Author: Katie Cannon, CFP®

State-Level Veterans Benefits

Post author By Katie Cannon, CFP®
Post date November 19, 2023

State-Level Veterans Benefits

The US Department of Veterans Affairs has many benefits for military veterans. But did you know each state also has their own veterans affairs departments with additional benefits? Read on so you don’t miss out.

Where to Start?

State veterans affairs offices, also known as local veterans service offices, are government-run entities run by each state dedicated to helping veterans receive the benefits and services they deserve.

State-level veterans benefits vary from state to state. The benefits available to you also vary based on factors like your length and type of service, type of discharge, and your level of disability rating (if any).

The best place to start is your local state veterans affairs offices. Check out their website to see all they have to offer. Then dig in for benefits that interest you!

This flyer from the federal VA has links to all 50 states and and the District of Columbia veterans services webpages.

https://www.va.gov/files/2020-11/state-benefits-quick-start-guide.pdf

What Veteran Benefits Do States Provide?

Here’s some categories that your state may offer, along with specific examples from individual states.

Education

State VA offices often offer educational benefits like tuition assistance, scholarships, and vocational training programs. These help you start a new career or enhance their existing skills. You can often find employment support through these offices, like job placement services, resume assistance, and training programs, too.

One of the most valuable state-level veteran benefits is help paying for college. At least 12 states offer tuition waivers (or something similar) for in-state universities to qualifying veterans and, in some cases, family members.

The tuition waiver typically covers all or some of the in-state tuition and sometimes certain other fees associated with attending college. The states may have different names for the program, such as “Veterans Tuition Waiver,” “Veterans Fee Waiver,” or “Dependents’ Educational Assistance.”

Example: In Virginia, the Military Survivors and Dependents Education Program supports veterans who are Virginia residents and rated at least 90% permanently disabled due to military service. It provides a guaranteed waiver of all tuition and mandatory fees for eight semesters at a Virginia public college or university. An eligible veteran, their spouse, and their children ages 16-29 can use the benefit.

Example: Texas’s Hazelwood Act, provides eligible veterans in Texas up to 150 credit hours of tuition exemption at public universities and colleges in Texas. This benefit can also be transferred to eligible children in certain circumstances. Unlike Virginia, there is no requirement to have a VA disability. However, when you entered active duty, you must have designated Texas as your Home of Record, or enter military service in Texas, or were a Texas resident. You must also currently reside in Texas, served at least 180 days on active duty (excluding training) and had an honorable discharge or a general discharge under honorable conditions.

Tax Breaks

Many states offer veterans some kind of break on state taxes like property tax, income tax, and sales tax.

Example: Florida veterans with VA service-connected disability ratings of 10% or higher are eligible for a state property tax exemption of $5,000. You must file paperwork in the county showing proof of disability and VA rating. Surviving spouses who were married to the veteran for five years before the veteran’s death can also apply.

Example: Almost all states exempt all or part of military retiree pay from state income tax. Only California and the District of Columbia tax all military retiree pay as income.

Example: Oklahoma offers a sales tax exemption, including city and county sales tax, to eligible veterans with a 100% service connected disability rating. The tax exemption is up to $25,000 for a veteran, and up to $1,000 for a Surviving Spouse.

State Employment Preferences

Certain states offer veterans hiring preferences for state government jobs. This means veterans may receive additional points or priority in the hiring process when applying for state government positions.

Example: All New York State resident veterans with an honorable discharge from wartime service receive a 5-point employment preference over non-veterans in interviews and exams for state jobs, or 2.5 points for promotion exams. Veterans with a disability rating receive a total of 10 points, or 5 points for promotion exams.

Small Business Support

Several states have programs that offer financial assistance, training, and resources specifically for veteran-owned businesses, aiming to encourage entrepreneurship and economic growth within the veteran community.

Example: Illinois’ Veteran Entrepreneurship helps returning servicemembers and veterans start their own business and assists existing veteran-owned businesses expand their operation. This includes training seminars, educational sessions, and other related events.

Land Purchase

A few states offer veteran residents the opportunity to buy state land at a discount.

Example: Alaska’s Veterans Land Discount program gives Alaska veteran residents a 25% discount on the purchase of state residential/recreational land. A similar but separate program, Veterans Land Sale Preference, allows veterans to purchase land at a restricted sale at fair appraised market value before it is offered to the general public by auction. You can’t use both benefits at the same time.

Hunting and Fishing Licenses

Some states offer veterans free or reduced price hunting and fishing licenses.

Example: Colorado offers a free lifetime combination small-game hunting and fishing license for a resident veteran with a permanent service-connected disability of 60% or more.

State Parks Passes

Most states offer veterans free or reduced prices for state park passes and/or camping fees and other use fees.

Example: Arizona residents who are retired military or service disabled veterans receive 50% off day-use entrance to Arizona State Parks. Arizona residents with a 100% VA disability rating are entitled to a free day-use pass.

License Plates

Many states issue special license plates for veterans. These plates may indicate you are a disabled veteran, your branch of service, or display other symbols representing your service.

