Serving in the military can unlock a number of financial benefits, including the option to participate in the Savings Deposit Program (SDP), tuition benefits to pay for college, and access to affordable housing. Military members are also eligible to take advantage of federal retirement savings plans. Developing a strategy for retirement saving and investing can help service members make the most of their career earnings.

Retirement Planning Options for Military Members

Military members don't have access to 401(k) plans the way private sector employees might. But they do have several options to save and invest money for retirement. Those options include:

• Federal military retirement benefits
• Thrift savings plan (TSP)
• Individual retirement accounts (IRAs)

Understanding how these different investing options work together is key for creating a retirement savings strategy.

Federal Military Retirement Benefits

The federal government offers two retirement plan options for military service members. These are the Legacy Retirement System (LRS) and the Blended Retirement System (BRS). The plan you're enrolled in and the benefits you enjoy depend on when you enlisted in the armed services.

The Legacy Retirement System—also referred to as the Uniformed Services Retirement System—applies to service members who enlisted on or before Dec. 31, 2017. This is a defined-benefit plan that pays a lifetime monthly annuity to service members at retirement. To qualify for this benefit, you need to have served for 20 years or longer. Annuity payment amounts are based on the number of years of service and the average of the service member's highest 36 months of base pay.

The BRS applies to service members who enlist on or after Jan. 1, 2018. If you started your service on or after that date, you're automatically enrolled in the BRS. This military retirement plan combines a defined benefit pension plan with a defined contribution plan. Specifically, the defined contribution plan that's used is the TSP.

Thrift Savings Plan

The TSP is a federal retirement plan that's offered to eligible government employees, including military personnel enrolled in the BRS. TSP accounts are similar to 401(k) plans in that military members can elect to make contributions to them from their base pay. The minimum election to contribute is 1% of base pay.

Those contributions can be made on a pretax or after-tax basis, depending on whether you choose a traditional TSP or a Roth TSP. TSPs are subject to IRS limits on annual contributions. For 2024, military members can defer up to $23,000. The catch-up contribution limit for those who are aged 50 and older is $7,500 for 2024.

Individual Retirement Accounts

Military members can also use IRAs to supplement their federal retirement benefits and TSP contributions. For 2024, service members can contribute up to $7,000 to a traditional or Roth IRA, up from $6,500 in 2023. Note that additional $1,000 catch-up contribution is allowed for military members who are 50 or older.

Traditional IRA contributions may be tax-deductible, while Roth IRAs offer the benefit of tax-free withdrawals in retirement. Whether it makes sense to choose a traditional or Roth IRA can depend on how much you're making now versus your expected income in retirement.

If you're in a higher tax bracket now, taking traditional IRA deductions could make sense. If you expect to be in a higher tax bracket at retirement, a Roth IRA may yield more tax benefits. Also, a Roth means you won't pay taxes on the money your savings have earned while they were in the IRA.

Savings Options for Military Members

In addition to retirement accounts, military members have other ways to save. Those options include:

• Savings Deposit Program accounts
• Military savings accounts at banks/credit unions
• Taxable investment accounts

Savings Deposit Program

The SDP is offered by the Department of Defense to certain active-duty military members. To qualify for this program, service members must be:

• Serving in an eligible combat zone
• Be deployed for 30 consecutive days or one day in each of three consecutive months

Service members can save up to $10,000 in an SDP account. These accounts earn a generous 10% interest rate, compounding monthly, but only for the $10,000 amount, outpacing even the best-paying high-yield savings accounts. When deployment ends, the money in an SDP account is returned to the service member.

Military Savings Accounts

Banks and credit unions can offer savings accounts, money market accounts, CD accounts, and other deposit accounts designed for military members and their families. These accounts may offer special benefits or provisions, such as reduced fees or higher interest rates for deposits.

The advantage of opening a military savings account at a bank or credit union is that there are generally fewer restrictions on how much you can save and when you can withdraw money. With the SDP, you're limited to saving $10,000 and can only make early withdrawals under limited circumstances.

Taxable Investment Accounts

Brokerage accounts allow military members to save and invest money without restrictions on contributions. Though you won't get any tax benefits by opening a taxable investment account at an online brokerage, you may have more options and flexibility when it comes to how you invest.

A TSP, for example, may limit you to a certain range of mutual fund or exchange-traded fund (ETFs) options. With a brokerage account, you may be able to invest in stocks, mutual funds, ETFs, bonds, options, futures, precious metals, or even cryptocurrencies. That can help increase diversification.

It's important to remember that any gains realized in a taxable brokerage account are subject to capital gains tax. Whether you pay the short- or long-term capital gains rate depends on how long you hold an investment before selling it at a profit. It's also important to check the commissions and other fees you might pay when choosing a brokerage option.

How to Create a Saving and Investing Plan

Knowing your options for saving and investing money as a member of the military is just one part of the equation. It's also important to consider your bigger financial picture. Specifically, as you shape your financial plan, consider things like:

• How much debt you're carrying, if any
• Your current strategy for paying off that debt
• How much your income is likely to increase or decrease over time
• Your monthly budget and typical spending
• When you'd like to retire
• How much money you'd like to have at retirement
• Your current age and risk tolerance
• What you'd like to save toward other financial goals, such as paying for college or purchasing a home

Also, consider how you're protecting your savings and investments. Life insurance, for example, can offer a financial benefit to your loved ones if something happens to you. You may be eligible for group life insurance through the Department of Veterans Affairs, but you may also want to purchase additional coverage to ensure that your family is financially protected. Meeting with a financial advisor can help you create a strategic plan for retirement saving and investing.

The Bottom Line

Retirement saving and investing for military members begins with knowing what your options are for saving. From there, you can determine where different retirement and savings accounts fit into your overall strategy. Considering how to pay down debt and how to prioritize different savings goals is also important for creating a well-rounded financial plan.