By Barbara O’Neill, Ph.D., CFP®
Last week, we shared 5 key takeaways from the recent webinar about retirement benefits for active duty service members and those in the National Guard and Reserve components. Below are four more takeaways from the webinar, presented by Mark Overberg, Director of Army Retirement Services:
- L Fund Asset Allocation– In 2022, an 18-year-old service member would be enrolled in the Lifecycle (L) Fund 2065 if he or she does not select another fund. Service members can choose any combination of TSP funds (C, S, I, F, G, and L) and change asset allocations at any time. L funds have a higher percentage of assets in stock the further out the target date year. For example, L Fund 2065 recently had about 90% of its portfolio in C, I, and S stock funds.
- Retirement Payout Options– Upon retirement, service members may elect to take a lump sum of 25% or 50% of retired pay from retirement to age 67. The trade-off: a reduced monthly annuity during this time period. At age 67, retired pay reverts to full monthly income; i.e., the same amount that those who don’t take lump sums receive upon military retirement. Service members who take lump sums must take a course about the tax implications of doing this.
- Taxation of Benefits– Federal income taxes are due on all retired military compensation but there is no Social Security or Medicare tax and retired service members collect full Social Security benefits when they reach the age of eligibility. State income tax liability is determined by a military retiree’s state of residence. Some states tall all retired pay and some tax some. Nine states have no state income tax: AK, FL, NV, NH, SD, TN, TX, WA, and WY.
- Retired Pay and Divorce– Military retired pay for a divorced ex-spouse is not automatic. Rather, it is an asset, just like the rest of a couple’s property, to be divided with a divorce decree in a court of law. If retired pay is awarded, it is based on a service member’s pay grade at the time of the court order, not a future pay grade after a marriage dissolves.
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