Example: Louisiana offers 47 license plate designs that honor veterans and eligible family members. These plates are issued for the same fee as a regular license plate.

Veteran’s Treatment Court

The number of states with Veteran Treatment Courts has grown rapidly. These courts offers alternatives to case proceedings for veterans. They try to address underlying problems which contribute to criminal activity or other court involvement. They promote education and job placement, and access to medical, mental health, dental, homelessness, unemployment, family counseling, and employment services.

Example: California has 33 veteran’s treatment courts throughout the state.

Veterans Homes

Every state operates at least one veterans home providing long-term care services to eligible veterans. These homes offer skilled nursing care, assisted living, and care for veterans who need specialized support in their daily lives.

Example: North Carolina operates four state veterans nursing homes. Applicants must be a veteran who served on active duty and was discharged under honorable conditions. The veteran must be a resident of North Carolina for two years immediately prior to application. And must be disabled and in need of nursing home care with physician orders. Veterans with a 70% disability rating or higher have most of their costs paid by the VA.

Veterans Cemeteries

Most states maintain their own veterans cemeteries, providing a final resting place for veterans and their eligible family members.

Example: Idaho has two state veterans cemeteries where any veteran may be buried (do not have to be a resident of Idaho). Most veterans are eligible for a VA burial plot allowance that covers the cost of internment, a grave marker, use of a committal shelter, and perpetual care of the gravesite. Spouses can share plot and grave marker with the veteran, but will need to pay their internment fee.

Don’t Miss Out!

You won’t receive these benefits automatically. Check with your local veterans services office or the official website of your state’s Veterans Affairs office for the details on specific benefits you may be eligible for. Then apply!

And remember, every state is different. So it’s on you to look for what a particular state has to offer and apply. Benefits available to you may vary based on factors like your length of service, type of discharge, and level of disability rating (if any), so check the details.

Here’s the VA link again that has the websites for all 50 states’ veteran services.

https://www.va.gov/files/2020-11/state-benefits-quick-start-guide.pdf

If you need help navigating state-level veterans benefits or federal VA benefits, get in touch with one of our military planners. MFAA-planners excel at figuring out how to maximize your benefits. You can find the list of MFAA planners here.

Financial Planning Real Estate

Veterans Affairs (VA) Loan Assumption, Good Deal for Me?

Post author By Katie Cannon, CFP®
Post date July 9, 2023

Veterans Affairs (VA) Loan Assumption, Good Deal for Me?

Mortgage interest rates have hit a 20-year high with average new mortgage rates over 6%. Higher rates (and payments) can make it hard for new home buyers to stay on budget. Before the spike, many people got new or refinanced mortgages for under 3% interest. For a seller with a low-interest rate, allowing a buyer to assume your VA loan could be a win-win scenario for both of you.

What is VA loan assumption?

A VA loan assumption is when one person takes over an existing VA mortgage loan from another. The home buyer takes on (assumes) the terms, payments, interest rate, and loan balance from the original borrower as part of the buying process.

All VA mortgages loans are assumable. And anyone is eligible to assume an existing VA mortgage, not just veterans. Buyers must still meet the lender’s creditworthiness, income, and debt-to-income ratio criteria.

I’m a buyer, why consider a VA loan assumption?

Buyer Pros:

Lower interest rates: You could save a lot of money on interest over the long term if the assumable VA loan has a lower rate.

Lower VA loan closing costs: A VA home inspection is not required. You only pay the 0.5% funding fee to assume an existing VA mortgage. There’s no funding fee if you are a veteran with a VA disability, Purple Heart recipient, or surviving spouse receiving Dependency and Indemnity Compensation.

Buyer Cons:

Limited property options: Only shopping for homes with an assumable VA loan will narrow your choices.

Seller’s loan terms: Assuming a VA loan means accepting the existing loan’s terms as is, such as interest rate, loan balance, and repayment period. This may not align with your needs.

Cash on Hand: If the existing VA mortgage is less than the home sale price, you must make up the difference. That means a down payment from savings or taking out a second mortgage. Taking out a second mortgage may be possible but has extra costs and makes the sale more complicated.

Time: Loan assumption is more streamlined than a new VA loan, but assumptions can take longer. Up to 6 months is not unusual. In the meantime, you can’t move in and the seller is waiting to receive money from the sale.

Possible Loss of Entitlement: The buyer may need you to substitute your own VA loan entitlement. This will reduce the amount you could borrow again until you pay off the assumed loan or refinance.

I’m a seller, why consider a VA loan assumption?

Seller Pros:

Increased buyer pool: VA loan assumption benefits may make the property more appealing to buyers. VA loan assumptions are also available to both veterans and non-veterans.

Competitive advantage: Buyers may offer a higher price for a home with a low rate, assumable VA loan.

Lower closing costs: The assuming buyer typically pays the assumption fees and charges.

Seller Cons:

Reduced cash flow: Money from the sale may be delayed until the loan assumption process is complete. You still have to make mortgage payments during that time.

