The military retirement pay system is undergoing a major overhaul (or, at least, it has been since 2018. That might sound scary to active military members and their family members, but it’s actually pretty good news! The new system will help save the government money while also giving veterans more control over their retirement income.
Since a majority of military members don’t stay in the military long enough to receive the full retirement benefit, the system has been changed to better serve those who serve their country. Does this change your current retirement if you’ve been in the military for quite some time? It all depends, really.
As you might know, there are currently two retirement systems for the US military: the new blended retirement system (called BRS) and the legacy high-3 system. Depending on when you joined the military and whether or not you opted into the BRS, you’ll find that you fall into one of the two plans.
Don’t get stressed, though, if you’re not sure how it all works. Here’s what you need to know in order to understand how the military retirement pay system works.
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What is the Legacy High-3 System?
As mentioned above, which retirement plan you fall under depends on when you joined the military. If you joined before January 1, 2006, then you were (and likely still are, pending any new changes you’ve made) part of the legacy system. If you joined on or after January 1st, 2018, then you were automatically enrolled in the BRS.
What about those who joined the military between January 1st, 2006, and December 31st, 2017? You had the choice to stay in the legacy system or enroll in the new BRS. However, the last day to enroll in the new BRS plan was December 21st, 2018.
If you missed that deadline then you’re not necessarily left out. You’ll just have to continue to be a part of the legacy high-3 system. Some perks of this retirement plan include the fact that if you served 20 years or more, you’ll qualify for the lifetime monthly annuity. On the downside, your Thrift Savings Plan contributions aren’t matched by the government.
How much money do you get as part of this military retirement plan? It depends on your years of service. According to the military’s website, your retirement pay is calculated at 2.5% times your highest 36 months of basic pay.
Already understand your retirement pay as a veteran and want to use your payments to purchase a home? Read through our helpful guide on the VA Loan Limits for 2021.
What’s the Blended Retirement System?
This is the new military retirement pay system that, as we mentioned in the beginning, looks to help both the government and veterans. It differs from the legacy system in that your Thrift Savings Plan contributions are matched. On top of that, you can earn mid-career retention bonuses!
Most newer military members will be automatically enrolled in this retirement pay system, but what about those who joined years ago? Well, if you switched over to the BRS before the 2018 deadline then it’s important to understand the defined benefit and defined contribution parts of this new plan.
The Defined Benefit Part of the Plan
Like the original plan, the new military retirement pay system has a defined benefit. All retirees will receive 2% times the number of years served. This means that if you served 10 years, you’d get 20% of your final base pay. If you served five years, you’d get 10%, and if you served 30 years you’d get 60%.
Want to see exactly what your retirement payout is going to be (or should be)? Check out the military’s online tool where you can calculate your BRS payments.
The Defined Contribution Part of the Plan
A defined contribution plan is part contributions from the military and part contributions from the military members themselves. Think of this like the kinds of contributions you might make to a 401(k).
The new military retirement pay system includes a contribution equal to 1% of your base pay from the military to your TSP, Thrift Savings Plan, and an automatic 3% contribution from your base pay, but you can raise or lower that amount as you see fit.
Once you’ve completed five years of service, the military will match as much as 5% of your contributions and you’d be fully vested after two years. This means after you serve two years, you’d receive any money the government contributed to your account. If you leave the military before serving two years, you’d lose the government’s portion of the contributions.
The new military retirement pay system also includes an incentive for military members who continue their service beyond 12 years. If you commit to another four years of service, you’ll receive 2.5 months of basic pay as a bonus.
Tax Benefits to Military Retirement
It’s worth mentioning that under this new military retirement pay system, your pension might not be taxed. That’s fantastic news for you! However, this isn’t the case for everybody. To check whether or not your military retirement pension is taxable, use the IRS’ helpful online tool here.
What Are the New Military Retirement Benefits?
It seems confusing that there is a new military retirement pay system, but it comes with many benefits:
- You don’t have to serve 20 or 30 years to get the maximum benefit of your retirement funds.
- You can contribute to your own retirement plan.
- The government will match your contributions after you serve two years, potentially doubling your money.
- You are fully invested after just two years.
- You can transfer the funds to your 401(k) when you leave the military without incurring a tax penalty.
Of course, there are benefits to the legacy system as well. And, if you’re smart about what you do with the money that’s already in your account, it can be possible to maximize your returns from the legacy system, too! Just keep reading.
How to Make the Most of Your Military Retirement Pay with Wealth Stack
Simply put, the new military retirement pay system offers military members more benefits. With the government match of 5%, you could potentially fund your retirement with 5% of your base pay contributed by you and another 5% by the government. All of this truly helps you build long-term wealth due to compound interest.
The key is to invest the money appropriately and to roll it over to your 401(k) or IRA. As long as you don’t take the cash in hand or if you do, you reinvest it in a 401(k) or IRA within 60 days, you won’t owe any taxes or penalties. And, that’s when you really start to see the effects of compound interest and retirement accounts.
Take advantage of the military retirement pay system and start funding your retirement as early as possible. The earlier you save money the more you’ll have for your golden years. Not sure what that even means, how to get started, or how to move your cash over to a 401(k)?
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