Members of the U.S. military have access to special tax advantages, providing some unique financial planning opportunities, according to experts in the field. Patrick Beagle, a certified financial planner and the president of WealthCrest Financial Services based in Springfield, Virginia, highlights that often, military personnel enjoy higher earnings post-service. This boost comes from combining income from a new career with military retirement benefits. His firm specializes in assisting military and federal employees.
Beagle emphasizes the importance of making after-tax Roth contributions to Thrift Savings Plan (TSP) accounts during military service. By contributing after taxes, the money can grow tax-free. “Skipping Roth TSP contributions during your service years, when your income might be lower, likely isn’t a wise choice,” advises Beagle, a retired Marine aviator.
Moreover, serving in a combat zone presents another financial planning window, as noted by CFP Curtis Sheldon, who also operates as an enrolled agent at C.L. Sheldon and Company in Alexandria, Virginia—a firm dedicated to helping both active and retired military members. “When deployed to a combat zone, most people earn tax-free income,” Sheldon explains. The IRS allows tax exemptions on earnings like basic pay, bonuses, or student loan repayments for any part of the month spent in a combat zone.
Strategically receiving more income during such a period can amplify the tax exemption benefits, experts suggest. For example, deferring a reenlistment bonus until you’re in a combat zone can render it tax-free, explains Beagle.
Roth conversions are another strategy, especially for higher-ranking individuals serving in a combat zone. During these times, they’re temporarily in a lower tax bracket, making it advantageous to convert pretax retirement account funds to a Roth IRA, Sheldon mentions. Although the converted amount is taxable upfront, it promises tax-free growth in the future.
Service members can also leverage the Department of Defense’s Savings Deposit Program (SDP), which offers a remarkable 10% annual interest on deposits up to $10,000 while deployed in a combat zone. Comparatively, traditional banks offered an average interest rate of 0.41% as of mid-March, and the top savings account rates were about 4.26% by the end of the same month, per Deposit Accounts data.
Beagle suggests using the SDP funds as a financial cushion for living expenses once you exit a combat zone, thus allowing for more Roth contributions to your TSP. “There are numerous benefits available,” he states, “and you can select from them to optimize your future investment returns.”