Possible Loss of Entitlement: If the buyer qualifies, they can substitute their VA loan entitlement. Then your entitlement is reinstated. If the buyer doesn’t substitute (or can’t if not a veteran), entitlement goes with the property. It is tied up until the new buyer pays off the mortgage. This would limit your ability to get another VA loan.

Release of Liability: Anytime you sell a home secured with a VA loan, YOU will still be liable to the government for payment unless:

-Your loan is paid in full.

-The VA releases you in writing from liability on the loan.

-You sell the property to an eligible veteran that assumes your loan AND substitutes their loan entitlement for yours.

Remember: Release from liability and VA entitlement restoration are two separate actions. Contact the VA office that guaranteed your loan and ask for the necessary forms and instructions.

Is VA Loan Assumption a Good Fit for Me?

A VA loan assumption can be a good fit for both buyer and seller when:

The existing VA loan interest rate is below the new mortgage interest rates.
You both (buyer and seller) can wait to complete a longer closing process.
The buyer offers a higher price or concessions in exchange for interest savings.
The buyer accepts the terms (years, payments, and interest) of the assumable mortgage.
The buyer can pay the difference between the home sale price and the assumable mortgage balance (downpayment).
The seller does’t need their VA loan entitlement restored. This allows non-veterans to make offers and assume the loan.

If you think a VA loan assumption might be a good fit for you as a buyer or seller, let your realtor know. They can get the word out and make inquiries for you and help negotiate a sale to benefit you both.

For more information on VA loans, including loan assumption, download the VA Home Loan Guaranty Buyer’s Guide at https://www.benefits.va.gov/HOMELOANS/documents/docs/VA_Buyers_Guide.pdf

If you’ve got questions about VA loans or other military financial topics, MFAA advisors can help. You can find them here.

College Debt Education GI Bill

Act Now–Become Debt Free!

Post author By Katie Cannon, CFP®
Post date July 11, 2022

Act Now, Become Debt Free with PSLF!

You could save you thousands of dollars thanks to temporary changes to the Public Service Loan Forgiveness (PSLF) program. The Department of Education announced the Limited Waiver Program last fall. But time is running out! Military service members and federal employees need to act before October 31, 2022 to cash in.

Who is eligible for PSLF?

The PS in PSLF stands for public service. Full time (active duty) service members are all eligible. So are those of you working full time for state governments and most non-profits. This includes hospitals, schools, libraries, emergency services, and public interest law. Public Service depends on the organization you work for, not the actual job you do.

What is PSLF?

The LF in PSLF stands for Loan Forgiveness. That means as long as you make 120 qualifying student loan payments (that’s 10 year’s worth) you won’t have to repay the rest of your student loan balance. “Poof” your student loan payments disappear! No more debt. And you won’t owe tax on the loan forgiveness benefit you receive either. This can be a massive value depending on your circumstances.

How to Participate?

You work for a qualifying employer full-time (see above). You have federal Direct Loans. Once you make 120 on-time monthly loan payments to a qualifying loan, you apply for forgiveness.

Federal Family Education Loans, Federal Perkins Loans, and Graduate Plus Loans are NOT federal Direct Loans. Loan payments under those programs didn’t count toward forgiveness. To qualify now, you must consolidate those loans into a federal Direct Loan.

If you were late to the consolidation party, you may have made months or years of federal loan payments that didn’t count toward forgiveness. Don’t dismay. Read on to the Temporary changes.

Why the changes?

It turned out in practice, PSLF was an unfulfilled promise. The goal was to provide debt relief to public servants by cancelling student loans after 10 years. But many borrows didn’t understand the requirements, were misled by loan servicing providers, or never even qualified in the first place. The Department of Education denied loan forgiveness to almost all initial PSLF applicants. Recent changes are supposed to correct some of this and fulfill the PSLF promise.

What has changed with PSLF?

Temporary Change #1 (Almost) All Past Loan Types Can Count

Good news. If you consolidate your federal student loans now, any payments you made in the past in will count toward your 120 payments. BUT only if you consolidate to a federal Direct Loan by October 31, 2022. This do over is a limited time opportunity!

Don’t know what kind of federal loans you have? Log into your account on StudentAid.gov https://studentaid.gov/fsa-id/sign-in/landing . Go to the My Aid page StudentAid.gov/aid-summary/. Scroll down to the Loan Breakdown section. There, you’ll see a list of each student loan you have borrowed, even if you have paid the loan off or consolidated it into a new loan. Direct Loans begin with the word “Direct.” This is what you want.

If you have Federal Family Education Loans (start with “FFEL”) or Perkins Loans (include the word “Perkins”) consolidate–DON’T refinance. Consolidate into a federal Direct Loan by October 31, 2022. Get all the details for consolidation at https://studentaid.gov/app/launchConsolidation.action.

Once you consolidate your loans into a Direct Loan, your previous payments will count toward PSLF retroactively. You could have your loan balance forgiven months or even years sooner.

Note, Parent Plus loans did not qualify before, can’t be consolidated into a Direct Loan, and still won’t qualify now.

