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Active Duty Retirement: 4 Ways to Plan Financially

Retirement Planning
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Veteran tucking his daughter in under a blanket on the couch after discussing active duty retirement

While you're serving in the military, you're eligible for a number of financial benefits through the government, including a possible pension when you retire. But to qualify for the pension, you need to serve at least 20 years. And even if you do qualify, the monthly payments may not be enough to cover your bills during retirement. On top of military retirement benefits, it still may be a good idea to build your own savings. Here are a few ideas that may be useful when planning for active duty retirement.

1. Consider a Roth IRA

One way to save money for retirement is through a Roth individual retirement account (IRA). This is different from a pension or 401(k) because you open and manage it on your own. As of 2019, you can add up to $6,000 per year into a Roth IRA if you're younger than 50, and up to $7,000 per year if you're 50 or older. Your modified adjusted gross income (AGI) will determine how much you can contribute to a Roth IRA. You could then decide on other ways of saving or investing your money.

Contributions to a Roth IRA are made up of money that you already paid tax on. As a result, you don't get a tax deduction for adding money into a Roth IRA as you would with a traditional account, but when you retire, you take the money out tax-free as long as the specific requirements are met.

Members of the military also receive additional active duty retirement benefits that may be useful for a Roth IRA. First, when you serve in a combat zone, your pay can be exempt from taxes. You could then put that into a Roth IRA and give it the opportunity to grow tax-free for the future. However, your contributions are not guaranteed to increase in value, and may instead lose value over time.

2. Look Into a Traditional IRA

A traditional IRA is similar to a Roth, except that the tax benefits are different. With a traditional IRA, you may be able to claim a tax deduction each year you add money. There are, however, IRA deduction limits from the IRS that you should consider. In exchange, you'll owe income tax on whatever you take out in retirement. A traditional IRA may be a better choice if all of your military pay is taxable for the year, or if you're in a higher income tax bracket and want more deductions.

3. Open a Thrift Savings Plan

The Thrift Savings Plan (TSP) is a contribution retirement plan for employees of the United States government, including members of the military. Starting on January 1, 2018, the government gave active members of the military the option to use a TSP in exchange for giving up part of their pension. This new system is called the Blended Retirement System.

If you choose this option, the military will contribute an extra 1 percent of your pay into your TSP without you doing anything. If you add some of your military paycheck to your TSP account, the government will match your contributions up to another 4 percent, so you can receive up to 5 percent of your salary in additional money for your retirement plan.

You can add up to $19,000 from your salary per year into a TSP ($25,000 if you are 50 or older). In exchange for the TSP, however, you agree to a smaller pension: You only earn 2 percent of your salary per year for the pension instead of the usual 2.5 percent. After 20 years, your pension benefit would only be 40 percent of your salary instead of 50 percent.

Also, when you leave the military, you can no longer add money to your TSP. At this point, you could transfer whatever you've saved to another retirement option, like a Roth IRA, so you can keep saving for the future.

4. Consider Cash-Value Life Insurance

Life insurance can help protect your family by providing a death benefit when you die. But life insurance could be another way to help address income needs in retirement. Some permanent life insurance policies, which are meant to last your whole life, can build something called "cash value." You have access to these funds while you're still alive. However, loans and withdrawals may generate an income tax liability, reduce the account value and the death benefit, and may cause the policy to lapse.

The life insurance company invests your cash value balance and it may have the potential for growth over time. Some policies, like whole life, pay a fixed return, while others, like variable life, put your money in the stock market; you might earn more this way, but the return goes up and down each year. It's important to remember that the cash value is not guaranteed to increase in value, and may instead lose value over time.

Either way, by paying for your life insurance, you also have the potential for cash value that you can use during retirement. Life insurance offered through the military does not include this feature, so you'd need to buy a policy from a private insurer to benefit from cash value. When you sign up, ask how they cover servicemen and women to make sure they still cover you while you are on active duty.

At any stage in your life and your military career, it's important to think about your future retirement. By taking advantage of these ideas, you may be able to build your own savings to go along with whatever else you receive from the government for your service.

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Information provided is general and educational in nature, and all products or services discussed may not be provided by Western & Southern Financial Group or its member companies (“the Company”). The information is not intended to be, and should not be construed as, legal or tax advice. The Company does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.