Read The Transcript Below:

Steven (00:51):

Hello everyone, and welcome to the next episode of the Retirement Tax Services podcast, financial professional edition. I’m your host, Steven Jarvis, CPA, and this week on the show we’re going to talk about an area we haven’t covered before, but certainly an interesting one and an impactful one, and that is tax planning specifically for military members. And joining us to talk about this is Brandon Lovingier with Enlisted Money. So Brandon, welcome to the show.

Brandon (01:16):

Yeah, thanks for having me. Just really excited to be here. And yeah, this is definitely one of those things that the military has some very nuanced things that can be a real benefit as long as you know what to look for. 

Steven (01:29):

Brandon, of course, want to start with thank you for your service. If you wouldn’t mind sharing your military background and then what led your interest to, okay, let’s help other people understand that Just like anything in taxes, we can’t just let this happen to us by default. We’ve got to understand what’s available to us and know how to take action. 

Brandon (01:44):

Absolutely. Thank you. And yeah, basically, long story short, I grew up middle of nowhere- Missouri, joined the army right out of high school and I’ve been in the army ever since. So I’m looking forward to retiring from service and then I’ll continue in the financial planning services industry. So along that route, I’ve made a lot of mistakes and so my project Enlisted Money is all about trying to make sure that the me of today can avoid those mistakes by getting my experience secondhand. And then along the way I’ve done content writing and then kind of finally landed on my own little sub-niche of enlisted military because that’s the most me.

Steven (02:25):

Yeah, it’s always great to see when people can connect with something they have got a personal background in and got plenty of extended family that’s in the military, don’t have anybody in my immediate family. I didn’t serve for myself. And so it was the first time that someone came to me with a tax return with a military spouse. I was like, oh, wait a second, this is different and I need to learn more. And really the first thing that came across my desk, and maybe you can speak to this personal dive into other things, is the tax impacts when you are deployed in a combat zone. It was funny for me at the time because I got credit for this huge refund the client got because it was the first year they’d worked with me, but it had nothing do with what I was doing. It’s that they had tax-free income. So for people listening who may or may not have a background of working with members of the military, this comes up all the time, whether you’re working directly with the enlisted member or a spouse or family member, whatever it might be. But we thankfully have a lot of enlisted or actively enlisted and veterans in our country who need financial help. So yeah, let’s start there and then we’ll keep going.

Brandon (03:21):

Yeah, that’s one of those that I wish I would’ve known more on my deployments, so I could have taken advantage of some of these things. My actual personal finance journey actually started in a cold, stinky, dusty tent in Afghanistan looking through bank statements. So that’s how you know you’re really bored. But yeah, the combat zone tax exemption, that’s a really big benefit. That’s one that a lot of people think of right off the bat. But also, there are different ways that you can use that to your advantage. So say for instance, Roth is already a great option for a lot of military members, but then if it’s tax-free coming to you, tax-free going in and tax-free going out, that’s a pretty amazing benefit, a pretty cool way to do that. And then also too, there’s the ability to actually contribute even more than the normal exclusion for your traditional TSP as well. So there are a lot of different things you can do with that depending on where you fall in the tax brackets, whether it makes sense to do Roth for you already or you may want to switch. So there are a lot of different things you can do there plus some special programs as well, like the savings deposit program. So there’s definitely a lot to know and a lot that you can take advantage of. I just wish I would’ve knew about it back in 2006, 2007 whenever I was deployed the first time.

Steven (04:37):

It’s great that you’re taking the time to put out this content because definitely something that more people could benefit from knowing. I want to talk specifically about, you mentioned in there that there’s an opportunity to put even more than just the Roth limits into a TSP- thrift savings plan, which is the same plan that’s available to basically any federal employee. So if people listening, if you’ve worked with any kind of federal employee including military members, this is basically the 401k equivalent, although there are some really important distinctions. This came up recently with an advisor who doesn’t work exclusively with military members, but had a situation where working with a client who’s going to retire and was in the process or had just transferred their TSP. I have a good friend, Micah Shilanski, who works with federal employees extensively, and he constantly beats me over the head with, it’s not a rollover out of a TSP, it’s a transfer.