Temporary change #2 Any Past Payment Plan Qualifies for PSLF

Past payments under any repayment plan now count toward loan forgiveness. You have to enroll in an Income Driven Repayment (IDR) plan like ICR, IBR, PAYE, and REPAYE payment plans to benefit from PSLF.

Now PAST payments made under any repayment plan count toward your 120 payments. These payments are supposed to be automatically recounted, but you’ll want to keep an eye on it.

If you’re not in an Income Driven Repayment now, change to one so future payments will also count.

Temporary Change #3 All Past Payments Can Count towards PSLF

Many previous loan payments did not count toward PSLF due to technical requirements. This includes wrong payment plan, timing, or amount of a payment. Some borrowers missed out because their payments were off by one or two pennies or late by a few days.

As a fix, the Department of Education will automatically adjust the count for payments made on or before October 31, 2021 if you have certified some employment. This look back is a temporary benefit. If you have not applied for PSLF forgiveness or certified employment, do it by October 31, 2022 to get all those payments counted.

Service members on active duty can qualify for student loan deferments and forbearances. This is to help you through periods where service inhibits your ability to make payments. But often in the past, those same deferments or forbearances did not count toward PSLF. Federal Student Aid is supposed to implement a process to address this and update affected borrowers. Watch out for this too.

And one last improvement coming down the pike. The Department of Education announced it will begin automatically giving service members and federal employees credit for PSLF by matching Department of Education data with information held by other federal agencies. So be on the look out for that! In the meantime keep rectifying your employment history.

More Help on PSLF

Where can you go for more information? You can read the entire Department of Education announcement: https://www.ed.gov/news/press-releases/fact-sheet-public-service-loan-forgiveness-pslf-program-overhaul

For help with all things PSLF, tons of helpful information, and the PSLF application, go to the official website at https://studentaid.gov/pslf/

Act Now to Qualify!

#1 You must work for a qualifying employer such as the military, state and federal governments and most non-profit organizations.

#2 You must work full-time.

#3 You must have federal direct loans. If you have other federal student loans, consolidate into a direct loan before October 31, 2022.

#4 You must be in an Income Driven Repayment (IDR) plan. If you aren’t in IDR yet, switch by October 31, 2022.

#4 Make 120 on-time monthly payments. Under the temporary waiver all virtually all past payments will count. This one time boost may help push you over the line sooner than you think!

The Limited Waiver Program is a major one-time redo to get your PSLF on track for forgiveness. Don’t miss out!

Military Retirement

Should you Buy Back your Military Time?

Post author By Katie Cannon, CFP®
Post date May 6, 2022

Should you Buy Back your Military Time?

What is military buyback? If you served on active duty in the military and then become a federal civilian employee, that military time may count as time in service for calculating your FERS or CSRS pension. We’ll look at which military time can count, how much it will increase your federal employee pension, what it costs to buyback that military time, the impact of a buyback on your military pension, when to buyback, and some how-to’s to help you answer the question “is it worth it for me?”

What military service time counts? Your service has to have been on active duty. Periods of active duty while in the any of the military reserves, including your annual active duty training, count. However, National Guard active duty only counts if it was Title 10, section 233(d), or under a call by the president. Regular monthly training and call ups by the states do not count. Your service must have been honorable and performed before you separate from civil service. And a deposit has to be received before you retire (that’s the buyback).

How much will a military buyback increase your federal employee pension? First you need to qualify for a FERS or CSRS pension, which generally means you have to actually serve at least 5 years as a federal civilian. Then the military time you deposit, nicknamed a buyback, is added to the years you actually work as a civilian for calculating your FERS or CSRS pension benefit.

A FERS Example

Here’s a FERS example. The pension formula for FERS employees is the average of your High-3 salaries times your creditable service times your multiplier. If you have 24 years of federal civilian service, a high-3 pay of $110,000, and will retire before age 62, your pension would be $110,000 x 24 years x 1%. That’s $26,400 a year. The military time you buy back is added to your creditable service.

What happens if you were to buy back 6 years of military time? That’s the same $110,000, x 30 years (instead of 24). And because you now have 30 years of service (instead of 24) your multiplier is 1.1% giving you a FERS pension of $36,300. That’s $9,900 more every year in your FERS pension. Live 25 years in retirement and that’s almost $250,000 more FERS pension with the buyback.

Buying back military time may also help you to retire earlier. Regular FERS employees can retire without a reduction at your Minimum Retirement age with 30 years of service, at age 60 with 20 years of service, or age 62 with 5 years of service. Buying back military time could nudge you over one of those age hurdles. It might not make sense to retire as early, but it’s nice to have the option.

What is the cost? The reason depositing military time is nicknamed a buyback is because you must pay cash to have your military time credited to your federal service. Human Resources will calculate the exact amount for you. In general, for FERS employees it will cost about 3% of your total military base pay you are depositing. For example, if you deposit 3 military years and during each of those years you earned $30,000, $30,000, and $35,000. That’s $95,000 total of military base pay x 3% which is $2,850.

