Q: Hello, I've been in the Navy just over nine years. Next year I have orders going PCS to an IA (individual augmentee) tour in Afghanistan. I have the TSP (since they first started the program) and my Roth IRA. I also want to sign up for the SDP program while over there, but noticed that the interest will be taxed upon withdrawal.
With the money being TAX-FREE while in a combat zone, which would you focus to fund first and why? I have a wife and two kids. Thanks.
--Tom, Ft. Meade , Md.
A: Thanks for your service ... the Navy in land-locked Afghanistan no less. I love the way you're thinking: Make some financial headway during what I'm sure will be a tough time for your family. So, thank you for the sacrifices you and your family make. Now to the details ...
Even though I believe you're squared away, I'm beholden to begin by saying this: Ensure you have no credit-card debt and that you have a hefty emergency reserve account set aside before funding these various investments.
With that out of the way, here's what you should consider in terms of planning for your future. First, continue to max out your Roth IRAs. Considering your tax-free combat pay, it's hard to beat tax-free going in and tax-free coming out! Of course, the IRS has a few rules that you must abide by. The Roth must be five years old, and you must be 59 1/2 years old to enjoy those fantastic benefits.
With additional long-term money, continue with your TSP contributions. It is a valuable retirement tool. Typically, the annual contribution limit is $16,500 (in 2010). While serving in a combat zone, the contribution limits leaps to $49,000. What a great opportunity to punch up the retirement savings! The tax-free deposits you make will never be taxed (the government tracks them separately) and you'll enjoy tax-deferred growth over the long term.
The third arm of your retirement strategy should be to build a pool of money outside of IRA/TSP/employer retirement plans. Typically, in a brokerage account, I would recommend no-load mutual funds for this purpose. But while you're deployed, the government-guaranteed 10% return on up to $10,000 in the Savings Deposit Program (SDP) is hard to beat! This would be an excellent place to get this part of your strategy started.
Here is another bonus of tax-free combat pay: If you or your wife has a traditional IRA, the reduction in your taxable income may make it an ideal time to consider converting to a Roth IRA. Paying taxes on the converted account while income is low to zero is another great strategy. Thanks again for your service, and stay safe!
June Lantz Walbert is a CERTIFIED FINANCIAL PLANNER practitioner with USAA Financial Planning Services. She is also a lieutenant colonel in the U.S. Army Reserve with 20 years of service. Walbert's basic branch is Air Defense Artillery. She writes a weekly advice column, " Ask June " on military.com. Follow June @AskJune_usaa.
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