Military retirement pay is a benefit that retired US Army personnel receive at the time of their retirement. They earn this money after completing 20 years of service.
Many factors affect the total amount you will receive at the time of your retirement, such as your rank, monthly payment, the number of years served, whether you are married, and time in service.
This article covers detailed information about military retirement pay, how to calculate it, the tax rate on retirement pay, and more.
So, without any further ado, let’s get started –
What Will My Military Pension Look Like?
Your retirement pay may go down or up based on many non-military factors, like your follow-on career or relocation. There are numerous military-specific aspects also you must consider. It will help you plan for retirement or post-military finances to handle unexpected issues if they appear.
Some of the aspects you must take into consideration are –
- The retirement pension will differ based on the way you are retiring. If you are retiring under the High-36 program, you will get a different amount than those who retire under the Final pay method, which is for those who joined before or on September 8, 1980, or CBS/REDUX is for those who retire at the 15-year mark with a $30,000 payout.
- The online pension calculator does not consider the TIG, which means 1 year of your lower pay grade.
- If you retire after 20 years, two years’ pay will be more than 18 years on average, and one year’s pay will be more than 16 years on average. The highest 36 months of pay is averaged out and multiplied by the service multiplier, which begins at 50% at 20 years and boosts by 2.5% annually.
What are the Taxes on Military Retirement Pay?
Taxes on military retirement pay can be divided into two parts – Annual Tax Liability and Monthly Withholdings.
Military Retirement Tax Monthly Withholdings
For monthly payments after retirement, the tax withholding is determined by how you fill out the DD Form 2656-Data for Payment of Retired Personnel. It is a form directing DFAS to send the pension after retirement. It calculates the dependent data and tax withholdings like an IRS Form W-4.
In this form, you may request DFAS to withhold at a greater tax rate, which is beneficial if you expect a big salary from a post-military job. Moreover, you can claim it as exemptions and dependents as per the status of your family to minimize tax withholdings. You can use a military retirement pay calculator to determine the monthly tax withholding.
Military Retirement Tax Yearly Liability
The monthly withholding amount is just an approximate of the tax liability. The tax liability depends on the total income, including your family situation, your credibility during the service, and the deductions or credits you are entitled to.
When you file the yearly tax returns, you are calculating the tax liability and reconciling the same with estimated payments, which have been made to the IRS. Your payment due or refund is the final estimation of how much you can get.
Determine the first or two years after retirement, which is a big adjustment, and you find yourself in a distinct tax situation than it should be. You may consult a tax professional if you cannot manage things independently.
State Tax Withholdings
The state taxes differ for every state. 23 states don’t have an income tax or don’t tax retirement pay, whereas more than 20 states offer special considerations on such income or pensions.
Individual consideration matters based on the state you are residing in.
Additional Withholdings from the Military Retirement Pay
There are more withholdings that you may take into account –
- Survivor Benefit Plan
- Tricare Prime
- Tricare Dental
- VGLI
What is VA Disability Compensation in Military Retirement Pay?
When you qualify for CRSC or CRDP, you continue to gain a complete military pension while getting disability compensation from the VA.
In other conditions, when the disability rating is 40% or less, a part of the payment is offset by the VA disability compensation and is withheld from the retirement pay. The total effect is the dollar amount, but a part belongs to DFAS and a portion from the VA. The VA amount is exempted from the tax to give you better earnings by paying fewer taxes.
VA disability ratings create a huge impact on your pay, and it can be complex. It is best to contact DFAS or a Veterans Service Organization, as they can offer you more individualized assistance to get you Veteran benefits.
Does Military Retirement Pay Affect Social Security Benefits?
It does not impact Social Security benefits. You get full Social Security benefits based on your earnings.
Survivors’ benefits affect the benefits payable under the optional Department of Defense Survivors Benefit Plan. Check the Department of Defense or your military retirement advisor for more details.
If there is health care protection from the Department of Veterans Affairs, Tricare, or the CHAMPVA program, the health benefits may alter or end when you are eligible for Medicare. You must contact the VA or an advisor for more details.
Credit for Military Service from 1940 through 1956
For professionals in the military from 1940-1956, attending the service academy exempted them from paying social security taxes. In this case, records are credited with special earnings. They can help them to qualify for Social Security and Medicare or enhance the amount of Social Security benefits to get military discounts.
These special earnings work in a different way by crediting the social security record with $160 per month as your Military Retirement Pay in earnings for serving from 16 September 1940 to 31 December 1956 under the following situations –
- Military members are discharged from service after 90 days or retire because of an injury or disability sustained during service.
- You are still on duty and applied for survivors’ plans, but the veteran died during active duty.
In such situations, you don’t receive credit for special earnings if you receive a federal advantage based on the same years of service. There is an exception – if you were actively serving after 1956, you still receive special earnings for 1951-1956, even if you receive a military retirement based on service.
