At Lionshare Partners, we salute our brave men and women in uniform. Thank you for putting your life on the line to protect our great country. We honor and cherish your sacrifices that keep us safe. In turn, we try to give back where we can and is one of the primary reasons we launched our Heroes and Zeroes Initiative to acknowledge you and your amazing fellow service members.
There are a lot of perceptions that prevent wealth management firms from working with members of the military. One pervasive perception is that those in the military don’t have enough assets to make them good clients. While some veterans are living paycheck to paycheck, many are extremely successful. Payscale.com, for instance, ranks the U.S. Military Academy at West Point fifth in salary potential among U.S colleges, with the U.S. Naval Academy at Annapolis in sixth place. The military;s specific programs and problems can be quite complex. It now has a blended retirement system that alters the military’s 80-year-old defined benefit pension plan for those retiring after 20 years or more of service. The plan includes Department of Defense automatic and matching contributions to the Thrift Savings Plan, midcareer continuation pay and a lump sum payout option.
By combining a traditional defined benefit pension with a defined contribution plan that includes a 5% matching contribution, the changes in the 2016 National Defense Authorization Act will placed increased retirement preparation on the shoulders of our active military men and women. Under the new plan blended retirement system, a military pension after 20 years of service drops to 40% of the average of the three highest-earning years of service, down from 50%. You will have to be a wizard to make up the 10% difference between the old pension and the new pension. Another pitfall facing retiring service members is the option to take a lump sum payout in exchange for a small pension. This lump sum portion is based on their pension’s future cash flow at a discount, currently predicted to be 7%. The problem is that current rates are around 2% so that future pay-out may not be the best deal for retirees. For example. A retiring lieutenant colonel could take a lump sum payment of approximately $157,000 by agreeing to reduce his pension to 30% of his highest-earning years. But in doing this, that retiree would be giving up more than $215,000 in future pension income.
Anyone enlisting after January 2018 will be offered a reduced pension along with access to the government’s Thrift Savings Plan that will include a 5% matching contribution. As is currently the case, active duty military can opt of an automatic 3% annual contribution, but even if they do, starting in January 2018, the government will contribute the equivalent of 1% of their income to their retirement savings and investing.
Current active military with up to 12 years of service have the choice of opting for the new blended plan or choosing the traditional pension. Participants have until the end of next year to decide, but anyone opting for the matching version should declare in January to take advantage of the full-year’s benefit. According to an analysis by First Command, anyone who plans to stay in through retirement should stay on the old defined benefit plan and then try to max out contributions to the TSP, which will not include matching contributions under that scenario. But someone planning to get out before the 20-year minimum retirement mark should opt for the new plan, and take advantage of the matching contributions.
Military families face plenty of financial challenges so I want to provide 7 important benefits that they shouldn’t overlook.
- VA Home Loan – Military families can often benefit from the 0% down payment, no primary mortgage insurance, and competitive rates. One misconception about the VA loan is that it’s handled by the government. Like other loans, VA loans are offered by private lenders such as banks, credit unions, and mortgage companies. Not all lenders offer VA loans and there is a funding fee (based on percentage of amount borrowed) that’s generally required to be paid at closing. The VA loan program is intended for purchasing primary residences. That means that the borrower must live in the property year-round; it is not intended for vacation or rental homes. However, the VA does allow homebuyers to use a VA loan to purchase a multi-unit property as long as the homebuyer certifies that they will occupy one of the units. The VA does allow for a qualified buyer to purchase a home, live in it as their primary residence and then later look to rent out the home — and in many cases even purchase again with a $0 down VA home loan using their remaining VA loan entitlement. This is a useful strategy when transferring to new duty station. Lastly, one lesser known feature of the VA loan program is the opportunity to do a cash-out refi and refinance an existing home loan (including a non-VA loan).
- Thrift Savings Plan – If you’re contributing a percentage of your basic pay, you can also contribute a percentage of your incentive pay, special pay, or bonus pay (but you can’t make catch-up contributions from these types of pay). And if you’re deployed and receiving tax-exempt pay (i.e., pay that’s subject to the combat zone exclusion), you can also make contributions from that pay, and your contribution limit for the year is even higher; the limit for total contributions from all types of pay is $54,000 for 2017. Also make sure you tracking the tax-exempt income, from combat zones, that funded IRAs and 401(k) and subsequently are rolled into the TSP because contributions and distributions are pro rata.