(05:23):

These are important distinctions. Anyways, this client transfers their TSP and gets two checks, which should be an immediate red flag to anyone, whether we’re talking about 401k or TSP, if you thought you had one type of money and instead you get two checks, we need to stop and say, okay, wait, why did I get two checks? They don’t just do this for fun. And so in this particular case, it was because this retired veteran had contributed to their TSP while in a combat zone not realizing or not remembering that they had money going in on an after-tax basis because similar to making a non-deductible contribution to a 401k or an IRA, it goes in after-tax, but you have to get it into Roth before it’s going to permanently be tax-free, including all the growth and the way we think about a Roth typically. So what else do we need to be keeping in mind when we’re thinking about whether it’s because we’re in a combat zone or we’ve just contributed above and beyond we making abstract contributions, what have you seen as best practices for setting that up for success?

Brandon (06:19):

I mean, yeah, that’s a great point and that’s definitely one to keep in mind. And also, a lot of service members don’t realize how to work with the new blended retirement system. The other thing to think about too, if you’re working with a military client, there’s actually I guess three different TSP ways that you can split that up. So you have the federal thrift savings plan and you have the military thrift savings plan, and then within that it’s split into what we call Legacy High three, and then also the new blended retirement system, which adds in the matching contributions. And a lot of younger service members don’t understand where those matching contributions go. They don’t understand why they have traditional funds when they’ve been contributing to the Roth. I’m hoping that with Secure 2.0 and we got some of those changes that hopefully soon-ish, the FRTIB will let us do matching contributions or an end of the Roth TSPs. Yeah, that’s just something we’re going to have to work through case by case.

Steven (07:19):

That’s a good reminder, especially as we started into 2024 here as this releases. I mean we’re over a year removed from Secure 2.0 coming out, and one of the highlights of Secure 2.0 was this expansion of Roth options including within the TSP. But as financial professionals, we knew coming out of the gate that there was going to be a time lag when those options were announced and allowed under the IRS code and when administrators actually have the systems in place to do that. And so as we’re working with clients, we need to make sure we’re getting real data. This is one of the reasons I encourage people to get actual tax returns, to get pay stubs, to get plan documents so that we know what’s actually available in that plan. Just because the IRS allows it, it doesn’t mean the administrator has caught up with the paperwork side of things and making that possible for everyone involved.

Brandon (08:08):

And the federal government isn’t exactly known for being passed. So I’m looking forward to seeing some of those changes, but I’m sure it’ll be a little while before some of those kinds of trickle in and actually get implemented. 

Steven (08:22):

Brandon, like I said, I don’t work extensively with members of the military, so I’d love to learn from you as you think about specifically tax planning or the tax impacts of planning that you do, the information you share with military members, what else comes to mind that you wish you would’ve known in 2006, 2007 or that you’re working with people on now?

Brandon (08:39):

Yeah, one of the things is just knowing what benefits and what some of our retirement, our VA benefits, things like that, and if they are taxed because that’s going to be one thing for me. I’m always going to have some kind of taxable income with a military pension coming in. So that’s something to plan around. So that makes conversations around Roth and service and things like that may be a little more important. But also for me, almost a third of what I get paid is all tax-free because some of our benefits such as BAH and things like that are non-taxable benefits. Same with some of our childcare benefits, our subsidies, and things like that. Those are not taxable benefits. So that’s a huge benefit to us and can kind of, I guess artificially keep us in lower tax brackets for longer depending on our spouse’s employment and things like that, or if you’re married or not. But those are definitely things to keep in mind. And then also too, we tend to go around the country and collect different things in different states and maybe even different countries. So it’s important to keep an eye out for that. So rental properties that are in one state that we were stationed here and then another state over here, and then now we’re living here, but our home of record is over here. So there are a lot of different things to think about, especially if they’re still active duty.

Steven (10:03):

A lot of great pointers in there as far as questions that you should be asking. It might go beyond what you normally would’ve a client. It can be easy to assume, oh, you live here in whatever city you’re currently meeting with a member of the military. But yeah, those questions of where else have you been stationed and what is your legal address or where do you claim as your residency? The other thing that stood out to me, what you were saying there, because it’s really common that people will be in the military, retire, have their pension start, and then start a second career. This is much more common for military members than in other services just because there’s so few pensions still left available to people. The reason I want to highlight this is because we talk a lot on this show. A lot of times when we talk about tax planning, one of the things we’re looking at is being intentional about when we recognize income, whether we defer it or accelerate it into years, we may have more or less income, take advantage of tax brackets.

