Military-Specific Retirement Savings Plans: An Overview
Retirement planning is one of those things that every one of us needs to be thinking about, whether you’re a civilian or in the military. However, military servicemembers have some interesting options that aren’t available to civilians. Understanding these plans and programs, and how they work will ensure that you’re able to make the right decision regarding your financial future and help make those golden years a little more golden.
Thrift Savings Plans
One of the most important options for military service members is a TSP or Thrift Savings Plan. This is a government-sponsored program that allows you to both save for and invest for your retirement. It’s somewhat similar to a civilian 401(k), but it’s not quite the same thing. Here’s how it works and what you need to know:
First, it’s a contribution plan, which means that if you don’t contribute, you’ll get nothing out of it. Your contributions don’t just sit there, though. Like the funds in a 401(k), they’re put to work on your behalf through investments that will hopefully increase your wealth over time. This allows your TSP account to gradually build, even if you’re not able to contribute as much as you’d like to.
All of your TSP contributions are made before taxes, which means that you’re both saving for retirement and reducing your tax liability at the same time (just like a regular 401(k) plan or an IRA). Lower taxes means you actually get to keep more of your pay, rather than handing it over to the IRS.
Like many other retirement vehicles, the money in your TSP grows tax deferred, meaning that you won’t pay taxes on it until you start withdrawing the money when you hit retirement. The logic is that in retirement, you’ll be making less money, which means that you’ll be in a lower tax bracket. TSPs also allow you to contribute to a ROTH account. You won’t reduce your taxable income, but withdrawals—including interest and dividends—are 100% tax free.
Employers in the civilian world can offer contribution matching, but the chances that Uncle Sam will match your contributions are pretty slim. Only certain MOSs are eligible and only if you agree to serve on active duty for six years.
Finally, if you have an existing 401(k) plan, you can roll your money over from that account into your TSP. Or you could go the other way ‘round, rolling your TSP funds into a 401(k) or other retirement plan if you don’t reenlist in the military.
Other Options
Military servicemembers have access to several other options, including some that are designed to help you leave a legacy to your spouse and/or your children after you’re gone. These include:
Each of these plans requires that you enroll through your base office, or through the VA. You can also get financial and retirement advise from a personal advisor if you have one to make sure that you’re enrolling in the right program for your needs.
Additional Tips
Retirement planning is never simple, and that goes double for military families. The most important thing to remember is to set a budget and then stick to it. Don’t let reenlistment bonuses, hazard pay and other extra earnings burn a hole in your pocket. Invest those earnings the right way and you’ll find that your retirement years are more comfortable. You’ll also need to understand the tax status of various different pay types and bonuses to make the wisest decisions with your money. For instance, reenlistment bonuses are taxed upfront, so you don’t gain the same tax-deferral benefits by rolling those earnings into your TSP or a 401(k).
Thrift Savings Plans
One of the most important options for military service members is a TSP or Thrift Savings Plan. This is a government-sponsored program that allows you to both save for and invest for your retirement. It’s somewhat similar to a civilian 401(k), but it’s not quite the same thing. Here’s how it works and what you need to know:
First, it’s a contribution plan, which means that if you don’t contribute, you’ll get nothing out of it. Your contributions don’t just sit there, though. Like the funds in a 401(k), they’re put to work on your behalf through investments that will hopefully increase your wealth over time. This allows your TSP account to gradually build, even if you’re not able to contribute as much as you’d like to.
All of your TSP contributions are made before taxes, which means that you’re both saving for retirement and reducing your tax liability at the same time (just like a regular 401(k) plan or an IRA). Lower taxes means you actually get to keep more of your pay, rather than handing it over to the IRS.
Like many other retirement vehicles, the money in your TSP grows tax deferred, meaning that you won’t pay taxes on it until you start withdrawing the money when you hit retirement. The logic is that in retirement, you’ll be making less money, which means that you’ll be in a lower tax bracket. TSPs also allow you to contribute to a ROTH account. You won’t reduce your taxable income, but withdrawals—including interest and dividends—are 100% tax free.
Employers in the civilian world can offer contribution matching, but the chances that Uncle Sam will match your contributions are pretty slim. Only certain MOSs are eligible and only if you agree to serve on active duty for six years.
Finally, if you have an existing 401(k) plan, you can roll your money over from that account into your TSP. Or you could go the other way ‘round, rolling your TSP funds into a 401(k) or other retirement plan if you don’t reenlist in the military.
Other Options
Military servicemembers have access to several other options, including some that are designed to help you leave a legacy to your spouse and/or your children after you’re gone. These include:
- Survivor Benefit Plan
- Reserve Component Survivor Benefit Plan
- Retired Serviceman’s Family Protection Plan
Each of these plans requires that you enroll through your base office, or through the VA. You can also get financial and retirement advise from a personal advisor if you have one to make sure that you’re enrolling in the right program for your needs.
Additional Tips
Retirement planning is never simple, and that goes double for military families. The most important thing to remember is to set a budget and then stick to it. Don’t let reenlistment bonuses, hazard pay and other extra earnings burn a hole in your pocket. Invest those earnings the right way and you’ll find that your retirement years are more comfortable. You’ll also need to understand the tax status of various different pay types and bonuses to make the wisest decisions with your money. For instance, reenlistment bonuses are taxed upfront, so you don’t gain the same tax-deferral benefits by rolling those earnings into your TSP or a 401(k).
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