There are lots of financial benefits of being 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 TSP (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.)