Financial Opportunities For Military Families

My son, Max, is going into his junior year of high school. Since he has started thinking about college, we have had many conversations about career choices. We have talked about the pros and cons of different jobs, including the salary potential. I would love to tell my kids to just “do what they love”—but let’s be realistic, doing what you love doesn’t always pay the bills. And I work in the financial world. I need to be realistic about these things. Jeff and I see it every day; a person’s career choice has a significant impact on his or her financial situation. I don’t mean this just in terms of the pay scale, but with respect to the benefits as well. And whether a person is just starting his or her professional journey, or is in the twilight of his or her career, it is important to be aware of and to understand those benefits, as they can affect both current and future financial health.
Today, I want to talk about a very important career, one that has some unique financial benefits that should not be overlooked: a career in the military. Few, if any, would argue that serving in the military is one of the most honored and respected career paths one can take, and with it comes some financial planning opportunities that, for the most part, are not available to other professions.
One benefit available to certain members of the military is the Savings Deposit Program, administered by the Defense Finance and Accounting Service (DFAS). This program allows eligible servicemembers to deposit $10,000 into an account that will earn up to 10 percent annually during each eligible deployment. Eligible servicemembers must be receiving Hostile Fire Pay and include those who are deployed to certain contingency operations outside the United States, designated combat zones, or qualified hazardous duty areas. To be eligible for the program, a servicemember must be deployed for at least 30 consecutive days or for at least one day for each of three consecutive months. The 10 percent annual interest compounds quarterly and for up to three months after returning home. Although participants are only allowed to invest up to $10,000 during each deployment, 10 percent guaranteed growth is hard to come by and is something to take advantage of.
Another financial planning opportunity available to some in the military can be executed with a familiar investment vehicle, a Roth IRA. Let me explain. For eligible members serving in a designated combat zone, certain income is excluded from taxation. This excludable income includes: basic pay, reenlistment bonuses, school loan repayment income, imminent danger/hostile fire pay, discharge benefits and certain other awards and financial incentives. Those servicemembers receiving tax-free income can make a contribution to their Roth IRA with that income, whereas usually, Roth IRAs are funded with income that has already been taxed (tax deductions are generally available for contributions to traditional IRAs, not Roth IRAs). Think about that: tax-free growth on tax-free money. Of course, regular contribution and income limits apply, but maxing out a Roth IRA each year with tax-free income is a benefit that should not be overlooked.
Another great benefit was created by the well-known Post-9/11 GI Bill. That bill provides education benefits for servicemembers who have served on active duty for a minimum of 90 days since September 10, 2001, and were honorably discharged, or for those who served at least 30 days of continuous active service after September 10, 2001, and were discharged due to a service-connected disability. The amount of benefits available increases for those who have served longer periods of time, with the maximum amount available to those who have served for at least three years since September 10, 2001. Generally, the maximum benefits available cover the full cost of a public college for four academic years, up to an annual limit, or a specified amount of private school tuition for four years. Certain housing allowances and book stipends are also available. Alternatively, those benefits can be used for on-the-job training programs, apprenticeship programs and reimbursement for licensing or certification exams. Furthermore, under certain conditions, military members can choose to transfer any unused portion of their benefits to a spouse of other dependent, with restrictions.
There are also benefits available to support and protect the families of servicemembers who have lost their lives while serving in the Armed Forces. Servicemembers’ Group Life Insurance (SGLI) is low-cost term life insurance coverage available to eligible servicemembers. All who are eligible are automatically issued the maximum SGLI coverage, $400,000, and are automatically enrolled, without needing to apply. Eligible servicemembers include: active duty members of the Army, Navy, Air Force, Marines, or Coast Guard; commissioned members of the National Oceanic and Atmospheric Administration (NOAA) or the US Public Health Service (USPHS); cadets or midshipmen of the US military academies; members, cadets or midshipmen of the Reserve Officers Training Corps (ROTC) engaged in authorized training and practice cruises; members of the Ready Reserve or National Guard who are scheduled to perform at least 12 periods of inactive training per year; and servicemembers who volunteer for a mobilization category in the Individual Ready Reserve (IRR). (Part-time coverage is also available for eligible members of the Reserves and Reserve Officer Training Corps who do not qualify for full-time coverage.) Anyone automatically enrolled can elect to either reduce or decline the coverage.
The low cost and the availability of this life insurance, without underwriting, are both reasons to take advantage of this special benefit. As well as that, as with all life insurance, SGLI coverage can provide a tax-free death benefit to the policyholder’s beneficiaries. And having that coverage can be a huge financial lift for those military families. But in addition to receiving the death benefit, a planning opportunity exists for the recipient of a SGLI policy that few families are aware of.
Most beneficiaries of an SGLI policy are allowed to contribute all of the proceeds from such a policy to a Roth IRA—that can mean a contribution to a Roth IRA of up to $400,000 in one year, for a policy with the maximum coverage! This allows the tax-free death benefit to become a tax-free retirement account. But as I mentioned above, it is important to not only be aware of any benefits you or your family are entitled to, but to understand the rules pertaining to them as well. For example, if the beneficiary of an SGLI policy wants to contribute the proceeds to a Roth IRA, that needs to be done within one year of receiving the benefits.
This is not an exhaustive list of the financial opportunities available to members of our military. And anyone who may be entitled to any such benefits should speak to a professional about their options. Our servicemembers make incredible sacrifices and should be taking advantage of any benefits available to them.
Your responsibility, Cutter Family Finance readers, whatever your situation, is to make the best decisions based on the opportunities available to you.
As Jeff always says, be vigilant and stay alert, because you deserve more.