Saturday, November 6, 2010

Best investment options for deployed military members

Open a Roth IRA

Roth IRAs are among the best investment options available to military and civilian members alike. Roth IRAs are retirement accounts with a great tax advantage – you make contributions with income that has already been taxed, and you are able to make tax free withdrawals in retirement. But, being deployed has it’s advantages – your income is already tax free, meaning you don’t pay taxes on your contributions or withdrawals! Once upon a time this prohibited you from making Roth IRA contributions, but the Heroes Earned Retirement Opportunities (HERO) Act was enacted several years ago to allow military members to open IRAs even if 100% of their income was non-taxable due to deployments.  

 Looking to get started? Here are some of the best Roth IRA companies.

Benefit of Roth IRA contributions in a tax free zone: Tax free contributions with tax free withdrawals.

Contribute to your Thrift Savings Plan

The Thrift Savings Plan is a great benefit available to military members. It functions the same way as a traditional 401k plan: you take pre-tax dollars and invest them without the drag of taxes until you make a qualified withdrawal in retirement years. This is the opposite of a Roth IRA, you don’t pay taxes now, but pay taxes later.

But there is a big difference if yo invest in the TSP while deployed. Your contributions are already tax free, but since your income is tax exempt, you will not pay taxes on the contributions made while in a tax free zone. This in effect gives you some tax benefits similar to a Roth IRA. Your withdrawals in retirement will be less flexible than a Roth IRA, however, and you will still be required to make minimm withdrawals when you reach the required age. Your taxable and tax free withdrawals will be made in proportion to the contribution amount, meaning you can’t determine how and when you withdraw the tax free funds (keep in mind these rules are subject to change in the future).

Benefit of TSP contributions in a tax free zone: Tax free contributions with tax free withdrawals.

Participate in the Military Savings Deposit Program (SDP)

The Savings Deposit Program (SDP) is a military investment benefit available only to those currently serving in a designated combat zone. It offers a guaranteed return of 10% interest for deposits up to $10,000. You can start it as soon as you are in country for 30 days and you can continue earning 10% interest for up to 90 days after you return home from the combat zone. There are some limitations and inconveniences with the SDP (you can only contribute the amount of your paycheck each month until you reach $10k and you can only leave it in there 90 days after you redeploy), but it is probably the only place in the world right now where you can earn a guaranteed 10% return on investment. See your finance department for more information.

Benefit of Savings Deposit Program: Guaranteed 10% interest on deposits.

Self-Directed Investments

If you are more concerned with short term investing and having access to your investments in the near future, then you probably want to avoid investing with a Roth IRA or the Thrift Savings Plan because both are retirement accounts which limits availability to your contributions. The Savings Deposit Program also locks you money away without access until you return from your deployment. If you are looking for a non-retirement investment option and don’t want to lock your money away for the duration of your deployment, then consider investing in stocks or mutual funds. Here is a list of the best brokerage accounts for cheap stock trades, if you are interest in going that route.

Where should military members start investing when deployed?

In my opinion, the first 3 investment opportunities are the best places to start, and I would work toward maxing those out if you can. Of course, that is a lot to ask if you are a junior enlisted member, but I have seen people do it.

The reason Roth IRAs and the TSP are great opportunities is due to their long term tax benefits. You won’t find another opportunity like this ever – civilians aren’t able to contribute to Roth IRAs or 401k plans with tax free contributions and make tax free withdrawals. This is an opportunity you can’t match or beat anywhere! The same goes for the Savings Deposit Program (SDP). A guaranteed return on investment of 10% is unheard of.

Finally, you always have the option of self-directed investments, investing how and where you want, without worrying about the contribution and withdrawal rules of IRAs or the TSP. These investment accounts don’t share the same tax benefits, but they offer more flexibility and are better for short term investing.

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