Jon Vinge – Most Frequently Asked Questions
May 2010
Greetings to subscriber’s to VRSAM’s news letter. I hope 2010 is off to a great start for you.
Thanks to those of you who are following my articles on the VR SAM® forum. We get lots of readers but I would like to encourage your questions as well so I can respond to the issues that interest you. In this article I will address the top 3 questions I have received this quarter. Perhaps these pertain to you, but if you have different questions, it is likely others have the same ones. So don’t be shy…send them to me. You can do this by emailing me or simply posting your question on the forum (link below).
I have been receiving many questions pertaining to service members deploying to “hot” theatres of the world (can you say Afghanistan) more frequently. The more frequent and longer the deployments, the more important this information is to you and your financial plan. While no one relishes long deployments, there is a way to make to most of it. A retired Air Force Colonel friend of mine had the perfect way to approach these “all expense paid trips.” He viewed the “tax free” zones as earnings that didn’t exist and saved or invested every penny of it and it grew to the biggest contribution of his retirement plan. This smart investor is very financially secure.
Jim, a deploying Air Force Lieutenant Physician’s Assistant wrote me this question.
“You talked about other vehicles to place money while deployed. Will be heading down range in a very short while for 180 days...plan on maxing out TSP $49,500 and SDP. What are your suggestions for other short or long term growth areas. Have about 5 yrs before retirement and probably will not have an opportunity like this again, so I am wanting to max out this benefit. Any advice is welcomed. Thanks ahead of time.”
My response: Jim, this depends on whether you plan to work after your military retirement, as many folks will, and your age at retirement.
First, you are correct as per the TSP guidelines a deploying service member can defer up to 49K. However, when you are already earning a tax free salary (Up to what an E-9 makes), what does deferring really do for you? Other than restrict how and when you use what you saved.
I think saving money is the best thing anyone can do while deployed, but saving into something traditionally restrictive isn't ideal. Depending on your tax bracket, I recommend deferring money into TSP (up to the max 16,500) while back in the states. Save the money you will eventually defer, even for later years. For instance, if you were deployed all 2011, and you saved 16,500 in a very liquid account while deployed, you could supplement your income in 2012 while you defer a chunk into TSP. This strategy could save you some tax dollars.
Another thing you might want to consider is whether or not you or your wife have any retirement accounts that aren't in ROTHs. For instance, maybe your wife has an old 401K that isn’t being contributed to. This year there is no income limit to convert deferred accounts to ROTHS. This is a tremendous opportunity for folks who've been contributing to non tax deductible IRAs (because of income limits). They can now convert all of those accounts to ROTH IRAs and possibly have no tax liability. There are more scenarios, but I will leave it at that. Thanks to "reactive" versus "proactive" thinking, TSP doesn't start their ROTH TSP until 2011. It is too late for many of my clients to convert their deferred accounts to a ROTH.”
Karl, asked the following question:
“Will my financial future really be dependent on the economies of small countries like Greece?”
My response: Greece is the start. The bigger issue is the potential domino effect of other countries like Portugal, Spain, and even Italy, that may follow the same course. The Euro is only in the start of its second decade and clearly the “honeymoon” is over. There will be growing pains and we are seeing this played out. For smart investors, crises such as these represent buying opportunities and I recommended certain stock purchases for my clients who saw an immediate rebound in the US markets and substantial gains.
Finally, questions regarding 401Ks/TSP continue to be on the rise. Kathleen asked:
“I’ve been contributing 15% of my salary to the TSP, should I do more?
Here is my response. We should really analyze your tax strategy to see how much, if any, you should defer in the first place. After that, we should analyze your cash flow to ensure you feel in control of your budget enough to increase it.
For the first step, your documented (meaning signed tax returns) “effective” tax bracket while overseas is in the single digits. When would you rather pay taxes; when you are in the 5% effective tax bracket or when you are retired and hopefully financially successful? It is also true that “marginally” you are in the 25% tax bracket, but after you factor in your tax free allowances, your children as tax deductions, and other itemized deductions, you are saving 5% now on deferring the income and the growth, only to likely be in a higher tax bracket in the future. Since you are a Federal government employee, you have matching for the first 4% of your contributions (1% is given to you without any employee contributing (EC) and the next 4% is matched to the EC). Therefore, defer 4% of your salary to maximize matching TSP’s (no matching for military personnel) and invest the 11% already directed to TSP and whatever else you can direct from your budget and towards your ROTH IRA and other areas of your comprehensive plan.
I look forward to your questions that you would like me to address in future VRSAM articles.