When can I buyback military time?

You can buyback any time after you start federal civilian service. But your buyback must be complete before you retire. You cannot retroactively buyback time after you retire as a fed. If you serve as a federal employee for longer than 3 years before buying your time back, you will also pay interest on that amount.

What about CSRS federal employees?

CSRS employees joined federal service before 1987. The multiplier for CSRS employees is about 7%. And the rules for CSRS employees are more complicated. If you are a CSRS employee that will not be eligible for Social Security, no deposit or buyback is required. You will get full credit for military service performed after 1956.

If you’re a CSRS employee that will be eligible for Social Security, the military time you buy back will count towards eligibility for retirement and computation of your pension. If you don’t buyback any time, your military time will only count towards eligibility for retirement. Unless you retire before you’re eligible for Social Security at 62, then your military time will count toward your pension computation just up until you reach 62.

All federal employees, did you serve long enough to qualify for a military pension? You can buyback all those years and add it to your federal retirement. No matter when you buyback, you can continue to receive your military pension while in still serving as a federal employee. BUT you must waive your active duty military pension when you begin your civilian pension. You can’t double dip. This often does not make financial sense.

How is your VA Disability pay affected by a buyback?

It isn’t. You will still receive your VA disability pay, including Combat-Related Special Compensation (CRSC) after buying back military time. And unlike a military pension, your federal civilian pension will not be reduced by your disability pay, regardless of your VA disability rating. This may tip the scales in favor of a buyback.

What about a military reserve pension that starts at age 60? You can receive that, whether you buyback military time or not. So, buying back active reserve time often does come out as a great deal, so be sure to run the numbers.

How do I get the exact cost of a buyback for me, and maybe do a buyback?

Stop by your federal civilian human resources department and ask for help. Here’s what you can expect:

Step 1, find your DD 214 the Report of Transfer or Discharge. That shows your military record and was given to you when you left military service. If you can’t find your DD214, you can request a copy from the National Personnel Records Center by filling out a Standard Form 180.

Step 2, complete a form RI 20-97 Estimated Earnings During Military Service and mail it along with a copy of your DD214 to your appropriate military finance center. The finance center should then send back your statement of estimated earnings.

Step 3, gather up your estimate of earnings, your DD214, go to your current Human Resources Office and fill out an SF 2803 Application to Make Deposit or Redeposit.

Step 4, HR will then compute the amount of your military deposit using the Military Deposit Worksheet, let you know the amount, and options for making payments.

Once you know the military deposit cost, you can compare your options and decide if you want to do a buyback, when and how to pay for it. You can payoff it all at once or in payments over time. Note you’ll owe interest on payments once you’ve had 3 years of federal service.

If your numbers are very close, remember your military pension gets a full Cost of Living Allowance (COLA) every year. But a FERS pension gets “COLA lite” which can be up to 1% less in high inflation years.

Let’s recap. Active duty military service and Title 10 reserve active duty can be deposited to increase you federal civilian time in service. This can increase your civilian pension and/or help you retire earlier. Depositing military time will cost you, thus it’s nicknamed a buyback. If you don’t pay for the buyback within the first 3 years of civilian service, you’ll also owe interest.

Putting it All Together

If you left military service before retirement, a military buyback is very likely a great deal.

If you are eligible for a Reserve retirement at age 60, you CAN receive both that and a civilian pension that includes a buyback. This will also likely be in your favor.

If you are receiving a regular active duty military pension you would have to forfeit that in almost all cases if you do a buyback (you can’t double dip). If your military pay was significantly less than your federal civilian pay is now and/or your military retired pay is being reduced by your VA disability it may be worthwhile to do a buy back.

Run the numbers. And remember, your application to buyback military time must be approved and paid BEFORE you retire from civilian service.

The right answer is unique to each military family. Working with a financial planner who understands your military benefits from firsthand experience can help you frame your decision within the context of your family’s financial plan.

The financial planners at the Military Financial Advisor Association can help you work through the various BuyBack scenarios so you can make the decision that best meets your family’s needs.

Tags Retirement

Investing TSP

TSP Lifecycle Fund Changes

Post author By Katie Cannon, CFP®
Post date June 16, 2020

What’s the Deal with TSP L Funds and their new updates?

Unicycles, bicycles, lifecycles – The Thrift Savings Plan (TSP) Lifecycle (L) Funds are evolving again. Beginning on July 1, 2020 the L Funds are going through some changes. Here’s the lowdown on what the L Funds are, how they are changing, and a bonus benefit you might not have considered.

TSP has core funds and lifecycle funds you can invest in. The five core funds are:

Government Securities Investment (G) Fund – invests in short-term U.S. Treasury bonds.
Fixed Income Index Investment (F) Fund invests in government, corporate, and mortgage-backed U.S. bonds.
Common Stock Index (C) Fund – invests in large companies that trade on U.S. Stock Exchanges.
The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund.
International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries.

