A Veteran’s Mission: Don’t Leave Money on the Table
Dek: From military retirement and VA disability compensation to TSP savings, Social Security and health care, here’s how service members and veterans can avoid costly mistakes and make the most of their benefits.
By: Sherron Permashwar, CPA/PFS
If you’re serving right now, you are building something valuable. Military retirement pay, possible VA disability, a Thrift Savings Plan, Social Security and healthcare coverage. Sometimes, service members treat each of these as its own little world and money gets lost in the gaps between them.
Veterans benefits often depend on one key question: Which one are you? If you’re still serving, whether on active duty or in the Guard or Reserve, you may have access to different education, retirement, and transition-planning opportunities than someone who has already left the military. If you separated before reaching 20 years of service, your focus may be on making the most of the benefits you’ve earned and identifying other resources to help bridge the gap. Understanding which category you fall into is crucial as you build a financial and retirement strategy that fits your military journey.
If You Separated Before 20 Years
If you separated from the military before reaching 20 years of service, take stock of the benefits you’ve earned and address any gaps in your long-term retirement and health care planning.
Review your Thrift Savings Plan (TSP) accounts to ensure your investments still align with your goals and consider whether rolling funds into an IRA or a new employer’s retirement plan makes sense for your situation. Create a my Social Security account and verify that your military and civilian earnings have been properly recorded because your future retirement benefit will be based on your lifetime earnings history. If you served on active duty between 1978 and 2001, you may also have earned extra Social Security credits that can increase your lifetime earnings record.
As you approach retirement age, understand when to enroll in Medicare and how it will coordinate with any employer-sponsored, marketplace, or VA health coverage you may have. If you have service-connected injuries or medical conditions, determine whether you may qualify for VA disability compensation. Even veterans who separated years ago may be eligible to file a claim or seek an increased rating if their condition has worsened. If you separated before 20 years, you have no military retirement pay for your VA disability to reduce, so the compensation is simply additional tax-free income.
No matter which category you fall into, taking these steps can help ensure you’re not overlooking valuable benefits and can strengthen your retirement, health care, and financial security long after your military service has ended.
If you’re still serving, here are five items to focus on:
1. Military Retirement Benefits: Know What You’re Building
Start by learning which retirement system you’re in. Military retirement pay is a monthly, taxable benefit for those who serve 20 years or more. The Blended Retirement System (BRS) applies automatically if you joined the military on or after January 1, 2018. If you joined earlier and didn’t opt in during 2018, you’re under the legacy High-3 system, which pays a larger pension but no TSP match. Under BRS, you get a smaller monthly pension plus automatic and matching TSP contributions.
Under the Blended Retirement System (BRS), you get a smaller monthly pension plus automatic and matching contributions to your Thrift Savings Plan (TSP), subject to eligibility requirements. Under the older High-3 system, retirement benefits are based on the pension alone, without government TSP contributions.
Active-duty members can retire after 20 years, which often means as early as their late 30s or early 40s. Guard and Reserve members generally begin receiving retirement pay at age 60, though some qualifying active-duty service can lower that age.
It also helps to know the difference between two benefits that sound alike. VA disability compensation is for service-connected conditions, and it is tax-free. VA pension is a different, needs-based benefit for qualifying wartime veterans with limited income and assets.
- Thrift Savings Plan: Save While You Serve
If you are still serving, the Thrift Savings Plan (TSP) is your most powerful tool. If you’re under BRS, contribute at least enough to capture the full government match. Then look hard at the Roth option. Traditional TSP contributions lower your taxes now, and you pay tax when you withdraw. Roth contributions give you no deduction today, but qualified withdrawals in retirement are tax-free. When you’re early in your career and in a lower bracket, Roth is often worth serious consideration.
Don’t let VA benefits become your reason to skip saving. Disability ratings can change, and a monthly benefit is not the same as a funded account. And when you leave service, don’t automatically roll over or close out your TSP. Compare your options first.
If you’re deployed to a combat zone, ask about the Savings Deposit Program. It pays 10% interest on up to $10,000 you save during deployment, for up to three months after you return.
