Congratulations! You have reached an important milestone in your military journey — the point where your spouse is approaching eligibility for Continuation Pay.
Continuation Pay Is Part of the Military's Blended Retirement System (BRS)
Use this webpage to help you reassess your career goals and make important personal financial decisions as they pertain to Continuation Pay.
Financial Planning Considerations
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Continuation Pay (CP) is part of the military’s Blended Retirement System (BRS). It is a one-time, cash bonus paid to service members who have completed at least eight but not more than 12 years of service.
The objective of CP is to offer midcareer service members a financial incentive to remain in their service in exchange for committing to at least four more years. Time of service is calculated from the service member’s pay entry base date (PEBD).
How much is CP? It depends. Each service establishes its own criteria for when a service member is eligible to receive CP and the amount they will receive. Factors, such as a critical skill set, training experience, or needs of the service may result in a higher multiplier for CP. The amount can range from 2.5 to 13 times basic monthly pay. Rates for 2019 can be found here. Please note, CP is its own distinct category and does not impact other types of special pay.
The goal of the BRS is to provide retirement benefit options to more service members. Under the legacy system, only members who served a full 20 years were eligible for a retirement pension benefit. The BRS encourages members to save for retirement by providing a match up to 5% in the Thrift Savings Plan (TSP), like a 401(k) in the civilian world.
As a component of the BRS, Continuation Pay is another part of the benefits package offered to the service member that may be similar to a retention bonus awarded to someone in the civilian sector. The BRS helps the military be a more competitive employer.
Financial Planning Considerations
A cash bonus can have a very positive impact on your family’s financial security. Here are some tips to help your family plan and make the most of this benefit.
There are many good ways to use your Continuation Pay. The key is first setting goals for this money and creating a plan to reach those goals. Before you do anything with your CP, check your budget to make sure it is balanced and that you are not overspending, or taking on too much debt. Are your overall savings goals on track? Visit our resource, Money Ready 101: Create a Budget, for guidance. Evaluate your current income and expenses. Are there areas where you could save more and spend less? This process will help determine how best to use CP.
Do you have credit card debt, a student loan, car payment, or other loan? Consider using CP to get rid of debt. We recommend two methods: the snowball method and the avalanche method. In the snowball method, you rank your debts from smallest balance to largest balance. Pay off the smallest debt first. When it is paid off, apply those resources to the next highest balance until you are debt free. The second method is the avalanche method. Watch a few short videos to learn six steps to pay off debt. Click here and scroll down to Managing Debt 101.
Unexpected events happen to all of us, but we can be prepared financially. Experts recommend you have three to six months of living expenses saved in a readily available account like a money market or savings account. Read more about emergency funds in this blog.
What percentage is your spouse currently putting in? Contribute at least 5% to take full advantage of the matching contribution. The IRS limits how much a participant and employer can contribute to retirement accounts, so be careful not to overfund the TSP early in the year, or you could miss out on matching contributions. The IRS limits participant contributions (called the elective deferral limit) to $19,500 for 2020 with a $6,500 catch-up provision if you are over the age of 50. The limit for total contributions, which includes employer matching contributions, is $57,000. Visit the TSP website for more information.
Continuation Pay is considered earned income and is taxable at ordinary income tax rates. It can be taken in one lump or in equal installments over a period of two to four years. It may be smart to take it over a few years if you are concerned that the bonus could push you into a higher tax bracket. Each person’s situation is unique, so discuss this with a tax professional.
You can direct Continuation Pay to your Traditional or Roth Individual Retirement Account (IRA). You are limited to contributing $6,000 for 2020 with an additional $1,000 catch-up if you are over 50. Remember, a contribution can be made to a spouse’s IRA if you file a joint tax return. There are phase-out limits for IRA contributions. Check with your installation’s personal financial counselor for more information.
You may be eligible for a tax deduction if you donate your Continuation Pay. Be sure to factor in all of your goals as you consider this option.
Recognize and protect your family from misleading consumer practices and identity theft. Scammers and unscrupulous businesses prey upon consumers, including service members with large sums of money to invest. Be careful. Protect your family’s personal information and do your homework before investing or doing business with any person or organization.
- Research financial investors and businesses at https://brokercheck.finra.org/.
- For more information on identity theft, visit the Federal Trade Commission (FTC) at www.consumer.gov or call 1-877-ID-Theft.
- You can also visit Military Consumer (MC), managed by the FTC, at http://www.militaryconsumer.gov.
Important note: What happens if your spouse receives Continuation Pay and does not serve the required years of service? All or a portion of CP may need to be repaid depending on why the commitment was not fulfilled. For a quick reference guide for Continuation Pay, download this handout.
Reserve and National Guard service members are eligible for Continuation Pay. The bonus amount can be from 0.5 to six times monthly basic pay, and the multiplier used is at the discretion of their service.
In summary, plan for the best way to use CP. Every family’s situation is unique with different needs and goals. This one-time cash bonus can help you meet your financial goals now and in the future.
Accredited and trusted by the military community, here are some excellent resources to get you started:
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