As discussed in the Banking & Savings section, it is essential to put away as much money as possible. The younger you are when you start saving, the easier it will be to grow a nice nest egg. Once you have established a saving routine, you should consider investing some of your money. It is important to understand that with investment always comes risk. The value of your investment can and will go up and down, unlike a bank savings account. However, investments are a good way to save up for long-term goals such as a child’s college education or a down payment for a house. Once again, investments can grow your money more than savings accounts, but they carry a risk. In this section we will discuss some investment options that are available to everyone, and some that are only available to service members. Fortunately, service members have some excellent options for retirement savings. It is up to you to make the most of them.
Thrift Savings Plan
The Thrift Savings Plan is a retirement savings plan. It offers a tax-advantaged, low-cost way to save for the future, similar to a 401(k). After you set it up, contributions are taken automatically from your pay. It can really add up, and the TSP provides a consistently higher rate of return than most other retirement savings plans. The average return over the last 82 years is 9.6%. Keep in mind that this includes the Great Depression, several lousy markets, and the most recent recession —not too shabby, everything considered.
The TSP is a tax shelter. This means that you don’t pay tax on the earnings until you withdraw your money. Additionally, you won’t be taxed on contributions from combat pay which is tax exempt. Say 10% of your contributions were from a combat pay period, then 10% of your withdrawal won’t be taxed.
After leaving the military, you may keep your money in the TSP, or your may roll it into an IRA or 401(k). If you take the money out and spend it you will have an immediate tax liability.
The Savings Deposit Program
The SDP is available to service members deployed to combat zones, and guarantees an interest rate of 10% a year. It is a great opportunity, especially for single service members who have little use for their money while on deployment.
The SDP allows you to invest $10,000 from the time you are deployed until 90 days after you leave the eligible region. During that time, your savings will earn a rate of 10% a year. Combat pay is tax-free, so at the very least, plan to stash in the SDP the amount you’ll save in a combat zone by avoiding federal taxes on your pay. You can withdraw your money and the interest 90 days after you return.
Unlike a traditional IRA, a Roth IRA offers no immediate tax benefits. However, down the road withdrawals from a Roth IRA will be tax-free. Additionally, your contributions can be withdrawn at any time tax- and penalty- free. In order to qualify for a Roth IRA, you need to have earned income. Tax-free combat pay counts toward this.
If you have been deployed, the Roth has a double tax benefit. The combat pay goes in tax free and comes out tax free! This is a fantastic opportunity that is tough to beat. You can contribute $5000 to the Roth in one year, and if your spouse does not have earned income, you can contribute $5000 to an IRA in their name too. You can invest through a lump sum, or monthly contributions.
Planning for the future is one of the most important things you can do for yourself and your family. There are no black and white rules for investing, it is just a matter of figuring out what works for you. Set goals and know your options. For more information on money management, go to http://www.saveandinvest.org/