Financial Frontlines®

The Roth Thrift Savings Plan Option will soon be available. Most agencies and services can begin accepting elections for Roth (after-tax) contributions on or about May 07, 2012. Your question might be “should I invest in Roth?” The answer may come down to whether you want to pay Uncle Sam now, or pay him later.

There are two distinct types of contributory retirement savings in 401(k) type plans, like the TSP, or IRAs – traditional or Roth. Traditional plans allow you to delay the payment of income taxes (payroll taxes – FICA and Medicare – must still be paid) on your contribution to a qualified retirement account. Uncle Sam provides an incentive to save for retirement by allowing us to postpone the tax due on those funds until we receive them. The funds are deposited into your account before federal and state, if applicable, income taxes are imposed. The funds we contributed, plus the employer match, if any, and any growth within the fund will then be taxed at our marginal tax rate upon receipt.

We may begin a penalty-free withdrawal from these tax-advantaged accounts at age 59.5. Minimum distributions are required beginning at age 70.5. This tax deferment is significant. If you believe that your tax rate in retirement will be lower than it is now, then a traditional TSP may be for you. However, many military folks will be in higher tax brackets once they lose their tax exempt allowances and their ability to claim legal residence in an income tax exempt state. Making a Roth contribution while still serving may be a smart thing to do.

No one can predict with certainty what tax rates will do in the future, of course. Let’s just agree that there is pressure to increase taxes, and that pressure is unlikely to dissipate with so many Baby Boomers entering their retirement years. Uncle is going to want to collect the taxes he’s postponed for so long.

Our other choice is the “pay Uncle Sam now” election, or Roth. There is no immediate tax break with Roth TSP contributions. The break comes later. Since all contributions to a Roth TSP are made after-tax, later withdrawals, including all growth, are tax-exempt.

Many financial planners encourage their clients to set up a stream of taxable and tax-free dollars to use in retirement. Roth contributions are a great way to do this. If you’re currently serving military, you know that you already receive a significant tax break through your allowances, primarily BAH and BAS. Can you afford to pass up another break now to receive one later? Many of you can.

What other ways can you use to receive tax-free dollars in retirement? Roth IRAs are another investment you can make. But Roth IRA contributions begin to phase out for singles making $110,000 and for couples at $173,000, and are proscribed at $125,000 and $183,000 Modified Adjusted Gross Income, respectively. Sounds like a lot of money, but with a military pay and a working spouse, or military retired pay and a good second job, many retirees bump up against those limits. The Roth TSP or 401(k) contributions have no income limits.

A few cautions. Employer matches must be applied to a traditional 401(k). That’s not an issue for military folks, but someday it might be. It is a big part of the equation when you’re in a job with an employee match – those funds can’t go into a Roth 401(k).

If you open a Roth, or split your contributions between a traditional and Roth TSP, the annual contribution limits still apply ($17,000 in 2012, plus a $5,500 catch-up contribution if you’re age 50 or more). You don’t get another bite at the apple just because you opened another account. Any employer match you might receive does not count toward these contribution limits.

Uncle Sam has given you a choice. You can pay him now or later, so do your homework and make your decision.

Detailed information on the Roth TSP is available on the TSP website.

Mention VA retroactive awards for disability compensation and the Strickland decision will make its way into the conversation. The Strickland court decision provides tax-free status to past taxable military retired pay due to the award of retroactive VA disability compensation.

We get numerous calls on this issue, and based on my discussions, there are some misunderstandings we need to clear up.  The most common is that the Strickland decision will convert taxable retired pay…amounts above and beyond the tax-free status provided by VA compensation and Combat-Related Special Compensation (CRSC)…to tax-free status.

First, let me start the discussion about members who do not qualify for concurrent receipt. You fall in two camps: 1) retirees with at least 20 years of service, are VA rated at 40% or less and whose disabilities are not combat-related, or, 2) retirees less than 20 years, with any VA rating but your disabilities are not combat-related. You represent two-thirds of the retiree/VA rated population. Bad news is you don’t qualify for concurrent receipt; good news is the Strickland decision probably does you the most good.

By the way, your group is a priority for MOAA as we fight for your concurrent receipt benefits up on the Hill.