Each of the TSP L Funds, sometimes called target date funds, are designed to meet your needs based on when you plan to tap your TSP retirement savings. If you plan to start spending your TSP savings starting in 2030, the L 2030 Fund is designed for you. You can choose whichever L Fund that matches your situation. New servicemembers in the Blended Retirement System that do not make a choice will automatically be put in an L Fund based on their age.

When choosing an L Fund year, pick a fund target date that matches the year you plan to start spending your TSP savings. This will most likely NOT be the year you could retire from the military. In most cases, if you draw from TSP before age 59 ½ you will pay a 10% penalty. Very few servicemembers will be allowed to serve long enough to retire after that age. Your fund target date maybe the year you plan to finish second career or when you become eligible for Social Security in your mid-sixties.

Each L Fund is made up of the five core TSP Funds—G, F, C, S, and I—in different proportions. The L Funds are target date funds, meaning the proportions of the core funds in each L Fund automatically adjust (also called a “glidepath”) as you get closer to the year you plan to retire (your target date). The L Funds are set up based on the idea that when your retirement is far in the future, you can take more risk (market ups and downs), while seeking greater reward (higher growth in value). You have time to recover from any market downturns before you’ll need your money. When your target date is close, you may want to be more conservative (lower risk, lower rewards) with your investments.

To make the gradual adjustment from riskier to more conservative investments on your own, you can regularly shift some of the money in your TSP account from the more aggressive C, S, and I Funds to the more conservative G and F Funds as you approach retirement. The beauty of the L Funds is that TSP does all that work for you, it’s “fire and forget”.

What is changing?

More choices! TSP is introducing six new L Funds to the lineup.

Right now there are four L Funds in ten-year increments – L 2020, L 2030, L 2040, L 2050 and the L Income Fund. When a target year arrives, it is rolled into the L Income Fund, the most conservative L Fund designed for your retirement years. So, July 1, 2020, the L 2020 is being retired. On that date TSP is also adding five new funds: L 2025, L 2035, L 2045, L 2055, L 2060, and L 2065. The five-year intervals give you more options to more closely match your investment time line. Also, the new L 2055, L 2060, and L 2065 are designed for our youngest servicemembers with long saving horizons.

As you can see in this chart, L 2065, L 2060, L 2055 will be invested 99% in higher risk/higher reward stocks (C,S,I Funds) and just 1% in less risky/lower reward bonds (G and F Funds). L Funds with sooner target dates have less risk. The L 2025 Fund will be invested in 50% stocks (C,S,I Funds) and 50% bonds (G and F Funds). Each month, TSP adjusts the proportions of each L Fund to gradually become less risky as the target date approaches. For example, the investment proportions of the L 2050 Fund will gradually change over time so that in 20 years it will look like the L 2030 Fund in the chart above.

More aggressive. In the past, the TSP L Funds were sometime criticized for being too conservative compared with outside target date funds and didn’t consider service members may also get a pension. In response, beginning July 1, 2020 all the TSP L Funds proportions will gradually change to invest a bit more in stocks (C, S, I Funds) and a bit less in bonds (G and F Funds). The percentage of stocks in the L Income Fund will gradually rise from 20% to 30% over a 10-year period. For the funds in between L 2055 and L Income, the stock allocations will not increase on July 1, 2020, but they will be frozen until they eventually come in line with the glide path planned for the newest L Funds.

More international. Starting April of this year, all the L Funds now have a slightly higher allocation of international stocks (I Fund) than they used to. One planned change to include stocks from less developed (emerging market) countries in the TSP I Fund had been put on hold. Watch for more news on that later this year.

Bonus L Fund Benefits

Hands-off rebalancing. Another great feature of the L Funds is that by design they are constantly taking advantage of changes in the market to buy low and sell high. As we’ve already seen, each L Fund has a certain target proportion of the five core TSP Funds. As markets go up and down, the value of each core fund changes. For example, this year when markets initially reacted to the Coronavirus, the C, S, I Funds’ values dropped significantly, while the G and F Funds held pretty steady. In order for the L Funds to maintain their target proportions, the L Funds had to sell some G and F Fund bonds to buy the now lower priced C, S, I Fund stocks.

A few months later, when the markets went back up, they sold back some of the C, S, I Fund stocks at a profit and put that money back into G and F Fund bonds. This is known as “rebalancing”. The TSP L Funds make these buy and sell adjustments every day. Over time this maintains the funds target riskiness (proportions of the core funds), while earning a higher return than if they had just bought once and held those investments. If you own just the core TSP Funds, you can log into TSP and do your own rebalancing. But you can only rebalance among all the funds two times a month. The L Funds do this for you every day, hands off.

Overall, TSP L Funds are a great choice for anyone who just wants to choose a plan once and let the TSP experts do all the work. Decide what year you think you will begin spending your retirement savings and choose an L Fund closest to that year. If your plans change or you decide you want to be more hand-on, you can log on and make changes to your TSP anytime.

Do you have questions or wonder how best to optimize your TSP? Contact one of our advisors to maximize your retirement savings!

