There are lots of financial benefits of being a doctor in the military. Very few of them are easy to understand, however. Unlike in the Vietnam era, our citizens and politicians are currently very keen on “supporting the troops.” This is manifested in a lot of little ways that can add up to serious money, especially when you deploy to a combat zone. Here is a list of just a few of them, a financial how-to guide to deploying, if you will.
1) Lower your interest rate on your loans
You should be very familiar with The Servicemember's Civil Relief Act, updated in 2007. It provides all kinds of opportunities for you. For example, it can keep you from getting sued while on active duty for all kinds of reasons. It keeps your family from being evicted even if you don't pay your rent (of up to $1200) and can even prevent foreclosures. It gets you out of rental leases. It will keep your life insurance up to $250K in force even if you don't pay the premiums. It can even lower your working spouse's state taxes.
But perhaps most significantly for military doctors, it can lower the interest rate of any loans you have prior to going onto active duty. Students loans, mortgages, consumer loans, credit card loans, peer to peer (P2P) loans, and car loans all have their interest rate permanently capped at 6%, as long as you entered into the loan before going on to active duty. Compared to most doctors, military docs don't generally have a lot of loans, but if this situation applies to you, you might as well take advantage of it. (If you're a P2P investor, be wary of loaning to military folks. Yes, they've got reliable income, but that 25% loan may suddenly drop to 6%!) The SCRA comes into play when you come on active duty, not necessarily when you deploy, but for reservist and guard physicians, that's often the same thing.
2) Lower your expenses
In general, when you deploy, all your food, clothing, housing, health care, and transportation needs are 100% covered. You have literally no need to spend money, at all. In fact, if you're single and renting, you could stick your stuff in storage and save nearly 100% of your income during the deployment. Even if you're leaving a family behind, at least you get to save what you'd be spending.
3) Deployment allowances
When deployed, you may be entitled to Family Separate Allowance ($250 per month), Hardship Duty Pay ($100 per month), and Hostile Fire Pay ($250 per month.) Even a doctor stationed in Germany who flies into Afghanistan one day a month to pick up a patient qualifies for Hostile Fire Pay, since you only need to be there one day to get the entire allowance.
4) Tax-Free Pay
A significant portion of military physician pay is tax-free even without a deployment. The Basic Allowance for Subsistence ($2880 per year) and the Basic Allowance for Housing (typically $20-30K for a military doctor) are always tax-free. In addition, most military members have figured out that if their permanent residence is in a state without an income tax, they don't pay any state tax. It is amazing how many license plates from Florida, Nevada, and Alaska are seen on a military base! You'd think there was a direct correlation with casinos and military service!
When you deploy, even more of your income becomes tax-free. In fact, for most military doctors, nearly ALL of your deployed income is tax-free. The limit is currently $7609.50 per month. Since the base pay for a typical doctor is generally in the $5-7K per month range, it becomes all of your base pay and much of your bonus pays. In fact, a lot of enlisted guys reenlist while deployed because it allows much of their reenlistment bonus to be tax-free.
5) Roth Roth Roth
So now that we've determined you're going to have a lot more after-tax, after-living-expenses money while you're deployed, what should you do with it? Since you're going to have very little tax liability in a year you're deployed, you should put as much as you can into after-tax retirement accounts such as Roth IRAs and the Roth Thrift Savings Plan (TSP). You can put $5K into your own Roth IRA, $5K into a spousal IRA, and $17K into the Roth TSP (new this year.) Not only will that money not get taxed when you make it, it won't get taxed as it grows or as you withdraw it in retirement. Triple-Tax-Free! Can't beat it. Oh wait, you can. If you can get your taxable income under $50K (easy to do with a long deployment) you may qualify for the retirement savings credit, and get up to another $1000 back on your taxes.
6) The Savings Deposit Program (SDP)
You can put up to $10K into the SDP. Actually, you can put in more, but the government will only pay interest on up to $10K of it. The money can go into the account the first month you're deployed and stay there for up to 3 months after you return home. You can put it in there as a direct withdrawal from your paychecks, or simply write a check to finance your first month. (Hint: don't take no for an answer and they'll eventually take your check.) The best part of this is that the account pays a guaranteed return of 10%, approximately 1000 times more than money market accounts are currently paying. If you have a 9 month deployment, and leave that money in there for 12 months total, it'll earn an extra $1K. It's taxable, of course, but not at a very high rate since you have little taxable income that year.
7) Tax-exempt TSP Contributions
While the previous 6 suggestions have been “no-brainers”, this one requires a bit more thought. It turns out that while you're deployed and making all that tax-exempt money, but have already maxed out your Thrift Savings Plan (preferably Roth TSP), you can then contribute that tax-exempt money into the TSP, up to a total of $50K for the year (that includes your TSP, Roth TSP, and tax-exempt TSP contributions.) That isn't always a good idea, since the earnings on those contributions (but not the contributions themselves) are fully-taxable in the year you withdraw them (or convert them to a Roth IRA.) It's a bit like using a low-cost variable annuity instead of investing in a taxable account. But for many doctors, it can be a good idea.
