Military Money Manual has partnered with CardRatings for our coverage of credit card products. Military Money Manual and CardRatings may receive a commission from card issuers. Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed or approved by any of these entities. Thank you for supporting my independent, veteran owned site.
After announcing that I would be deployed in 2017 for 6 months, my orders changed. I am not currently deployed to a war zone. Instead I PCS'd to an exciting OCONUS assignment.
This assignment comes with tax free, Combat Zone Tax Exclusion (CZTE) income for the next two years based on my duty location. I plan on saving aggressively with a 50% savings rate, but I do not expect to save $54,000 in six months. Got to feed the family! We also want to travel and experience the culture as much as possible in this exotic region while we are here.
The CZTE income for the next two years is a fantastic opportunity to sprint towards financial independence. The first priority is contributing 50% of my monthly income to my Roth accounts to lock in the tax free flavor of the money forever.
When you contribute tax free money to a Roth account, the money goes in untaxed, grows untaxed, and comes out untaxed. This is the ultimate tax strategy billionaires wish they could use.
So, I will max out my and my wife's Roth IRA as well as my Roth TSP in 2017-2019.
In 2018, all of my income will be federal income tax exempt. While I'm maxing out my Roth accounts, I can simultaneously convert money in my Traditional IRA to my Roth IRA and potentially reap some tax benefits.
I used the MoneyChimp tax calculator to plan my tax strategy for 2018. See below:
Convert Traditional IRA to Roth IRA While in a Combat Zone
converting my Traditional IRA funds to my Roth IRA account up to the married filing jointly standard deduction plus the personal exemptions, which is $20,800 for 2017.
For 2017 the IRS has set the married filing jointly standard deduction at $12,700 and the personal exemption at $4,050 (times two for my wife and I).
That means that you can have up to $20,800 of income (or Roth conversions) and not pay any taxes. Play around with the calculator to understand the concept.
Converting Traditional IRA money to Roth counts as taxable income in the year the money is converted. Traditional IRA money converted to Roth accounts must be taxed in the year converted, since Traditional contributions were not taxed in the year they were originally contributed. Uncle Sam always has to get his cut.
Here is a picture of a Viking statue in Norway to breakup the boring IRA conversion discussion:
However, if your taxable income is extremely low in a specific year (such as a year long deployment), Uncle Sam won't take much or any. Any income up to $20,800 for a married filing jointly couple in 2017 is exempt from federal income tax due to the standard deduction and the personal exemptions.
My plan is to convert $20,800 of my and my wife's Vanguard Traditional IRA contributions to our Vanguard Roth IRA account. This reduces our future tax burden and also give us the option to withdraw $20,800 from our Roth IRA tax free after five years, thanks to the IRS conversion rules. Root of Good goes into the details of climbing the Roth IRA Conversion Ladder.
Since we are converting in a year when we have no other regularly taxed income, converting our Traditional funds into Roth means we never pay taxes on this converted money. It's like contributing tax free CZTE income into a Roth IRA. It goes in untaxed, grows untaxed, and distributes untaxed.
Vanguard Roth IRA Conversion
Vanguard makes the conversion process easy. After logging in, find the search bar at the top of Vanguard's site. Search for “Roth IRA conversion.” Click the article entitled “How to convert a Roth IRA online.” From there, just follow Vanguard's easy to use conversion tool. The website will walk you through where the money it coming from and where it's going.
It should only take a few days to convert and transfer your Traditional IRA funds to your Vanguard Roth IRA. When you file taxes in the following year, you will need to receive tax documents from Vanguard to properly report your conversion and pay any taxes on the conversion. If you have done it right, your tax burden should be low or zero.
Other Ways to Maximize the Financial Benefits of Military Deployment
While you are deployed there are many things you can do to boost your savings, reduce your expenses, increase your investments, and sprint towards financial independence.
- Maximize you and your spouse's Roth IRA contributions (I recommend Vanguard for your Roth IRA) up to $11,000. Deployed CZTE pay goes into a Roth account untaxed, grows untaxed, and comes back to you untaxed. The ultimate tax avoidance strategy.
- Contribute $10,000 to the SDP for a guaranteed 10% return (I use some of my emergency fund to top up the SDP).
- Maximize your Roth TSP contributions up to $18,000, then switch to contributing to Traditional TSP up to $54k annually. Same Roth style account benefits as the IRA.
- Convert your Traditional IRA funds to Roth IRA and pay little or no tax on the money.
- Here are 8 ways to save money while deployed.
- And finally why deployment can be the most financially beneficial time in your career.
Have you tried converting your Traditional IRA to a Roth IRA while deployed and reaped the tax free benefits? I would like to hear if you have made any mistakes or would do anything differently; share your experience!
Amex Platinum Card With NO Annual Fees for Military
Military servicemembers and spouses can get The Platinum Card® from American Express with NO annual fees. This ultra premium luxury travel card normally has a $695 annual fee.
Learn how to apply for the Amex Platinum military fee waiver.
The Amex Platinum offers:
- $695 Annual Fee WAIVED for US Military (and spouses)!
- Earn 100,000 Membership Reward Points with $6000 spend in 6 month
- Earn up to $200 annual Hotel Credit: Get $200 statement credit on prepaid Fine Hotels + Resorts or the Hotel Collection, which requires a two-night minimum stay, booked on Amex Travel and paid for with your Platinum Card
- Earn up to $200 credit for Uber rides (or Uber Eats!) annually
- Earn up to $200 airline fee credit
- Centurion Lounge and Priority Pass Airport Lounge Access
- Earn up to $100 annual Saks Fifth Avenue credit, can be used for gift cards, enrollment required
- No foreign transaction fees, terms apply
- Earn 5x points on airfare booked directly with airline or on amextravel.com up to $500,000 per calendar year
- Transfer to 22 travel partners
These benefits, especially up to $600 of credits for hotels, airlines, and Uber, plus the massive 100,000 point welcome bonus, make the Amex Platinum card my TOP recommended card.
This is the largest welcome bonus on this card I've seen in years.
You have a leisurely 6 months to meet the $6000 minimum spend to earn the 100,000 points. That's only $1000 per month.
If you already have an Amex Platinum card, check out the American Express® Gold Card, fee waived Chase military credit cards like the Chase Sapphire Preferred, and this month's top recommended credit card bonuses, all with no annual fees for US military personnel and their spouses.
Military Money Manual has partnered with CardRatings for our coverage of credit card products. Military Money Manual and CardRatings may receive a commission from card issuers. Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.