Invest Re-enlistment Bonus in TSP + Does BRS Have a Military Pension? | Military Money Manual Podcast Episode 93

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Spencer from militarymoneymanual.com tackles two questions from an active duty Army E-6:

Is it a good idea to invest $18,000 of my $50,000 reenlistment bonus into the Thrift Savings Plan (TSP)?

If I'm in the Blended Retirement System (BRS), will I receive a military pension if I serve 20 years?

Military Money Manual Podcast Episode 93 Transcript

[00:00:00] Okay, get ready for a Spencer rant because this annoys me. I see this on Reddit all the time where young Joes, young airmen, are confused that they're not going to receive a military pension when they reach 20 years. 

Hello podcast listeners. Welcome to another episode of the Military Money Manual podcast. Spencer here from MilitaryMoneyManual.com. Today I'm doing a solo round podcast because Jamie actually has a day job and has to work sometimes. 

Jamie, you are missed, but we'll get you in the next episode. I received a listener question in the inbox. It's a two part question on re enlistment bonuses and the BRS military pension. So here we go.

[00:01:00] Brian writes, “I'm currently an E-6 in the US Army and I just finished reading your book. I recommended it to a number of my guys already.”

Thanks, Brian. 

“I have a few questions regarding my TSP and the blended retirement system or BRS. I'm about to get a large reenlistment continuation pay bonus and I was curious what your thoughts would be about putting a large portion of that bonus into the Roth TSP. I am scheduled to get $50,000 after taxes, reenlistment, plus continuation pay bonus in October of this year.” Brian continues, “I know you said in your book do not max out your Roth TSP before the end of the year because the 5 percent agency matching is paid out in a monthly bonus.”

That's correct.

“My wife and I are leaning towards putting $18,000 into my Roth TSP directly so that we do not even see the money in our checking accounts. I'm curious what your thoughts are on this move, the $18,000 contribution would still allow me to make my monthly contribution of 6 percent and receive the 5 percent agency matching for October to December.”

[00:01:57] That's the end of Brian's first question. So, first off, Brian, I think that's a great idea. That's a huge reenlistment and continuation pay bonus of $50,000 after taxes, which means that Brian's probably actually getting a $64,000 re-enlistment and continuation pay bonus. And then his taxes being withheld at the standard 22%.

[00:02:21] So a quick side note on how military bonuses are taxed. So military bonuses are automatically withheld at 22% by DFAS. So if your taxable rate is lower than that number, when you file your tax return in April next year. You'll receive a large portion of that money back. This is what happens for most military service members.

There's almost no military service members out there who are paying an effective tax rate of 22%. So if you receive a bonus, you can look forward to a large tax refund when you file your taxes next year and that 22% is just set. It's automatic. If you're in a combat zone, then some portion of your bonus may be tax exempt.

Kate Horrell, who's a guest on episode number 91, has a great article. If you google taxes on military bonuses, Kate Horrell, that should pop right up and she has a great explanation of military bonus taxes. With that little side note complete on military bonus taxes, yeah, I think this is a great plan to contribute a good chunk of your military bonus straight into your Roth TSP and potentially even max out your TSP contributions for the year.

[00:03:33] It sounds like Brian, that you're only making 6% monthly contributions and then receiving the 5% agency match. So, that's still great. It's 11% of your pay being contributed to the Roth TSP, but you might want to look at increasing your TSP contributions month to month to maybe 7% or 8% once you get a time and grade promotion or maybe if you make E-7.

But still, I think… Contributing anything, especially if you're in the BRS, at least getting your 5% match. That should be the minimum and you're doing that. I've got some tables on my website that show you exactly how much to contribute to the TSP each month so you can max out the account and earn the full 5% match.

[00:04:19] And again, the maximum contribution for 2023 is $22,500 and it's estimated to go up to $23,000 for 2024. But we'll get the official numbers from the IRS at the end of October or early November. I made those tables when I was active duty because it was very useful for me to be able to see how much I should be contributing so that I can max it out every year.

And I was able to max out my Roth TSP account for the last five or six years of my career. Actually, I think I transitioned to traditional contributions towards the end of my career because I was a well compensated major and so it made more sense to put money into the traditional TSP. 

Okay, here's part two of Brian's question.