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Military Thrift Savings Plan Essentials

Post author By Katie Cannon, CFP®
Post date June 5, 2020

Understanding the military thrift savings plan essentials

The Thrift Savings Plan (TSP) is the government long-term retirement savings and investment plan, similar to a civilian 401(k). Together TSP, Social Security, and military pension make up the three pillars of the military retirement system. Service members can make voluntary contributions to TSP through automatic payroll deductions. If you are in the Blended Retirement System (BRS), you will receive contributions paid by the military into your TSP account as well. These contributions are invested for you and are intended (but not guaranteed) to grow over time and provide you with income in retirement.

Contribute

Service Contributions – BRS members (only) receive an automatic contribution by the military to their TSP account every month equal to 1% of your basic pay, regardless of whether you make any contributions yourself or not. This money becomes yours (vested) after two years in the service.

Payroll deduction – BRS members who began or rejoined service on January 1, 2018 or later are automatically enrolled in TSP. 3% of your basic pay is automatically deducted from your paycheck every month and deposited in your TSP account. You can change your contribution if you want. Everyone else must proactively elect their own TSP contributions. For 2020 you can contribute up to $19,500 to your TSP. Service members age 50 or older can make an additional $6,500 Catch Up contribution each year.

Service Matches – BRS members (only) also receive matching contributions (additions to your TSP account) on the first 5% of the pay you contribute each month.

TSP Essentials Tip – Steady Wins the Prize. Matching contributions for BSR members are made month-to-month. If you elect to make large payroll contributions int the beginning of the year and hit the annual limit early, you could lose out on matching contributions later in the year. Consider spreading your payroll contributions out evenly to the end of the year to get all your due.

TSP Essentials Tip – Don’t Leave Money on the Table. BRS members should consider increasing your contributions to at least 5% so you get the full-service match.

Pay Taxes – Or Not

There are two kinds of TSP accounts, Traditional and ROTH. Services will make the automatic and matching contributions for BSR members to their Traditional TSP account. You can choose to make your contributions to a Traditional or ROTH TSP account. The main difference between the two is how they are taxed.

Traditional TSP -Traditional TSP contributions that you make reduce your taxable income, so the amount of taxes that come out of your paycheck now are less. When you withdraw money from TSP, usually in retirement, the entire amount (contributions and investment earnings) is taxable as regular income. For many people their tax rate in retirement will be less than when they’re working and they would pay less taxes overall with a Traditional TSP.

ROTH TSP – With ROTH TSP you pay taxes now on your contributions just like regular income. But when you withdraw money from your ROTH TSP it is completely tax-free (including earnings) as long as it’s withdrawn at least five years after your initial Roth contribution and you are at least 59 1/2 years old, permanently disabled, or deceased.

Tax-exempt contributions – Contributions you make to Traditional TSP while earning tax-exempt pay in a combat zone are not taxed when you make the contribution or when you withdraw it. However, the earnings that grow in your Traditional TSP will be taxed as normal income when you withdraw it. For contributions you may make to a ROTH TSP with tax-exempt pay, the contributions AND the earnings are completely tax-free as long as you meet the withdrawal requirements in the ROTH TSP paragraph. Servicemembers 50 and older can make catch-up contributions with tax-exempt pay only to a ROTH TSP. Catch-up contributions to a Traditional TSP cannot be made with tax-exempt pay.

TSP Essentials Tip – Pay Now, Pay Less. Service members with lower income, such as early in your career, should consider making ROTH TSP contributions. If your tax bracket is lower now than when you retire, you will pay less tax in total with the ROTH.

TSP Essentials Tip – Pay No Tax. You should consider making your TSP contributions to ROTH TSP while you’re deployed to a combat zone. As long as you meet the ROTH withdrawal requirements (59 ½ and 5 years), both the contributions you make to ROTH TSP with tax-exempt pay and the earnings that grow over the years are not taxed. Ever.

Invest Two Ways

TSP offers you two ways to invest your money. The first way is with “Lifecycle” L Funds. These funds are a professionally designed mix of stocks, bonds, and government securities. You select your L Fund based on your “target date,” the year in the future that you plan to start withdrawing your money. Depending upon your plans, this may be as soon as you leave the service or further in the future. The second way is to invest in individual TSP funds. This way you make your own decisions about your investment mix by choosing from any or all of the individual TSP investment funds (G, F, C, S, and I Funds).

When you start TSP contributions, you designate which TSP Funds you want your contribution to go to. If you are a BRS member and do not make a selection, all contributions TSP receives for you will go into an L Fund appropriate for your age.

L Funds – Your target year is when you will expect to start withdrawing money from TSP. For example, the TSP Fund L 2040 has a target year of 2040 and is designed for those who will begin withdrawals in years 2035 through 2044. L Funds assume that if you who won’t need your money for quite a long time, you are able to tolerate more risk (ups and downs) while seeking an overall higher return (increase in value).

