Military Personnel: Investing For The Future

Military personnel have access to numerous savings and investment opportunities, including some unavailable to civilians. While serving in the military doesn't leave much free time to research and choose the best investments, there are several options to help military members prepare for a comfortable future. One of the best ways to build wealth during military service is to take advantage of the Thrift Savings Plan (TSP), which offers automatic payroll deductions, matching contributions, low fees, and tax benefits. Another option is to invest in a traditional or Roth Individual Retirement Account (IRA), which offers a wide range of investment choices and can supplement a TSP. Other investments include the Savings Deposit Program, 529 college savings plans, and real estate. It's important to remember that diversity in investing is key, and to be cautious of investment fraud targeting military personnel.

Thrift Savings Plan (TSP)

The Thrift Savings Plan (TSP) is a retirement investment program for federal employees and uniformed service members, including the Ready Reserve. It is a defined-contribution (DC) plan that offers federal employees many of the same benefits that are available to workers in the private sector.

The TSP closely resembles a 401(k) plan offered by private employers. Participants in a TSP can get an immediate tax break for their savings. They can also choose to invest in a Roth for freedom from taxes after retirement.

There are several ways to invest in a TSP:

• Automatic payroll contributions
• Agency matching contributions
• Tax-deferred contributions into a traditional TSP (withdrawals are taxed in retirement)
• After-tax investments in a Roth TSP (withdrawals are untaxed in retirement)

The TSP offers a choice of six funds and a mutual fund option:

• The Government Securities Investment (G) Fund
• The Fixed-Income Index Investment (F) Fund
• The Common-Stock Index Investment (C) Fund
• The Small-Capitalization Stock Index Investment (S) Fund
• The International-Stock Index Investment (I) Fund
• Specific Lifecycle (L) funds

The contribution limit for 2024 is $23,000, and employees aged 50 and over can also make catch-up contributions of $7,500. The TSP has very low fees, usually around 0.05%.

Individual Retirement Accounts (IRAs)

With a traditional IRA, you can deduct your contributions from your taxable income, so you save money upfront. However, when you withdraw the money after retiring, it is taxed as income for that year. There are also annual income limitations on deducting contributions to traditional IRAs.

A Roth IRA is funded with after-tax money, so no further taxes are due when the money is withdrawn. There are income limitations on contributions to a Roth IRA.

IRAs can be opened through a bank, an investment company, an online brokerage, or a personal broker. They can be invested in a wide range of financial products, including stocks, bonds, mutual funds, annuities, CDs, and exchange-traded funds (ETFs).

There is usually an early withdrawal penalty of 10% (plus taxes) if you take money out of an IRA before age 59½, but there are some exceptions for educational expenses, first-time home purchases, and other unusual life events.

529 College Savings Plans

A 529 college savings plan is a state-sponsored investment plan that enables you to save money for a beneficiary and pay for their education expenses. The plan is named after Section 529 of the Internal Revenue Code, which authorises tax-free status for qualified tuition programs. There are two primary types of 529 plans: education savings plans and prepaid tuition plans.

Education Savings Plans

Also known as 529 college savings plans, these are tax-advantaged investment accounts designed for education savings. They work similarly to a Roth IRA or Roth 401(k) in that you invest your after-tax contributions in mutual funds or similar investments. The value of your investment will increase or decrease based on the performance of your chosen investment options.

Prepaid Tuition Plans

These plans let you pre-pay all or part of the costs of an in-state public college education. You can also convert them for use at private and out-of-state colleges. The Private College 529 Plan is a separate prepaid plan for private colleges sponsored by more than 250 private educational institutions.

Benefits of 529 Plans

• Tax-free withdrawals: You can withdraw funds tax-free to cover nearly any type of college expense.
• Tax benefits: 529 plans offer federal tax benefits and may offer state tax benefits depending on the state where the account owner or contributor lives.
• High contribution limits: Depending on the plan and your state, contribution limits range from $235,000 to $553,098.
• Account control: The account owner retains control of the account until the money is withdrawn.

Drawbacks of 529 Plans

• Must be used for qualified expenses: Withdrawing from a 529 account for non-qualified expenses will incur income tax and a 10% penalty.
• Not all states offer deductions: While most states offer an income tax deduction for 529 contributions, some do not.
• No self-directed investments: You must invest in portfolio options offered by the 529 plan.
• Fees: All 529 plans have fees, although low-cost options are available.
• Ownership rules: The account owner controls the 529 plan, not the beneficiary.

Savings Deposit Program (SDP)

The U.S. Department of Defense's Savings Deposit Program (SDP) is a savings scheme for military personnel serving in designated combat zones, certain hazardous duty locations, and approved contingency operations. It offers a guaranteed 10% annual return on deposited amounts of up to $10,000. To qualify, an individual 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. The 10% interest continues to accrue for 90 days after redeployment, unless the individual requests an earlier withdrawal.

The Savings Deposit Program is not automatic and requires enrolment after the qualifying period of service in a combat zone. Troops that are eligible can sign up at the military finance office in the theatre of operations where the deployment is taking place. The account may not be closed until the service member has left the combat zone, and funds are returned 120 days after closing the account.

The amount deposited cannot exceed the individual's monthly pay, minus deductions, and must be in amounts divisible by five. While the money is locked in the account, it continues to earn interest at a rate far higher than that of traditional savings accounts. This makes the SDP an attractive option for military personnel looking to build their savings.

Withdrawing funds from the SDP before the end of the 120-day period requires approval from a commanding officer, who must determine that the withdrawal is necessary for the health and welfare of the individual or their family. Requests can be made via MyPay, mail, fax, or email.

Real estate

Military personnel can take advantage of several benefits when investing in real estate. These include the Service Member Civil Relief Act (SCRA), which requires lenders to cut interest rates on pre-enlistment debts to 6%, and Basic Allowance for Housing (BAH), which provides an untaxed allowance for housing that can be used to build savings for larger investments.

The VA loan is another powerful tool for military real estate investors. It allows service members to buy a one- to four-unit home as their primary residence without a down payment. This is especially useful for those stationed in expensive markets, as it enables them to save a portion of their BAH to build investment capital.

The nature of military service, which often involves relocating every few years, can also be advantageous for real estate investors. It provides exposure to different markets and the opportunity to utilize the VA loan multiple times. Military personnel can also benefit from investing in properties near military bases, as there is usually a strong demand for rentals from other service members.

Long-distance real estate investing, which military personnel often have to do due to their deployments or postings, can lead to more passive investments. It forces investors to build a solid team of property managers, realtors, lenders, and contractors, as they are not physically present to oversee the properties.

Overall, military service can provide unique advantages and opportunities for those interested in real estate investing. By leveraging benefits like the VA loan and BAH, as well as taking advantage of their changing locations, military personnel can build wealth and create passive income streams through real estate investments.

Frequently asked questions