[00:06:01] Brian says, “I am in the BRS, that's the Blended Retirement System. When I joined the Army in 2014, I was under the High-3 system, but I opted into the BRS in 2017 because I was unsure if I was gonna stay in the Army for 20 years.”

Brian, I think that's a great idea. I also opted into the BRS and I highly recommend that unless you absolutely for certain know that you're going make it to 20 years, I highly recommend that you opt into the BRS if you're given the opportunity. Most people aren't given the opportunity anymore although I think there is some legislation pending that people who are in the high three can switch but at this point It's probably too late and I would recommend just staying in the High-3 if you've been in for that many years.

 So Brian's question continues, “At this point, having been 10 years in, I'm committed to making the Army my career. My question about the BRS is… Do I receive the pension and my TSP account or does the Roth TSP set up for me by opting to the BRS serve as my monthly pension payment? Essentially, do I receive a pension and my TSP or just my TSP?” 

Okay, get ready for a Spencer rant because this annoys me so much. I cannot believe that here we are in 2023 and people are still confused.

And Brian, it's not your fault, but how is it that Military leaders still aren't communicating this effectively? I see this on Reddit all the time where young Joes, young airmen, are confused that they're not going to receive a military pension when they reach 20 years. 

Yes, you will receive a military pension under the Blended Retirement System, under BRS.

It's 2 percent of your years served. So if you make it to 20 years, you get a 40% of your base pay pension based off of the last 36 months of your highest pay, which is usually the last 36 months of your career. Under the High-3 system, it was 2.5% of each year of service.

[00:07:56] So if you made it to 20 years, you got a 50% pension. So it is a reduction of 10 percentage points, 50% down to 40%. Or if you are a math guy, it's a 20% reduction because 40 is 20% less than 50, so is a 20% reduction in your pension. Which can add up to a substantial amount over the lifetime of a military retiree. But you are still receiving a pension.

[00:08:23] The TSP is an addition to your military pension. So if you're listening to this right now and you ever hear somebody say oh I'm not gonna receive a military pension because I'm in the BRS, please please please correct them because they are eligible for a military pension if they make it to 20 years of active duty service and you can earn a reserve pension if you don't do your full 20 years of active duty service. You can still qualify for a reserve pension, which starts at age 60.

So, yes, if you're in the BRS, your TSP is on top of your military pension if you make it to 20 years. However, if you leave before 20 years, you won't receive a military pension, but you will have access to all the money that you put in the TSP, including your agency matching. And you may qualify for VA disability benefits, which is another form of disability compensation that the United States government offers to military service members.

[00:09:20] So if you're in the BRS, please understand that you do qualify for a military pension. It will be 2 percent of your years of service. So if you make it to 25 years, for instance, then you will receive a 50% pension. If you only make it to 20 years, you'll receive a 40% pension, but that's in addition to the amount of money that you have saved in the TSP.

If you're on the road to financial independence. You should be contributing to your TSP, and in fact, you should make it a goal to eventually max out your TSP, especially if you're staying in long enough for a 20 year career and you're going to earn a military pension. I left the military after 12 years, and my TSP balance was somewhere around $300,000.

[00:10:03] If I had stayed in for a full 20 year career and earned a military pension, I would suspect that my contributions plus the growth in my account would have probably grown to about $700,000 maybe $750,000 based on like an 8 to 10 percent rate of return and maxing out for the last eight years of my career. So that just shows you that here you go, you could have this great TSP fund that is growing.

And if you retire in your 40s. It will be probably 20 years until you can access it penalty free at age 59 and a half. And that just gives it even more time to grow before you can access it. There are ways to access TSP funds early, but I won't cover them in this episode. So two great questions there, Brian.

[00:10:52] I think it's a great idea to put part of your reenlistment bonus, your continuation pay bonus, into your Roth TSP and max it out for this year. And if you receive another reenlistment bonus in the future, I think that's a great place to put some of the money is into your TSP. 

And then number two, don't worry if you make it to 20 years, you are still going to receive a military pension under the Blended Retirement System.

It's a little bit less than the high three system, but it is a guaranteed US military pension. And it will be paid just like the guys who are under High-3. Okay, that's it for today. We'll catch you in the next episode of the Military Money Manual podcast. 

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