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I get asked a lot about what type of clients I work with, and what I do to help them.  In this case study, I talk about a client I worked with who was preparing for a military deployment.  This client hired me on an hourly basis to help them prepare financially for the deployment and maximize the benefits available to them during the deployment.  You can read the first case study in this series here.

Facts

• Military Reservist being mobilized for an approximate 10-month deployment
• Current Financial Situation
  • No debt, other than mortgage
  • Has 401k for civilian job, Thrift Savings Plan (TSP) through the military, and a traditional IRA

Starting the Process

• Client came to me with general questions on benefits available to a deploying service member
• As we discussed what benefits were available, it was determined that the client wanted to focus on two main goals; maximize savings and increase retirement preparedness

Goal #1:  Maximize Savings

• To maximize their savings during deployment, we wanted to take advantage of the Savings Deposit Program (SDP)
• The SDP is a high interest savings account available only to service members deployed to designated combat zones
• The money deposited into the SDP earns 10% interest annually, making it a very attractive and safe option for savers
• To maximize the interest earned, it was imperative that the client be able to deposit as much as possible, as early as possible and the key to this, was starting early
• I was able to work with the client in developing a pre-deployment savings plan, that allowed them to have a significant amount of money put aside prior to the deployment, which once eligible for the SDP, was able to be directly deposited into the SDP
• With the proper planning and dedicated savings by the client, they were able to make over $800 in interest in the SDP account over the course of the deployment

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Goal #2: Increase Retirement Preparedness

• As a way to maximize the benefits of saving for retirement, I made the client aware of the benefits of contributing tax-exempt income to their TSP
• Since the client would be receiving tax-exempt pay during the deployment, we collaborated on a strategy of making Roth contributions to the TSP from tax-exempt pay, which will then grow tax-free for the rest of the client’s life, and will not be subject to income tax when withdrawn
• The client also received a match from their civilian employer on their 401k contributions
• In order to maximize the amount they could get matched from the employer and the fact that there are limitations on how much can be contributed to an employer sponsored retirement plan, we had to work closely to determine how much should be contributed to the 401k in order to take advantage of the match while working as a civilian and maximize the Roth contributions to the TSP while in military status
• Through proper planning and being mindful about saving, the client was able to save over $19,000 towards retirement in just one year, with almost 90% of that retirement savings now growing tax-free

Roth Conversion

• While not a stated goal of the client when we first met, as we discussed their situation, it became apparent that they would benefit from a Roth conversion in the year of the deployment
• Since the client was deployed and earning tax-exempt income for the majority of the year, I recommended converting a portion of their pre-tax retirement savings to a Roth IRA, taking advantage of them being in a low-income tax bracket
• We ran several tax projections to highlight the effects of the conversion, and ultimately decided to complete the conversion
• By converting it in a year where taxable income was extremely low, the client was able to pay a minimal amount of income tax on the conversion and the amount converted will now grow tax-free
• This conversion, over the long run, is projected to save the client over $5,000 in taxes when the money is withdrawn

While this scenario may not seem familiar to you if you are not a service member, chances are your situation has strategies and options that you may not be aware of or there could be an opportunity to take even more advantage of than you are currently.  This is where financial planners add value, by educating you on your options and making recommendations to help you live the financial life you want.  If you are a service member, you may benefit even more from working with a financial planner who has lived inside and is familiar with the military financial system.  Regardless of your background, if you have financial questions or want a second look at what you are doing, let’s talk today and start giving you confidence in the financial decisions you are making.