(10:54):

And we’ve got to always start that conversation with what is our non-discretionary income. What’s that taxable income? To your point, as you retire from the military, you’re going to have this pension coming in. And personally, I’m not going to forego earning money just to pay less in taxes. And so it’s not that we’re just going to say, Hey, no, sorry, government. I don’t want my pension. And at least as far as I’m where there’s not an option to just say, Hey, why don’t you wait and give that to me in 10 years? I’ll take it all at once then. And so understanding these pieces of it might be a little bit more complicated. It might not be that, Hey, when I retire at 60 that I might have a couple of years of relatively no income before social security starts. I might have my military pension, I might have a severance from whatever my second career was. We’ve got to make sure we understand those pieces and how they stack up before we just try to slap the same plan on every single client we talk to.

Brandon (11:43):

Right. Yeah, and also, the state taxes are going to be very different as well. I mean there’s been a lot of changes recently. I think just heard Virginia recently bumped up their exemption for tax on military pensions. There’s a lot of different things to look at there as well. And then also, on the tax side, it’s really important, especially if they have a spouse, if they’re still in service just with UFO and different acts like that, their tax treatment’s going to be different than it might be for a typical client. So where we live, no matter where we live, my wife will get taxed in my home of record state. So that’s a little bit different and something we have to walk through with employers and things like that. No, it’s actually Missouri where we need to pay our taxes not here.

(12:32):

And so that’s kind of a funky thing. And then the other thing too, I guess I’ll mention this is something I’ve been waiting on and looking for is a lot of changes happen through alternate means for military. So every year the National Defense Authorization Act, there’s generally a lot of different changes, sometimes some kind of odd stuff. So this year I saw in there there’s a spot that they’re supposed to declassify, or not declassify, but declassify any information on UFOs. So there’s that, but then there’s also, Hey, we’re going to calculate the basic needs allowance a little bit differently this year as well. So it can be all over the place, but that is a very important place where a lot of the changes for us do happen.

Steven (13:23):

That’s really interesting. I mean, tax law changes get baked into all sorts of other congressional acts, but UFOs is a new one for me. I’ve never thought to look in the same update as a UFO Declassification for tax-related impacts. Fascinating.

Brandon (13:38):

And that’s another thing too is a lot of our benefits and things you can kind of get into this, I guess I would call it benefit stacking kind of. So some of our benefits may affect other benefits. The rule of thumb used to be generally if it’s an allowance then it’s not taxable, if it’s a pay, then it’s taxable. But the new basic needs allowance, it’s a taxable benefit, but that could affect some other things. But then now we have the new Dependent Care flexible spending account, which is a nice benefit, which helps with lowering our AGI. So you can kind of look at stacking some different benefits. They don’t necessarily cancel out each other per se, but definitely could. By looking through those and knowing all those different benefits, then you can definitely be very, very helpful to a military client.

Steven (14:28):

Yeah, that’s a good reminder in there that compared to other more traditional W2 employees, because military members get a W2 at the end of the year, but a lot of times if you work with traditional W2 employees, you expect some sort of pretty stable baseline of what their tax situation is going to look like year to year. And then it’s okay, well adjust ready any bonuses, adjust any equity comp, but year over year for an in-service military member, that tax situation can change pretty dramatically depending on how some of these benefits stacked together, depending on where they’re deployed or not deployed. And so we can’t just go into it assuming, oh, well it’s going to be like last year, but there’s an extra $10,000 bonus we’ve really got to look at and help the client understand helps that expectations for how that refund or payment at tax time might fluctuate, especially when you’ve got multiple spouses working and only one in the military, that outcome, the tax filing time can be drastically different from one year to the next. And taxes are such a kind of mysterious black box for most people that can just feel like a complete surprise to them each year. And while that might be a fun surprise when they get a refund, it’s a painful surprise when they have a payment due. And so there’s a lot of room to add value just through education there.

Brandon (15:33):

Yeah, no, absolutely. And bonuses too. You mentioned bonuses. I mean, those can vary wildly. There are some very specialized jobs and pilots and things like that. Sometimes they could get a hundred thousand dollars in one chunk, which for us is pretty significant. That might be double your normal taxable income. And so you kind of have to look through that and plan for that. But also if you can work that to where you’re in a combat zone and you can get that tax-free, then hey, that’s a really cool place where you can do a lot of different tax planning around and get a lot of benefit, a lot of miles out of that. 

Steven (16:09):

I know a handful of advisors who specifically work with service members, which is great to see. But I also see a lot of questions come up where this becomes a one-off thing for an advisor, whether it’s because of a client’s family relationship or they get involved with the spouse and the marriage, whatever it might be that they didn’t go out searching for, Hey, I’m going to serve service members. They end up with somebody in their client base. I mean, as we talk through this, there’s a lot of nuance and unique things specific to military members. So I know that you put out a lot of content through enlistedmoney.com. What other resources, where are you going to learn more to stay up to date? I mean, if someone comes across a client and says, oh, geez, I need to go learn some more about this. What are the great resources out there?