- Savings Deposit Program – If you’re deployed to a designated combat zone for at least 30 days, you have a unique chance to save for your goals at a guaranteed interest rate by participating in the Defense Department’s Savings Deposit Program (SDP).The SDP pays you 10% interest on deposits up to $10,000 while you’re deployed, and you’ll earn this interest rate on your money for up to 90 days after your return. You may deposit all or part of your unallotted pay. Interest compounds quarterly and is taxable.Generally, you can withdraw funds and close your account only after you leave the combat zone and are no longer eligible to participate in the SDP, although emergency withdrawals while you’re deployed are allowed in some cases.To find out more or begin participating in the SDP, contact your local military finance office.
- Post-9/11 GI Bill – Education benefits are one of the most valuable benefits available to servicemembers. If you’re entitled to benefits, the Post-9/11 GI Bill will pay up to the full cost of in-state tuition and fees at public colleges for up to four years, or up to a certain maximum per academic year if you attend a private college or foreign school. The maximum for the 2016 academic year (August 1, 2016 through July 31, 2017) is $21,970.46. But if you don’t need to use your entitlement, the Post-9/11 GI Bill can provide a great way to pay for your family’s education. Servicemembers who make a long-term service commitment have the opportunity to transfer unused education benefits (up to 36 months’ worth) to their spouses and children. To transfer your unused benefit entitlement to your spouse, you must have served at least 6 years, and generally commit to serving 4 additional years from the date a benefit transfer is approved (some exceptions to this added service requirement exist). Once the transfer is approved, your spouse may begin using benefits immediately and has 15 years after your last separation from active duty to use up the benefits. If you opt to transfer your unused entitlement to your dependent children, they can use the benefits only after you’ve completed at least 10 years of service. In addition, they must have attained a secondary school diploma or equivalency certificate or have reached age 18, and they can use the benefit entitlement only until age 26. If both your spouse and your children are attending school, you can opt to split your benefit entitlement among them.
- Servicemembers’ Group Life Insurance – Knowing that your family will be protected is extremely important, and affordable term life insurance coverage is available through the Servicemembers’ Group Life Insurance (SGLI) program. Eligible service members are automatically enrolled in SGLI, and spouses and dependent children are generally automatically insured through a related program, Family Servicemembers’ Group Life Insurance (FSGLI). When you leave the military, you can apply to convert your policy to Veterans’ Group Life Insurance (VGLI), which provides renewable term coverage. An SGLI policy may also be converted to an individual policy sold by a participating commercial company. (Deadlines apply to both types of conversions.) However, you should carefully evaluate your options to determine whether VGLI will meet your life insurance needs. Points to consider include premium costs, plan features, and whether term insurance is your best option.
- 2008 HEART Act – Under the Heroes Earnings Assistance and Relief Tax Act,enacted under President George W. Bush, a young widow can roll all or part of a service member’s life insurance policy (plus additional $100,000 combat-related fatality benefit) directly into a Roth IRA. This would allow instant accumulation of several hundred dollars in a tax-free retirement vehicle.
- Maximize Your Tax Strategies – I want to summarize some important tax strategies for active duty military personnel as well as military veterans.
U.S. Military Veterans – The first thing to know is that pension payments received after retirement from the military are taxable and should be reported on your tax returns. Disability benefits received from the Department of Veterans Affairs do not need to be reported on your personal tax return. The VA may determine retroactively that you were entitled to additional disability benefits that were already reported in prior years as taxable pension. You may consider amending previous tax returns to reclassify the amounts based on the VA directive, and apply for an income tax refund. The Survivors Pension benefit, which may also be referred to as Death Pension, is a tax-free monetary benefit payable to a low-income, un-remarried surviving spouse and/or unmarried child(ren) of a deceased Veteran with wartime service. Survivors Pension is also based on your yearly family income, which must be less than the amount set by Congress to qualify. Your yearly family income must be less than the amount set by Congress to qualify for the Survivors Pension benefit. If eligible, your pension benefit is the difference between your “countable” income and the annual pension limit set by Congress. VA generally pays this difference in 12 equal monthly payments. Beyond just tax strategies, consider these resources if you find you need some additional help guidance or assistance with further education or employment. Visit the VA benefits website (http://benefits.va.gov/) for a host of ideas and benefits ranging from education, training to loan information, employment services to health care benefits. Veterans may find that they are in need of legal assistance with their homes, child support issues, or past warrants or fines. Legal help may be available for reduced costs or even for free at http://www.statesidelegal.org.