If you've used the Roth TSP instead of the traditional, tax-deferred TSP, for your entire career (as many doctors should, but there'll be another post on that) it's a no-brainer. Put the money in. Then when you separate/retire, you roll the money over to a Roth IRA and just pay to convert the earnings. (I don't believe that even with the new Roth TSP coming out that those earnings will be tax-free.) Unless you stay for decades after that deployment, those earnings will be a relatively small percentage and paying tax on them will be a small price to pay to have a huge Roth IRA.
Even if you've used the tax-deferred TSP for most of your career, those tax-exempt contributions can still be a great idea, since there is a way to separate the tax-exempt money from the taxable money after separation, even without losing access to the TSP. The TSP doesn't allow you to roll after-tax/tax-exempt money into it. So after separation, you roll almost all the money out of the TSP to a traditional IRA. You then roll all the taxable money back into the TSP and convert what's left to a Roth IRA for a minimal tax bill. Of course, just like with a backdoor Roth IRA, you can't have any other traditional or SEP-IRAs or you have to do the pro-rata calculation. You could always roll those into the TSP before the conversion though.
But if you've used the tax-deferred TSP for most of your career and plan to stay for decades, you may be better off just investing that tax-exempt money in a taxable account or using it to pay down your mortgage or other debt. Plus, then you don't have to deal with Military Finance screwing it all up (which I assure you, they will.)
1) re sdp: marine corps does not allow you tocontribute more than your gross on the monthly LES. So it took me two months despite having 10k ready to go in my bank account
2) HDP has been changed to 7.50/day rather than the 225/month. that way the military does not have to pay more for just one day in country
-current Navy EM doc
Thanks for another great article geared towards the troops. I will disagree that costs necessarily go down and for me they certainly went up. For many families, the one additional person at dinner doesnt add much cost so you arent saving much on the required items. I personally found we spent a lot of money on child care/baby sitting and other such activities for the wife and kids. When there isnt two of you to handle these type of activities, the spouse may need extra support/time off in order to get through the deployment and this has associated costs. Some of these long deployments create unforseen costs on our soldiers. Finially ill add, that people need to be careful not to waste money while deployed. There are groups out there trying to sell you a new car etc during your deployment and many of the larger forts/bases have exchanges where you might be tempted to waste significant money while deployed. It can get boring at times of less action and every day can seem like groundhog day. Try to pick up a cheap hobbie like working out or reading during your deployment.
Will-
They gave me that line in the AF too. Eventually they took the check. The fun thing about groundhog day is you can go by finance every single day and bug them. I can’t remember where I found the authorization to do that, but I doubt it’s different between services. By the way, I thought there wasn’t such a thing as a Marine Doc. I thought the Navy provided all medical services for the marines.
When you write a check to fund your SDP, make sure you get a receipt! Needless to say, DFAS or someone lost my $10k. The check was debited electronically, so there was no cancelled check. But to their credit, they accepted my handwritten receipt from Spc. Snuffy, which if I recall he didn’t even sign his name on, and my bank statement showing that $10k was taken out by someone, and they credited my account for the deposit and all accrued interest back to the date of deposit. Unfortunately it cost me 4 months of grief and worry. Also, my deployment ended in December, and for some reason all the interest was assigned to the next year (received a 1099-DIV from DFAS), so I didn’t get any tax breaks on that.
A few of things:
1) I also was able put 10k in SDP at one time, but only because they happened to see my august LES which had my 15k doctor bonus in it (wouldn’t let me contribute more than you make in one month). I gave them $5 dollars cash and they got $9995 from my eagle cash card. The SDP account didn’t not show up until I showed them receipts 5 months later in garrison….not sure if it was worth the hassle or not. Finance at home is tough, finance in a war zone is a frustrating black hole.
2) I also tried to get my TSP to take $16k from my specialty bonus in OCT. I wanted them to take only from my Taxble income to defer which there was more than enough of that month. Of course they took the max they could of tax free money then started to use the taxable income. I could not fix this no matter who I talked to. I talked to a lot of people. Nobody could (or wanted ) to fix it
3) Tell USAA you are deploying and you and your spouses USAA credit cards go to 4%. If you get any medal, it goes to 0% and they reimburse you the interest they charged while deployed.
4) You can definitely save while deployed. I paid off 25k of credit cards and filled up my wife and my retirement accounts.
5) Plenty of time to read finance books and to get in shape.
Thanks for the all the information White Coat investor. Keep up the good work
Re: 10k check- I placed about 60-65% the first month and the rest the second via checks since they kept maintaining that you are not allowed to give a 10k check- I will lose out on a little interest, but it already occurred. I went on several different days and it was the same story.
Marines don’t have MDs. I’m Navy attached to them for several months.