What Credit Do You Get for Military Service After 1956?
Professionals involved in active duty since 1957 become eligible for extra Social Security wage credits, which are added to their earnings records. Social Security also covers inactive duty service within the Armed Forces.
Special additional earnings for the duration of active duty from 1957-2001 are credited to the Social Security earnings record.
- If the active duty is after 1967, the additional earnings are mentioned on the record.
- If you were an active worker in the military from 1957-1967, additional earnings are added to your record.
No special additional earnings are credited for military service after 2001.
How Does Military Retirement Plan Work?
The military serves a few retirement plans. You have to see the one you have and the way it works. Usually, you must serve for a minimum of 20 years to get full retirement pay.
The various military retirement plans are –
High-36
It suits those who entered the reserved service or active duty between 8th September 1980 and 31st July 1986. Members get retirement pay based on 50% of the average of the highest basic pay of 36 months after 20 years of duty. An additional 2.5% is estimated for each year. You can visit https://militarypay.defense.gov/Calculators/High-3-Calculator/ to calculate your High-36 pay.
Final Pay
The retirement pension applies to military members who started their reserve service or active duty before 8th September 1980.
They are eligible for a retirement pension of 50% of their basic pay after 20 years of service, plus 2.5% for each extra year. You can visit this link https://militarypay.defense.gov/Calculators/Final-Pay-Calculator/ to calculate your final pay.
CSB/REDUX
CSB/REDUX is the only retirement system that includes a re-adjustment to its retired pay amount. At age 62, retired pay is recomputed to what it would have been under High-36.
Also, at age 62, a one-time COLA adjustment applies the cumulative effects of High-36 COLA (CPI) to the new retirement base. Afterward, future COLAs are again set to CPI minus 1 percent.
Visit https://militarypay.defense.gov/Calculators/REDUX-Calculator/ to calculate.
Disability
Military professionals who are medically unfit to continue to serve fall under this plan.
Visit this URL https://militarypay.defense.gov/Calculators/SCAADL-Calculator/ and fill out the necessary details to calculate your disability military pay.
Blend Retirement System
It offers monthly retirement pay after 20 years of service to those who joined the military service in 2018 or later. You can visit https://militarypay.defense.gov/Calculators/Blended-Retirement-System-Standalone-Calculator/ to calculate your military pay.
How Much is the Average Military Pay?
The average military pay is the monthly amount you can expect based on your military status and retirement plan. You can use a military retirement pay calculator to calculate the average pay you receive.
Usually, you can expect about one-half of the base pay on retirement. For example, it is around $30,000 -$35,000 annually for an enlisted person and approximately $60,000-$70,000 for an office.
These estimates are valid for professionals who served full-time duty during their careers. Members that retire from the reserve can expect the retirement pay to be based on tenure, grade, and total points earned for the working periods.
To use the military retirement calculator, you have to enter the information and determine the expectation in terms of retirement pay. Even the Defense Department provides calculators to estimate benefits as per your military plan.
How to use the Final Pay Military Retirement Calculator?
Members who joined the armed forces before 8th September 1980 and continue to serve the forces can use the Final Pay retirement calculator to calculate their future pension amount. Service members joining the service after 8th September 1980 can use the High-3 calculator.
The Final Pay system is the simplest among the various retirement plans. You receive a 2.5% of the final monthly basic pay for each year of service. So, if you leave the job after 40 years of active service, you can expect 100% of your monthly base pay as the retirement pension.
To use the Final Pay calculator, you can visit https://militarypay.defense.gov/Calculators/Final-Pay-Calculator/. Here, enter all the relevant information asked on the High-3 calculator.
It is possible to reset the calculator’s results by making a few adjustments. For example, if you don’t earn a promotion when you delay the retirement year in the higher base pay because of automatic cost-of-living adjustments, it increases retirement pay.
Additional Benefits for Military Retirees
You can benefit from additional services when retiring close to the military base. Retirees and their families gain on-post benefits from commissaries, gas stations, Class VI, gyms, and PX. You can also gain financial aid for eye care and dentist visits based on the Federal Employees Dental and Vision Insurance Program.
After serving in the military, you can get a job in the civilian field, particularly when you retire in the 40s or 50s. The military offers numerous services, like the Transition Assistance Program, that help the members transition to civilian life and plan a new career.
The ongoing support in other areas is also highly valuable. Retired experts have the right to get free legal aid for their entire life. It is a huge benefit for those who want to write their wills, get through support, or understand the contract law for a novel business.
Summing Up
There you have it – a detailed article covering information about military retirement pay.
It is best to start planning your retirement early to get higher pay at the time of your retirement. You can take professional assistance where needed and use a military retirement pay calculator to determine your retirement payments and plan accordingly.
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