI can be a good option if you have health issues. See the VGLI page for eligibility and deadlines.
Longer-Term Education Benefits for You and Your Family
The Post-9/11 GI Bill covers the full cost of in-state tuition and fees at public colleges for up to 36 months, or up to $25,162 for the 2020-21 school year for private colleges. It also provides money for books and supplies, and you can receive a housing allowance if you attend school more than half time. You can use the money for undergraduate and graduate degrees, vocational and technical training, and other eligible programs. (Use the GI Bill Comparison Tool to look up eligible schools and estimate benefits.)
"There's impressive flexibility in the way that you're able to use the GI Bill benefits," says Didi Dorsett, a retired Navy intelligence officer who is now a certified financial planner in Occoquan, Virginia. A few years after leaving the military, she used her GI Bill benefits to pay for a financial planning certificate program at Georgetown University. She says that having the GI Bill benefits can also be timely for veterans who have lost their jobs this year. "Former or retired service members who may have lost a job due to the economic upheaval caused by the COVID-19 pandemic may be able to train in a different career field or take a couple of refresher courses to strengthen their resume as they begin applying for jobs again," she says.
To qualify for the maximum benefits, you must serve for at least 36 months on active duty (or less if you were discharged for a service-connected disability). Service members and veterans originally had to use their Post-9/11 GI Bill benefits within 15 years of leaving the service. However, the 2017 Forever GI Bill eliminated this time limit for people whose service ended in 2013 or later. See the VA's Post-9/11 GI Bill page for more information.
Long-time service members get a special benefit: They can transfer their Post-9/11 GI Bill benefits to their spouse or children. To qualify to transfer your benefits, you generally must have served for at least six years and agree to serve for four more. Spouses can use the transferred benefits right away, but children must wait until you've served at least 10 years. Children must use the benefit before age 26. For more information, see the VA's Transfer Your Post-9/11 GI Bill Benefits guide.
Also, many colleges participate in the Yellow Ribbon Program, which provides scholarships to help supplement GI Bill benefits for out-of-state or private colleges with tuition above the maximum limit. The Yellow Ribbon program is currently available only to veterans and to children who are using transferred benefits, but will be extended to active duty service members and spouses starting on Aug. 1, 2022. The specifics vary by school; see the VA's Yellow Ribbon Program page for more information.
[Check out the U.S. News Best Colleges for Veterans.]
Larger Mortgages With No Down Payments
VA loans have a long history of providing competitive mortgage rates for service members and veterans, and enable them to buy a house with no down payment without having to buy private mortgage insurance. The size of the maximum VA loan has increased significantly in the past several years -- see the VA's Purchase Loan page for more information. If you have a service-connected disability, you may not have to pay the VA funding fee.
If you already have a VA loan, you may be able to lower your mortgage rate with an Interest Rate Reduction Refinance loan, says Shay. See the VA's factsheet for more information.
Legal Protections for Service Members
The Servicemembers Civil Relief Act, or SCRA, provides valuable legal protections for service members. Most important is the 6% interest rate cap for loans taken out prior to military service -- including mortgages, credit cards, car loans, student loans, home-equity lines of credit and business loans. The cap only applies to loans you took out before you were on active duty, so it can be particularly helpful for new service members who had high-interest loans before they joined the service, or members of the Reserves who are called to active duty. The rate is reduced to 6% while you are on active duty, not just delayed.
You need to contact your lender to get the loan rate reduced, but the procedure is usually simple. Most lenders have an SCRA form to submit along with your military orders. Navy Federal Credit Union, for example, has an SCRA page and benefits request form.
The SCRA also gives you the right to terminate a residential lease if you receive permanent change of station orders or if you receive orders to deploy for 90 days or more. You can terminate a car lease in several circumstances, such as if you receive orders to deploy for 180 days or longer. These lease termination provisions helped a lot of military families whose plans were changed earlier this year because of stop-move orders.
For more information about these and other SCRA provisions, see the Consumer Financial Protection Bureau's SCRA Factsheet. You can get help from the legal assistance office at your base or from the American Bar Association's Military and Veterans Legal Center.
Kimberly Lankford has been a financial journalist for more than 20 years. As the "Ask Kim" columnist at Kiplinger's Personal Finance Magazine and Kiplinger.com, she received hundreds of reader questions every month about insurance, taxes, retirement planning and other personal finance issues. Her financial articles have also appeared in the Washington Post, Boston Globe, Chicago Tribune, Bloomberg Wealth Manager, Military Officer magazine and many local newspapers.
She received the personal finance Best in Business Award from the Society of American Business Editors and Writers, and she has written three books: "Rescue Your Financial Life," "The Insurance Maze" and "Ask Kim for Money Smart Solutions." She also wrote the "Financial Field Manual: Kiplinger's Personal Finance Guide for Military Families," which has been reprinted in three editions and is distributed to servicemembers at military bases throughout the world. Kim has been featured as a financial expert on NBC's Today Show, CBS This Morning, CNN, CNBC, Fox News, National Public Radio, PBS and many local radio and TV stations. Her website is www.kimberlylankford.com.