We all know that military retired pay is taxable income and VA disability compensation is tax-free. When you qualify for VA disability compensation, you have to agree to waive your retired pay by the same amount you receive in VA compensation; aka the VA Waiver. With the VA Waiver, you trade away your taxable retired pay to receive tax-free VA compensation. This is the foundation of whether you qualify to file amended tax returns to receive a tax refund.

Consider your retired pay situation had your retired pay been docked by the VA Waiver during the VA retro award period. The VA Waiver amount would have docked your taxable pay and you wouldn’t have paid taxes on the amount of income that was docked. You can file an amended tax return for those years to seek a refund for the taxes you paid on the income you wouldn’t have received.

You have to determine what the VA Waiver amount would have been in those years by backing-up the Cost Of Living Adjustments (COLAs) and/or VA rating changes.

Next, for those of you who are eligible for concurrent receipt in the form of Concurrent Retirement and Disability Pay (CRDP) or CRSC, the retroactive tax-free status of retired pay is a little more complex.

Retirees eligible for concurrent receipt are: 1) retirees with 20 or more years of service, VA rating of 50% or greater, or, 2) retirees regardless of years of service and regardless of your VA rating whose disabilities are combat-related.

For you, your past retired pay, after the application of the VA retro award of disability compensation, may or may not have been impacted by a VA Waiver. As discussed above, this is all about the amount of tax you paid on income you wouldn’t have paid if the VA Waiver had applied in the past.

CRDP restores your retired pay by getting rid of the VA Waiver. In restoring your retired pay, the restored portion of pay is taxable; like regular retired pay since CRDP is regular retired pay. CRDP is being phased-in over the years. By 2014, there won’t be a VA Waiver for you CRDP eligibles**. During the phase-in, your VA Waiver amount is getting smaller each year. To determine what your tax refund would be for past years, you have to know what your actual VA Waiver amount was after the application of CRDP in those past years. In other words, you can’t claim a refund for the full amount of your VA compensation because your past pay wasn’t docked for the full amount of the VA compensation due to CRDP.

CRSC impacts retirees in a completely different way than the CRDP crowd. CRSC reimburses you for all or some of the amount of your VA Waiver. All CRSC recipients have a VA Waiver in their retired pay for the full amount of their VA compensation. Because the CRSC rating and payment is based only on the combat-related nature of your disabilities and not total disabilities as is a VA rating, it is possible that your CRSC amount is less than your VA compensation.

Because CRSC is tax-free and the amount will not be more than the VA Waiver amount, the amount of CRSC is not relevant to the amended tax return affected by the retro payment of VA compensation. CRSC payees will use the VA Waiver amount to determine their tax refund status over the retro period. It is the VA Waiver amount that docks the retired pay thereby making the past retired pay income waived by the VA Waiver amount eligible for tax-free status. Your situation is similar to the folks above who aren’t qualified for concurrent receipt.

Now that you know what you are looking for in past pays, I’ll provide a few details on how to file amended tax returns.

To change past taxable retired pay into tax-free pay, you have to file a separate amended tax return (IRS Form 1040X) for each tax filing year in involved. You are filing to get a tax refund for the income you paid taxes on that should have been tax-free had the VA Waiver amount been applied during the retro period.

Some details about how to apply for the tax refund were discussed in a recent article on this blog by Curt Sheldon, one of our guest authors. See Curt’s article for his practical insights at http://moaablogs.org/financial/2012/02/va-disability-benefits-retirement-pay-and-your-taxes/.

The tax code limits the time period to file amended tax returns due to the award of retroactive VA compensation to 4 years from the time of filing the taxes being amended. So a tax filing from 2008 can be amended in 2012. See IRS Publication 525 page 17 for more details (http://www.irs.gov/pub/irs-pdf/p525.pdf).

As Curt states in his article, the burden is on you to provide the background documents to make your case when you file the amended returns. Be sure to put yourself in the shoes of the IRS official reviewing your case. Assume you know nothing about VA disability compensation, military retired pay, or retroactive VA awards. Now what paperwork would you need to convince you the amended tax return is spot on?

Best wishes. When all else fails, consult an expert tax specialist.

** Technically there could be a VA Waiver amount if your retirement pay multiplier used a greater Service disability rating rather than your years of service retired pay multiplier.

The deadline for eligible service members, veterans and their beneficiaries to apply for Retroactive Stop Loss Special Pay (RSLSP) has been extended to Oct. 21, 2012, providing those eligible more time to apply for the pay under the program guidelines.