The SDP doesn’t start accruing interest til the 10th of every month and the monthly deposit window starts over every calendar month, so if you have to put in two deposits, then you put in the first after the 31st day in country, then put in the 2nd deposit after the first of the next month before the 10th, you’ll gain interest on the full amount for the longest possible term.
For more information on that as well as a couple of other deployment investing tips, you can get this free guide:
http://www.militaryinvesting101.com/free-report
Lot’s of good info. Hope it helps.
Thanks for the tip and the link.
I was hoping you could answer a few questions or give a bit of guidance pertaining to an ECISP bonus I am due in April. I too am an ER doc and was initially considering placing the entire sum (44,000) into my traditional TSP, but after reading your information on the Roth, am wondering if I should maximize the Roth TSP or just let them tax the bonus, as I am being told that my base pay is the only amount that is tax free given that I am an officer and the highest enlisted monthly base pay if roughly 7600 which is only about 1000 more than my current monthly pay as Major. In short, they are going to tax my specialty pay regardless of being in a CZTE.
Should I just let them tax it and then push 11,000 of the 30,800 remaining towards both my spouses and my Roth IRA? The reason I was considering dumping the whole amount into a traditional TSP was so that I don’t lose the 25% to taxes(13,200). As your blog has mentioned, we are eligible for up to 52,000 this year being in a combat zone, where traditionally we are only able to put 17,500 yearly. I am currently putting 15% of my base pay in the traditional TSP which equates to about 1000 a month. For the last 3 months that’s 3000. With the 44,000 and the 500 I put in the Roth TSP a month it will bring me to the 52,000 for the year and then I can stop the 1000 a month contributions to Traditional TSP now and use that to fill the 11,000 for the Roth IRA’s for my wife and I. What are your thoughts? I am new to the blog, but so far you have raised some interesting questions?
Thanks for your help
As a general rule, do Roths while in the military, especially while deployed. That means Roth IRAs for you and your spouse (via the backdoor if necessary), Roth TSP, Roth conversions within the TSP when allowed (I don’t think they are yet, but eventually.)
The decision about whether to put tax-exempt money into the TSP is completely separate from the Roth vs traditional discussion. If you anticipate being able to isolate the basis to eventually convert that tax exempt money to Roth money, then I think it is a good idea. Otherwise, I’d just use it to pay down debt, invest in taxable, fund 529s etc.
Hope that helps.
The other nice thing about having money in the Roth or Traditional TSP is that if needed to you can take out a TSP loan for half the amount in your account, paying yourself the interest as opposed to having to borrow it from a bank.
Hello,
My wife, military ER doc, is currently in a combat zone and contributing to the Roth TSP. I’m a civilian ER doc and we should have most of our income in the 24% tax bracket this year (I’m RVU only with a new job and still estimating my income). Is there any reason why we shouldn’t have her max out her Roth TSP + the tax exempt up to the max while she is deployed (56k total)? We’ll likely retire early and have plenty of time to convert to a Roth during those years.
Additionally, she is only deployed for 6 months, which means only the money she contributes to her TSP during that time is tax free or exempt, correct? So when she returns in Oct or Nov, we no longer have this option?
Thank you as always.
Not that I can think of. Also look at the SDP.
Yes, the tax-exempt money is only while deployed.
Much appreciated as always.
So I’ve spent a good few hours talking with military finance people and I’ve found them to be quite nice but not the most helpful. Was wondering if you (or anyone else reading a 6 year old thread) could clarify somethings. We’ve discussed above that given my wife and I’s situation it makes sense to try to hit the 56K annual addition limit with her income. 19K should be in Roth. She blended retirement. Complications and questions:
She contributed some money to the traditional TSP prior to deploying. Is this deducted from the 19K deferral limit for the year? If this is yes, I assume she can only contribute 19K minus however much she contributed to the traditional TSP prior to deploying. Is this true or does she actually still get to put 19K in the Roth TSP?
Everything I’ve read says we get locked out of the accounts if we exceed the limits and then cannot contribute further for the remainder of the year. This means that we should try to max out the 37K while she is deployed because she won’t have access to that account once she gets back in Oct/Nov. Employer match for the year is approx 3500. So thats 33500 to place in traditional and 19K in Roth. If we hit the 19K roth prior to December, she does not get the 5% match. This means we have to map it out so that she will hit 19K in December.
So, my plan is to contribute the most possible to the traditional while she is deployed while still assuring we will be able to hit the 19K limit for roth with her December contributions and maintain at least 5% contributions to assure employer match. I understand everyone says to contribute to Roth while deployed but if we are going to be able to max out the account anyways does it really matter on timing?
This convolution is what happens when you get into finance mid deployment. Better now than never but boy would this have been better to look at 6 months ago. Thank you very much.
I wonder if the first $19K that goes in has to be the employee contribution. Quite the dilemma if there is no true-up. Shame on the feds for designing it that way.