By FPA member Phil Dyer, CFP®, RLP® and CPCC (Certified Professional Co-Active Coach)
Last Updated: January 11, 2010
With unemployment at 10 percent nationally, and significant uncertainty clouding the employment picture, and healthcare concerns and lackluster defined contribution plan performance for the past decade, military service looks like a pretty good deal these days. It is virtually recession-proof, provides guaranteed healthcare, generous housing, non-taxable housing allowance (or tax-free base housing) and a cost-of-living adjusted (COLA) pension after 20 years of service that most private sector employees can only dream of. However, military service comes with its own unique set of challenges — such as frequent moves, even more frequent family separations, long stretches of time in some of the least savory parts of the world where people are keen on shooting at you and the very real danger of death or disfigurement.
Over the past six years, I have had the honor of educating thousands of currently serving military members through financial education programs on military installations all over the world. Military service presents significant financial roadblocks and opportunities. If you are a service member, consider some smart financial moves that can help you keep more of your hard-earned money working for you and your families as we begin 2010.
Consider the following three items:
- Homeowner's Assistance Program (HAP): The HAP program was initially designed to assist service members whose bases were being closed due to Base Realignment and Closure Commission (BRAC) or to assist severely wounded/disable veterans with housing issues. However, when the bottom dropped out of the real estate market — many neighborhoods around military installations were hit particularly hard due to (1) the transient nature of military personnel who move every two to four years on average and (2) the general real estate market in states such as Florida, California and Nevada that were hit particularly hard by the downturn and that contain a large number of military personnel. Under the expanded HAP program, military homeowners that purchased homes as a principal residence before July 1, 2006 and received reassignment orders between February 1, 2006 and September 30, 2010 may apply for financial relief due to inability to sell their home. They must be moving at least 50 miles away from the property to qualify. Learn more about the HAP program.
- First-Time Homebuyers Program: The popular first-time homebuyers program from 2008 and 2009 has been expanded and extended into 2010. Under the revised rules, first-time homebuyers — defined as someone who has not owned a home in the last three years — are eligible for a tax credit of up to $8,000 on the purchase of a new principal residence, provided they have a signed sales contract as of May 1, 2010 (the property must be closed by June 30, 2010). This benefit applies to single taxpayers with adjusted gross income (AGI) between $75,000 and $125,000 (the limits double to $150,000 to $250,000 for married taxpayers, so virtually all military personnel will qualify). In addition, current homeowners that purchase a new principal residence can qualify for a tax credit of up to $6,500 — provided they have lived in their previous home for five of the previous eight years. You can even claim the credit on your 2009 taxes — via filing a Form 1040X amended return – even if you close on the property by the required dates in 2010. One important caveat for military homebuyers: You must use the home for three years as your principal residence and currently there is no Permanent Change of Station (PCS) carve-out to avoid this potential penalty, so buy with caution.
- The Thrift Savings Plan (TSP) "Turbo-Charger" for Deployment: With today's "Op Tempo", chances are you will be deployed in the next 1-2 years to one of those garden spots referenced above. If you are deployed in a hazardous duty zone — and thus eligible for income tax-free pay — you can contribute up to $49,000 per year (in 2010) into your TSP and it is segregated into a special tax-free channel. This can be done multiple times over multiple deployments. While future earnings on this money go into the regular TSP channel (and are therefore taxable when withdrawn), the tax-free money can be rolled into a Roth Individual Retirement Account (IRA) after you separate or retire from the military, creating a significant pool of future tax-free money. It also looks like a true "Roth TSP" option will become available in the next one to two years for military members and federal civilians.
Check back next time when we delve into the ins and outs of the new Post 9-11 GI Bill.
FPA member Phil Dyer is a 1985 graduate of the United States Military Academy at West Point and former Army Captain. He has been a fee-only financial planner since 1996 and is the founder and principal of Dyer Financial Advisory in Towson, MD. He also serves as the Deputy Director of Financial Education for the Military Officers Association of America.