The majority of military people do not have time to worry about their finances. They are simply too preoccupied with their families, friends, and careers. When servicemembers are faced with a financial dilemma, they are not always confident. There are just too many stocks, mutual funds, and retirement plans to select from, not to mention all the mortgages and insurance options. It’s difficult to know what’s best, and it’s simple to overlook a smart investment.
Federal Thrift Savings Plan
The Thrift Savings Plan (TSP) is a qualified retirement plan that offers federal employees and service members a low-cost, tax-advantaged method to invest. You can invest in anything from a short-term US Treasury bond to index funds to a life-cycle fund, which automatically rebalances your holdings as you get closer to retirement.
You have two options for how your TSP donations are taxed:
Traditional TSP—With this pretax plan, you get a tax credit when you contribute during the year and pay taxes when you withdraw money in retirement.
Roth TSP—This after-tax plan doesn’t provide any immediate tax benefits, but eligible withdrawals are tax-free in retirement.
Check out TSP.gov’s contribution comparison tool if you’re not sure which choice is best for you.
You can put up to $19,500 in a TSP in 2021 (increasing to $20,500 in 2022). If you’re 50 or older, the figure climbs to $26,000 in 2021 (increasing to $27,000 in 2022). You can receive up to 5% extra in matching contributions from the military if you’re a member of the Federal Employees Retirement System (FERS) or the Blended Retirement System (BRS). On the first 3% of your paycheck that you put to the TSP, you’ll get a dollar-for-dollar match, with 50 cents on the dollar for the next 2%. The higher the match, the more you save, so try to max out your donations if at all possible.
You may set up automatic installments that come directly out of your paycheck, just like a 401(k), making it simple to “set it and forget it.” It’s a good idea to set up automatic deposits before you receive your first check so you don’t miss out on the money.
Individual Retirement Accounts (IRAs)
Even if you’ve maxed out your TSP contributions, you can continue save money in a personal retirement account (IRA). An Individual Retirement Account (IRA) is a fantastic method to augment your TSP and assist assure a safe retirement.
Traditional (pretax) and Roth (after-tax) IRAs are available, just as the TSP. Because of the large variety of investment options, IRAs offer more flexibility than TSPs. The contribution restrictions, on the other hand, are substantially smaller. You can contribute up to $6,000 to your IRA in 2021 and 2022 ($7,000 if you’re 50 or older).
529 College Savings Plans
A 529 plan might be a tax-advantaged option to save if you have children and expect to have educational expenditures in the future. You can utilize a 529 plan to pay for K–12 expenses, not just college and other postsecondary education, thanks to tax legislation implemented in 2017 and 2019. While federal contributions are not tax deductible, more than 30 states provide a full or partial tax credit or deduction. 9 If utilized for approved education expenses, a 529 plan grows tax-free and withdrawals are tax-free.
You can put any amount into a 529, but anything over $15,000 per person (the annual gift tax exclusion for 2021) will trigger federal gift taxes (the gift tax exclusion will rise to $16,000 in 2022). 1112 The majority of programs let you to set up recurring investments, making it simple to keep on pace.
Savings Deposit Program
The US Department of Defense’s Savings Deposit Program (SDP) guarantees a 10% annual return on deposits of up to $10,000 to deployed military personnel serving in designated war zones. To be eligible, you must be earning Hostile Fire Pay and have been deployed for 30 days in a row or at least one day per month for three months in a row. Unless you request to withdraw your money sooner, you will continue to earn 10% interest when you redeploy home for another 90 days.
While an extra $1,000 can be beneficial, bear in mind that SDP earnings are reported on a 1099-INT form the year you withdraw cash, which means you may owe taxes on the earnings.
Real estate can be a great strategy to diversify your portfolio and increase your earnings. The cost is that it entails more risk (and work) than less risky ones. Real estate investments, on the other hand, have a number of advantages, including tax advantages and recurring passive income. Buying a house and turning it into a rental property is a frequent strategy to invest in real estate (some service members buy property near their bases to make managing the rentals easier).
Another prominent alternative is real estate investment trusts (REITs). A real estate investment trust (REIT) is a firm that owns, manages, or finances income-producing properties. Shares of publicly traded REITs can be purchased using a taxable brokerage account or an IRA. REITs are required by law to pay out 90% of their profits in dividends each year, which can result in substantial dividend yields for investors.
Investing Help from the SEC
The Securities and Exchange Commission (SEC) of the United States urges service members to contact them with inquiries regarding investing or for information on how to check a person’s or company’s license or registration. To do so, call the SEC’s toll-free investor support line at 1-800-732-0330 (from outside the US, dial 1-202-551-6551) or send an email to Help@SEC.gov. The SEC is a member of the Department of Defense’s Financial Readiness Network and holds investor education briefings at military facilities on a regular basis. If you’re interested, send an email to Outreach@SEC.gov.
The Bottom Line
Remember that there are numerous additional options for saving and investing, including U.S. Savings Bonds (Series I Savings Bonds pay 7.12 percent through November 2022) and Servicemembers’ Group Life Insurance. 1617
Members of the military can also take advantage of programs that, while not investments, can help you save money. The VA Home Loan program, for example, provides mortgages with no down payment, low interest rates, cheap closing costs, and no requirement for private mortgage insurance (PMI).
In addition, the Post-9/11 GI Bill covers the entire cost of in-state tuition and fees for up to 36 months at public universities and up to $26,042.81 a year at private colleges and foreign schools. If you move from a remote region to attend school, you can also earn money for accommodation (if you’re in school more than half-time), books, supplies, and transfer costs. Benefits can be transferred to a spouse or kid for long-term service members.