Personal Finance Plans For Service Members And Their Families

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Military Service Member with Family

Source: web

Veterans and their families face different types of financial problems compared to others. Even though veterans are entitled to myriads of advantages that are inaccessible to others, there are several hardships that have to be combated by the veterans and their families.

Long service hours and being posting in combat zones takes a toll on the earning member of the family thus leaving little or no time for him or her to pay attention to the financial well-being of the family.

It is thus important for other family members to take charge of the situation as far as matters pertaining to personal finance are concerned. As the benefits doled out to veterans are many, family members and veterans should try to mitigate the risk by efficiently utilizing these available benefits. Steps that a serving member or one of their family members can take for a secured financial future are discussed right below.

Your Pension Is Not Enough

Even though people serving in the military for 20 years and over are officially qualified for a stable pension, you will also have to pay equal attention to personal savings. Statistics suggest that most military personnel voluntarily retire or leave active duty even before they become eligible for their pension. And, unlike pension plans available for civilians, they aren’t entitled to a “partial pension” if they choose to leave early. Thus, if you resign from the service before completing 20 years in the service, you receive nothing. Well, you do receive health care benefits and you should have the GI Bill lined up.

And that is not all! Even after completing the slated number of years in service, the pension would be no more than 50% or less of your basic salary at the time of completing 20 years of service! That would hardly suffice! Therefore, the best thing to do would be to take charge of your personal finance and save as much as possible while you are still employed. Have you heard of the Thrift Savings Plan or TSP? Well, that is one way (discussed further below). Moreover, family members can add their two cents too in this endeavor. There are various saving plans that may be adopted to maximize on the benefits military people are entitled to.

Thrift Savings Plans For Service Members

Thrift saving plans floated by the government is the right place to start. Military personnel, while they still are in the service, can invest in this plan which is low on costs (there is not any) and can provide a retirement saving option with several tax advantages. This is something akin to the 401(k) plan but for federal employees. One can contribute a maximum of $17,000 dollars to this plan as of 2012 or more if you have received tax free pay when posted in a designated combat zone (no, that does not count or include Chicago or Detroit). The total contribution limit for this plan, according to latest guidelines, is $50,000. And since these contributions are exempted from taxes and that they are taken out of you paycheck before you even receive the money, you do not even know what you are missing.

The contributions made to this plan continue to grow tax deferred until you choose to withdraw the amount when you retire, which could be in your early 60s. Since the contributions are deducted from your paycheck before you even know it, this steady and regular investment could pay off really well. Thus, even if you leave the service after a period of 10 or 15 years, or only 4, and do not contribute anything else after that, you still stand to receive a hefty sum by the time you are 55 years of age and ready for retirement (or, at least thinking about it).

After you leave your respected military branch, you still can choose to leave your money in TSP or you can roll it into a 401(k) with another, or your next, employer or transfer it into an IRA or Roth IRA. Again, the money will keep growing here, tax deferred as well. If you withdraw the amount and spend it, there will be an immediate tax bill to be settled and this just does not make financial sense. You have proven to be a saver, continue to do so and plan for the future. Also and furthermore, if you are below 55 years of age, when you honorably discharge yourself from the military and make a withdrawal request, you will be entitled to a 10% penalty hit. This is why it is imperative you just let it sit or you transfer it a Roth or a 401K that your next employer has eligible for you. For more information, you need to visit the official website of TSP. An interactive calculator made available on the website can help you in projecting your future balances.

Consider A Roth IRA For Tax Free Earnings

In traditional IRA plans, you are not entitled to pay taxes on current contributions, thus a percentage of your present income is tax free. In case of a Roth IRA, you pay your tax right away, the following tax period. All withdrawals made from the Roth IRA at a later date would be tax free after you reach a certain age (most likely that is a long wait but worth it!). On the other hand, withdrawals from a traditional IRA would be liable to tax deductions at the prevailing rates in the future. Regarding the Roth IRA, you can end up withdrawing contributions at any point of time and your withdrawals would not be plagued by taxes or penalties after you have reached the age of 59 1/2.

As of 2012, the contribution limit is $5,000 for a Roth IRA for those below the age of 55 years of age, and $6,000 for those above 55 years of age. The only condition being that your gross income needs to be less than $110,000 for 2012.

A Roth IRA could prove to be especially suitable for those posted in combat zones who are eligible for tax free income (TSP should be your top investment choice though if you are active duty). Your salary is tax free and your contribution and earnings are tax free too! That indeed is a win-win situation! If you are the sole earning member in your family, you can start contributing $5,000 to a Roth IRA that’s in your spouses’ name for cumulative benefits. If you are the only income earner in your family, you can also contribute $5,000 to an IRA in his or her name.

Your Life, Your Financial Independence

While serving your country, do not forget that you also have a duty towards you and your family’s financial well-being. Just because your buddies spend a hundred dollars or a lot more every month going out and drinking does not mean you need to follow in their footsteps. Your financial future is at stake, not theirs!

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About Author

Benjamin is from Sacramento, CA. He has 2 master’s degrees and served 4 years in the U.S. Navy. He has worked at Wells Fargo Financial and has been investing in equities since 1995. He is a constant reader of finance articles and books related to business.


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