Understanding Military Retirement Savings Options

Understanding Military Retirement Savings Options

Retirement planning is crucial for everyone, including those in the military. Military personnel have specific savings options designed to meet their unique needs. Navigating these options can seem daunting, but breaking them down can make the process clearer.

Thrift Savings Plan (TSP)

The Thrift Savings Plan (TSP) is a primary retirement savings option for servicemembers. It works similarly to a 401(k) plan available to civilian employees. The TSP allows participants to save money on a tax-deferred basis.

Here are some key features of the TSP:

• Contributions: Participants can contribute a percentage of their basic pay, incentive pay, special pay, and bonuses. The maximum contribution limit is set annually by the IRS.
• Investment Options: The TSP offers five individual funds and several lifecycle funds. Each has a different investment strategy, ranging from government securities to domestic and international stock indices.
• Matching Contributions: For those who joined the military after January 1, 2018, under the Blended Retirement System (BRS), the Department of Defense offers matching contributions up to 5% of the servicemember’s basic pay.
• Tax Advantages: Contributions to the TSP can be traditional (pre-tax) or Roth (after-tax). Traditional contributions reduce taxable income in the year they are made, while Roth contributions grow tax-free.

Blended Retirement System (BRS)

The Blended Retirement System (BRS) was introduced in 2018. It blends the traditional pension with contributions to the TSP. Eligibility for the BRS depends on when the servicemember joined the military.

Components of the BRS include:

• Defined Benefit: The pension component is calculated using a fixed formula based on the number of years of service and the average of the highest 36 months of basic pay.
• TSP Contributions: Automatic and matching contributions to the TSP as previously mentioned. Automatic contributions are 1% of the basic pay, while matching contributions are up to 4% for a total of 5%.
• Continuation Pay: A one-time bonus payable between the 8th and 12th year of service. The amount varies by branch and is intended to encourage servicemembers to continue their careers.
• Lump Sum Option: Upon retirement, servicemembers can choose to receive a portion of their retirement pay as a lump sum. This option reduces the monthly annuity payments until reaching full Social Security retirement age.

Legacy Retirement System

The Legacy Retirement System is for those who joined the military before January 1, 2018, and chose not to opt into the BRS. It retains the traditional pension without the TSP matching contributions feature.

Key points include:

• Defined Benefit Pension: Calculated using the same formula as the BRS without the additional TSP contributions.
• No Continuation Pay: This system does not include the continuation pay that the BRS offers.

Individual Retirement Accounts (IRAs)

Military personnel can also contribute to Individual Retirement Accounts (IRAs), supplementing their TSP and pension. There are two types of IRAs: Traditional and Roth.

• Traditional IRA: Contributions may be tax-deductible, and the funds grow tax-deferred. Withdrawals in retirement are taxed as ordinary income.
• Roth IRA: Contributions are made with after-tax dollars, but the funds grow tax-free. Qualified withdrawals in retirement are also tax-free.

Saving for Retirement While Deployed

Servicemembers deployed in combat zones may have additional opportunities for tax-advantaged savings. Combat zone tax exclusions (CZTE) allow servicemembers to contribute tax-free income to their retirement accounts. Roth TSP contributions can be particularly advantageous, as they grow tax-free forever.

Survivor Benefit Plan (SBP)

The Survivor Benefit Plan (SBP) provides ongoing income to a retiree’s surviving spouse or other eligible beneficiaries. The plan pays a monthly annuity, ensuring sustained financial support. Enrollment in SBP occurs upon retirement, and the cost is deducted from the retiree’s monthly pension.

Financial Planning Resources

Military personnel have access to numerous resources for retirement and financial planning. These include financial counseling services offered through Military OneSource and installation Personal Financial Managers (PFMs). The U.S. Department of Defense Office of Financial Readiness also offers educational materials and tools to aid in financial literacy and retirement planning.

Veterans Affairs (VA) Benefits

Beyond the retirement systems, veterans may be eligible for additional benefits from the U.S. Department of Veterans Affairs (VA). These benefits can include disability compensation, education and training, home loans, insurance, and pension programs. Understanding these benefits is important for comprehensive retirement planning.

Housing and Relocation Assistance

Military careers often involve frequent relocations, which can impact financial planning. The Department of Defense offers resources like the Military Housing Assistance Program (MHAP) to help manage the financial aspects of relocating, buying, or selling a home. Proper housing and relocation planning can support long-term financial stability.

Health Care in Retirement

Health care is a significant consideration in retirement planning. Military retirees have access to TRICARE, the health care program for uniformed services members and retirees. Understanding the coverage options, costs, and enrollment requirements of TRICARE is crucial for maintaining health and financial well-being in retirement.

Tax Considerations

Retirement benefits and savings plans have tax implications. For example, TSP contributions may impact your current taxable income. Roth contributions offer tax-free growth, but have no upfront tax benefit. Military retirement pay may be subject to federal, but not always state, taxes. Consulting with a tax professional who understands military tax issues can be beneficial.