Brandon (16:47):

I follow a lot of people who are part of the Military Financial Advisors Association, so kind of a group of military financial planners that is their sole focus. So a lot of really great folks, and I’ve learned a lot from all of them. Also, too specific conferences that you can go to learn about military personal finance, so Mill Money Con, I’ll be speaking there next year, so if you want to come see me, then that’s a nice place to go and learn. But really you can get on a lot of our information is free out there. And on my resources page, I linked to a lot of that kind of stuff. But yeah, the Fin Red website, TSP website, those are going to have a lot of basic information, but unfortunately whenever you really want to get deep into the weeds, then we’re getting into US code and things like that and really kind of digging into it. So yeah, I wish I had a perfect CE source for you. Maybe that’s something that I’ll get with everybody to think about. But for sure, the closest thing to that would be a military in personal finance conference like Mill Money Con. That would be a great place to go, or at least get the pass and look at that or look at some of the speakers that are on there and reach out and network with them. That would be kind of where I would start though.

Steven (17:59):

I mean, Google has all the information. I mean, you’re almost apologetic. There aren’t better resources. But I mean that’s where the financial advisor is so valuable is being able to comb through the details, to comb through all that information and parse it down to here’s relevant to this specific client. And so I try to remind people as often as I can that we’re talking about tax planning, financial planning, these things take work. There’s not an easy button. There might be resources that make it easier or at least help you skip over some of the learning curve, but just, I mean, whatever area you’re going to focus on, know that it’s going to take work if you want to do it well.

Brandon (18:32):

Yeah, and that’s the thing. I mean, you can almost have to get hyper-specific really quickly with a lot of military families because there are a lot of different dynamics that work into that, especially now with childcare and things like that are expensive. People have different family dynamics and things like that. And so there’s a lot of nuance around all of that. And a lot of us come from a lot of different backgrounds and have a lot of really neat experiences, but a lot of different things that can be somewhat challenging to unravel after the fact because we’re really good about just going and doing things and then figuring it out later. So kind of that buyer-ready aim kind of mentality. That’s great for winning wars, but not so great for long-term tax planning maybe.

Steven (19:16):

Yes, intentional, proactive strategic approach is pretty important to tax planning. And although it might feel like it sometimes, thankfully with tax planning, no one is actively shooting back at us. Thankfully we make that distinction. Brandon, anything else top of mind for you when we talk about tax planning as it relates to military members?

Brandon (19:34):

Nothing specific. I would just say that for advisors that are out there, it is something to educate, at least know what your local benefits, state benefits and things like that and what those are because you are going to run across veterans, you are going to run across military out there. And even if you think, well, we’re not close to a military base, well, there’s recruiters and different, there’s a lot of different specialty assignments, but bottom line, we make up veterans and military make up about 7% of the US population. So seems like a small group, but we’re out there. So just kind of get a baseline education, at least what your state benefits offer and then reach back and make sure that you’re getting that information and just keeping an eye out for us.

Steven (20:17):

Certainly a much bigger percentage of the population than CPAs, so certainly, appreciate all the sacrifice and surf that’s going in there. Well, Brandon, I really appreciate your time. I want to make sure that we’re highlighting for listeners that just this topic like any other, it is only going to do you good if you take action. And so if you don’t currently work with any military members, maybe this just gets filed away as a resource that you come back to later, that you have something in your back pocket. As those questions come up of resources to revisit, if this is something you’ve come across and felt overwhelmed as Brandon said, take the time to research these things, to find these resources, to spend time on making sure you’re able to provide that value to clients in that situation. And like we always say on here, you need to make sure that you’re getting to the actual real data that’s getting tax returns, that’s getting pay stubs, that’s understanding the benefits available.

(21:10):

Because if our clients who are here domestically and don’t have people shooting at them can’t remember what benefits they chose or how much taxes they paid or what last year looked like versus this year, I’m going to go ahead and bet that it’s not top priority for someone who’s currently or recently deployed to have figured out and memorized all of their tax status. So if we want to get real data, we want to make sure that we’re actually looking at the details and doing everything we can to provide value on this topic. Brandon, thanks so much for being here. Really appreciate your time and sharing your insight. And again, thank you for your service.

Brandon (21:40):

Yeah, yeah, no, I really appreciate you having me on. It was a lot of fun.

Steven (21:45):

And for everyone listening until next time, good luck out there. And remember to tip your server, not the IRS!