The L Funds invest in mix of individual TSP investment Funds (G, F, C, S, and I Funds) and automatically adjust the mix to reduce risk (and returns) as you get closer to your target year. If the target year is a long time from now, that L Fund will be more exposed to risky assets, such as stocks in the C, S, and I Funds. The L Income Fund is designed for those who are already withdrawing from TSP and offers lower risk and lower growth. As the value of stocks and bonds go up and down, each of the L Funds is automatically rebalanced to restore its intended investment mix. In practice this rebalancing forces the L Funds to “buy low and sell high” for you each business day, boosting your return and while maintaining the same level of risk.

TSP Essentials Tip – Rebalance. For those of you in L Funds your set, TSP rebalances for you. If you choose to invest in the individual TSP Funds, you can rebalance among any of the TSP funds yourself up to 2 times a month. Determine what target percentage of each fund you want to maintain, then periodically log into TSP and do an inter-fund transfer by typing in your target percentages.

Individual Funds – TSP has five individual funds you can invest your TSP dollars in. The Government Securities Investment (G) Fund is invested in short-term U.S. Treasury securities. This is the only fund that guarantees you will not lose money. Your contributions (principal) and interest are guaranteed by the U.S. Government. The trade-off is the growth in value will be quite low and might not keep up with inflation.

Each of the other four individual funds (F, C, S, and I Funds) are invested to track separate market indexes. For example, the Common Stock Index (C) Fund seeks to invest in the same stocks as the Standard & Poors (S&P 500) Stock Index. This index includes 500 large companies that trade on U.S. Stock Exchanges. One dollar you invest in the C Fund buys you a tiny portion of each of those large companies. This helps reduce (but not eliminate) your overall risk by diversification, that is “putting your eggs” in many, many baskets.

The Small Capitalization Stock Index Investment (S) Fund is invested in small to medium-sized US companies not included in the C Fund, and tracks the Dow Jones U.S. Completion Total Stock Market (TSM) Index. The International Stock Index Investment (I) Fund invests in international stocks of more than 20 developed countries and tracks the MSCI EAFE (Europe, Australasia, Far East) Index. The Fixed Income Index Investment (F) Fund invests in a government, corporate, and mortgage-backed bonds U.S. Bonds and tracks the Bloomberg Barclays U.S. Aggregate Bond Index.

TSP Essentials Tip – All L Fund or None. The L Funds are already made up of the five individual TSP funds (G, F, C, S, and I Funds), so you will duplicate your investments if you invest in an L Fund and the individual TSP funds at the same time. Consider choosing only an L Fund for simplicity and hands-off investing, or build and mange your own custom portfolio from among the other G, F, C, S, and I Funds.

TSP Essentials Tip – Early Bird Gets the Worm. Making and maintaining investment choices can seem intimidating. Don’t let that keep you from getting started. You can start now with an L Fund, let the pros work it for you, and start watching your nest egg grow. As your knowledge and confidence grows, you can always make changes and take more control if you want to.

Withdrawals

Retirement – TSP is a qualified retirement plan designed for long-term saving for retirement. You will be able to make retirement withdrawals from TSP once you reach age 59 ½. Generally, if you withdraw money before that time, you will be hit with a 10% penalty, in addition to any taxes due. When you are eligible, you will be offered a choice of regular “installment” payments from your balance, a single lump-sum payment, or purchasing an annuity that guarantees a set monthly benefit for life to you (or your survivor).

In-service – There are two types of withdrawals you can make while you are still in the service, financial hardship and age based “59 ½”. You can make a financial hardship withdrawal if you
can certify you have a financial hardship as a result of a recurring negative cashflow, legal expenses for separation or divorce, medical expenses, or a personal casualty loss. You can only withdraw contributions you made and earnings on those contributions. You can request $1,000 or more; but, the amount cannot exceed the actual amount of your certified financial hardship.
You can make age-based in-service withdrawals any time after you reach age 59½. You can withdraw it all, or part of your account balance up to four times per calendar year.

TSP Essentials Tip – Don’t Eat Your Seed Corn. Early TSP withdrawals can have steep penalties and taxes due. Even penalty-free withdrawals permanently deplete your retirement savings and any future earnings those saving would have made. Consider building an emergency fund and separate accounts for short-term savings that you can tap when you need it. Then your retirement savings will still be there when you need it.

Loans – You can borrow up to $50,000 of your contributions from your TSP account while you are still in the service. There is a $50 processing fee and most loans must be paid back with interest within 5 years. You can get up to 15 years to pay back a loan for a primary residence. If you don’t pay your TSP loan back on time, there will be a 10% withdrawal penalty and the IRS will charge you income tax.

End Note

It’s never too early to start saving for retirement. The key to growing a mighty oak from a seed? Time. Even small amounts put away now will have a major impact on your financial future. Start by tracking your income and expenses, making a spending/saving plan (budget), and then carving out some TSP contributions to seed your future.

One “Final” TSP Essentials Tip – Name a Beneficiary. A beneficiary is the person (or people) that will receive your TSP funds when you die. If you have not designated someone as your beneficiary for your TSP, government law determines who gets it. You can designate the beneficiary you want with TSP, just be sure to update it with life changes like a marriage or divorce.

For more information on TSP, go to www.tsp.gov