3. VA Disability and Military Retirement Pay: Make Your Benefits Work Together
In general, VA disability pay reduces military retirement pay dollar for dollar. Two programs can fix that.
Concurrent Retirement and Disability Pay (CRDP) restores your full retirement pay if you have 20 years of service and a VA rating of 50% or higher. Combat-Related Special Compensation (CRSC) is for disabilities caused by combat or hazardous duty and it is tax-free. You generally can’t receive both CRDP and CRSC for the same period, so you’ll want to compare them if you’re eligible for both. CRSC requires an application and isn’t automatic.
Also review your VA disability rating whenever your health changes. Many veterans leave benefits on the table simply because they never asked for a re-evaluation.
4. Military Retirement Taxes and Medicare: Plan for Taxes and Health Care
Use your working years for proactive tax planning. A few rules to know:
- Combat pay: Qualifying combat pay is tax-free for enlisted members. For officers, the exclusion is capped.
- Earned Income Tax Credit: You may be able to include combat pay in income when claiming the Earned Income Tax Credit, which can help.
- Tax filing extensions: Your filing deadline is automatically extended while you’re in a combat zone, plus 180 days after you leave, subject to applicable rules.
- Reservist retirement withdrawals: Certain reservists called to active duty for more than 179 days or for an indefinite period can take qualifying retirement account withdrawals without the usual 10% early-withdrawal penalty.
- Reservist travel expenses: Reservists called to active duty for 180 days or more can take retirement account withdrawals without the early-withdrawal penalty.
- Mortgage interest: You can still deduct mortgage interest if you itemize.
Think carefully about where you will retire, too. States tax military retirement pay very differently, and the choice can be worth thousands each year.
Medicare and VA Health Care: Don’t Assume You’re Covered
When it comes to health care, please don’t assume “I have VA health care” answers the Medicare question. It doesn’t.
TRICARE For Life, the coverage available for eligible military retirees and family members with Medicare, requires you to be enrolled in Medicare Part A and Part B. Skipping Part B can leave you with a coverage gap and a late-enrollment penalty.
VA health care also doesn’t replace Medicare or generally protect you from Part B late-enrollment penalties.
For more information, visit TRICARE and VA Health Care.
Social Security still fits into the retirement picture. Your military service earned you Social Security credits and military retirement pay does not reduce your benefit. Make sure to include it in your total financial and retirement plan.
5. Survivor Benefits and Life Insurance: Protect Your Family
Before you retire, get your estate plan and survivor benefits in order.
The Survivor Benefit Plan (SBP) lets you provide a monthly income for your spouse or other eligible beneficiary after you’re gone. You generally make this election at retirement, so make it on purpose, with the numbers in front of you.
If you or a loved one may need help with daily living in later years, look into Aid and Attendance, an additional VA benefit for those who qualify. Eligibility is subject to medical, service, income and net-worth requirements, so it pays to learn the rules early.
Life insurance matters too. Service members’ Group Life Insurance and VA-offered life insurance are options worth reviewing.
Three More Military Benefits You May be Missing
- Post-9/11 GI Bill. Qualified service members and veterans can use it for tuition, housing and books. In some cases, eligible service members can transfer unused benefits to family members while still serving, subject to service requirements.
- Tax relief for the families of those lost. Certain federal tax liabilities may be forgiven for service members who die in a combat zone or under other qualifying circumstances, and certain death benefits paid to survivors are not taxable.
- Lower interest on pre-service debts. Federal law generally caps interest at 6% on debts you took on before entering active duty, such as loans and credit cards, while you serve. Debts taken on after you join aren’t covered. You have to ask each lender in writing and include a copy of your orders.
The Bottom Line: Don’t Leave Military Benefits on the Table
You’ve spent years serving something bigger than yourself. Your retirement deserves the same level of planning. Don’t plan for retirement as though your military benefits and civilian finances live in separate worlds.
A CPA can help you coordinate taxable retirement pay, tax-free VA disability, Social Security, civilian retirement accounts, and health care.
Sherron Permashwar, CPA/PFS, is founder of The Modern Savvy CPA. She is a member of multiple committees and task forces with the American Institute of CPAs (AICPA).