- Active-Duty Personnel – Service members’ income is 100% tax-free when they are deployed to a combat zone and I encourage clients to contribute as much of that income as possible to a Roth IRA. This means never paying taxes on that income! Though a taxable benefit, your reenlistment bonus should be invested prudently and blown on frivolous spending. A common question that military clients may have is whether or not they can claim a deduction for items paid for with their basic allowance for housing (BAH), since the BAH is a living allowance that was not included in taxable income in the first place. The answer is — you can still deduct mortgage interest and real estate taxes on your home even if you pay these expenses with your BAH!
- Maximize Your Tax Strategies – I want to summarize some important tax strategies for active duty military personnel as well as military veterans.
In, sum, we love our active-duty military men and women as well as those that have served in the past! We thank you for your service, and we are here to help with whatever situation you find yourself in. Whether you are actively serving or making the transition back to civilian life, consider these ideas above to help along your journey.
Medicare open enrollment is often overlooked by financial advisors who are scheduling meetings in the final quarter. The low hanging fruit items of reviewing investment portfolios to identify tax-loss (and sometimes tax-gain) harvesting opportunities, roth conversions, and maximizing contributions to retirement plans generally take priority. Medicare Open Enrollment begins October 15th and runs through December 7th for coverage beginning January 1st. Open Enrollment is also a good time to ask yourself whether you’re truly satisfied with your medical care.
Choosing a plan is an important and personal decision (and not a one-time decision). The lowest-cost health plan option might not be the best choice for you. Which is why financial advisors should encourage clients to look beyond changes to monthly premiums but scrutinize other out-of-pocket costs, such as increased deductibles or a plan switching to a more expensive coinsurance cost sharing method. Your time is valuable so you want your plan providers and rules to be convenient for you. Where are the doctors’ offices? What are their hours? Which pharmacies can you use? Can you get prescriptions by mail? Do the doctors use electronic health records or prescribe electronically?
About a third of Medicare beneficiaries forgo the original Medicare route and opt instead for a private Medicare Advantage plan (also known as Medicare Part C), which provide additional benefits that original Medicare doesn’t cover, such as dental services, hearing, and vision, and some might even provide a free gym membership. This Medicare Part C plans on less expensive than original Medicare but, however, restrict access to in-network healthcare providers.
The key chooses to make during open enrollment is for clients to move from original Medicare to Medicare Advantage, switch from one Medicare Advantage plan to another, or choose a different Medicare prescription drug plan (Medicare Part D). Medicare Advantage members can decide to return to orginal Medicare during open enrollment, but when they apply for a private Medicare policy, they will be subject to medical underwriting that did not exist during their initial enrollment period (three months before the month they turn 65 and extended three months after). If you need help on what to decide you can take the 10 question quiz at https://www.medicare.gov/medicarecoverageoptions/.
Not all health care is created equal, and the doctors, hospitals and facilities you choose can affect your health. Remember that even if you’re happy with your current plan, these answers might change from year to year—so it’s important to take the time to compare.
The Medicare Plan Finder (https://www.medicare.gov/find-a-plan/questions/home.aspx) makes it easy to compare plans based on all of these factors, so you can choose a plan that meets your needs.On the website there is a four video guide to assist you on how to look for plans with a 5‑star performance rating—the right expertise and care can make a difference.
For additional assistance, The National Council on Aging offers a free online guide to Medicare Open Enrollment. An online questionnaire helps Medicare beneficiaries compare plans and get free, detailed information from licensed benefits advisors. Those who live in California, I would recommend using The HICAP network (http://www.aging.ca.gov/HICAP/) who provides free, confidential counseling and community education for California Medicare beneficiaries, their representatives, and people who will soon be eligible for Medicare. Assistance is available related to all aspects of Medicare.