“Even with extensive outreach efforts, and tremendous support from the President, Congress, the VA, veteran and military service organizations, and friends and family around the world, some qualified individuals have not yet applied,” said Juliet Beyler, acting director of Officer and Enlisted Personnel Management. “We highly encourage anyone who may be eligible to apply for this pay; you have earned it.”

RSLSP was established to compensate for the hardships military members encountered when their service was involuntarily extended under Stop Loss authority between Sept. 11, 2001, and Sept. 30, 2009. Eligible members or their beneficiaries may submit a claim to their respective military service in order to receive the benefit of $500 for each full or partial month served in a Stop Loss status.

When RSLSP began on Oct. 21, 2009, the services estimated 145,000 service members, veterans and beneficiaries were eligible for this benefit. Because the majority of those eligible had separated from the military, the services have engaged in extensive and persistent outreach efforts, to include multiple direct mailings, public service announcements, and continuous engagements with military and veteran service organizations, social networks and media outlets.

To apply for the pay, or for more information on RSLSP, including submission requirements and service-specific links, go to http://www.defense.gov/stoploss.

One of our MOAA members received an unwelcome surprise recently when he tried to enter a Navy facility in Tennessee. His military retiree ID card was confiscated!

His diligent follow-up led him to request MOAA assistance, and it turns out that what happened to him could affect many of our members.

If you have a retiree ID card that was manually prepared (on a typewriter), it’s time to go to the nearest RAPIDS facility (Real-Time Automated Personnel Identification System) to get a new card. How can you tell if you have a manually prepared ID card?

• If your picture was cut from photographic paper and pasted on the card before lamination, leaving a raised photo on the card;
• If there are no bar codes on the reverse; or
• If the card stock is a version prior to Oct 93 (printed at lower left on reverse)

then you have a manually prepared card, and should get a new one. In these days of heightened security, the manually prepared card just can’t meet today’s tighter standards.

The military stopped issuing manually prepared ID cards in 1993. A base commander has discretion to bar access to a military facility of any retirees with these manually prepared cards. If you attempt to access that facility, your card may be confiscated. It may be returned to you, but the card will be invalidated, usually with a hole punched through the Social Security Number (SSN). You will need to get a new ID issued. Spouses aren’t affected by this issue, because until recently, their ID cards needed to be renewed every four years.

The modern ID card has some distinct advantages. It will mask your SSN for one thing. It will also enable electronic scanning at military facilities for another, making your identification quicker and less prone to errors.

You can make an appointment at a RAPIDS facility to get a new card issued to you. Visit http://www.dmdc.osd.mil/rsl/appj/site?execution=e1s1 or type RAPIDS Site Locator into your internet search engine. Once on the RAPIDS page, enter your zip code and RAPIDS will serve up the ID card facilities in your geographic area. Call ahead to the ID Card issuing facility for any special requirements. Remember that you will need two forms of ID to receive a new card. Your old ID and a passport or state-issued driver’s license is usually sufficient.

Plan ahead, and don’t have your next base visit interrupted before it begins.

Tricare to Offer Credit Monitoring in Wake of Data Theft

While Tricare Management Activity maintains that there is no evidence that sensitive personal patient information stolen in September has been accessed by a third party, the insurer now says it will take “proactive measures” to ensure that patients are protected.

On Sept. 12, an employee of Tricare contactor Science Applications International Corp. reported the theft of computer tapes containing personal health information of 4.9 million Texas patients. While the tapes contain no financial data, they do include patients’ names, Social Security numbers, addresses, phone numbers and personal health data.
TMA, which has insisted that information on the tapes would be difficult to access, has been criticized for not providing free credit monitoring in the wake of the theft.

But on Nov. 4, TMA announced that it has directed SAIC to provide one year of credit monitoring and restoration services to “patients who express concern about their credit.”

“We take this incident very seriously,” said Brig. Gen, W. Bryan Gamble, TMA deputy director. “The risk to our patients is low, but the Department of Defense is taking steps to keep affected patients informed and protected.” Gamble said the measures “exceed the industry standard to protect against the risk of identity theft.”

TMA said concerned individuals can contact the SAIC Incident Response Call Center on weekdays from 9 a.m. to 6 p.m. ET at (855) 366-0140 (toll free) in the United States, and (952) 556-8312 (collect) internationally.