Retirement is an exciting word, regardless of your career path. However, there is something especially special about retiring from the United States military.
Did you know that only 7.3% of veterans receive retirement benefits? So, if you or your loved one are preparing for this momentous occasion, congratulations! And thank you for your service.
To help you live out your golden years the best way possible, we’ve compiled the top places to help your military retirement go farther. But first, let’s take a look at a brief history of the military retirement plan.
The History of Military Retirement
Although fighting for America goes back before the country was official, military retirement wasn’t offered until the mid-1800s. However, things really changed during WW2.
Pre-WW2 Retirement
Before the Second Great War, retirement benefits for military personnel varied greatly between the branches of service. During this time, it wasn’t uncommon to force retirement on service members under the “up or out policy,” which gave military members the option to climb the ranks into a higher place of position or leave the military altogether.
Around the same time that “up or out” became a common phrase, the US military established the standard calculation for retirement compensation. Members were offered a rate of 2.5% of their base pay multiplied by the number of years they served, with a cap at 75% of the base pay.
This calculation is still standard practice today.
Post WW2 Retirement
After WW2 ended, the military adopted the standard 20-year retirement timeline. Thus, service members become eligible for retirement benefits after 20 years of active duty service.
High-3 System
In 1981, Congress passed the National Defense Authorization Act, which provided some reform to the way service members receive retirement benefits. Rather than calculating benefits based on one’s base pay on their final day of service (also called final pay), benefits would now be based on the average of the highest 36 months of base pay earned within the member’s entire career. This change allowed the US to continue offering retirement benefits at the 20-year mark but without the same financial burden.
The REDUX System
In efforts to further mitigate the financial burden of military retirement benefits, Congress passed the Military Retirement Reform Act of 1986. This reform reduced the 2.5% of base pay multiplier to 2%. Therefore, the new calculation would be 2% of the base pay multiplied by the # of years in service. The effect reduced military benefits for those who served 20 years by about 20%, although those who served at least 30 years would see no difference in pay.
President Clinton repealed the act in 1999, with the option for service members to retire either under the REDUX or the High-3 system.
The Blended Retirement System (BRS)
Thanks to the lengthy War on Terror, the US military experienced rapid growth. While retirement and healthcare costs of service members were rising, there were a number of people that did not reach a full-term retirement and left their service with very little. To help these individuals, lawmakers passed the National Defense Authorization Act for Fiscal Year 2016 and birthed the Blended Retirement System (BRS). The BRS combined aspects of the current military benefit plan with options similar to those offered in the civilian workplace (like a 401K). Service members could opt-in to employer-matched contributions up until December 31, 2018.
The Best Places To Use Your Military Retirement Pay
Ready to get the most out of that hard-earned money? Each state has the right to determine its own tax laws, including how to handle military retirement pay. Some states consider military retirement exempt from taxes, while others do not. Based on those tax laws, here are the best places to stretch your military retirement pay.
States That Don’t Tax Military Retirement Pay
Currently, there are 33 states that won’t tax your retirement benefits.
States With No Income Tax For Anyone
There are 8 US states that don’t collect income taxes in any form: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.
States In Which Your Military Retirement Pay Is Excluded From Income Tax
These states generally utilize income tax but consider your military retirement income exempt: Alabama, Arizona, Arkansas, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, and Wisconsin.
If you choose to buy a home in any of these states, you can make your retirement pay go further.
A Breakdown Of How Other States Tax Your Military Retirement Benefits
Unfortunately, not every state offers the same benefits to military members. Here’s a look at how the other states compare.
States That Partially Tax Military Retirement
These 9 states offer some kind of relief for military retirement plans. See the state-by-state breakdown below for more details: Colorado, Delaware, Idaho, Kentucky, Maryland, New Mexico, Oregon, South Carolina, and West Virginia.
States That Will Fully Tax Your Military Retirement
Finally, here are 7 states that consider your military retirement pay fully taxable: California, Georgia, Montana, Rhode Island, Utah, Vermont, and Virginia.
State-By-State Look At Military Retirement Pay Taxes
Here is an alphabetical breakdown of each state:
- Alabama: Military retirement benefits are exempt from income tax.
- Alaska: Alaska doesn’t utilize an income tax of any kind.
- Arizona: Military retirement benefits are exempt from income tax.
- Arkansas: Military retirement benefits are exempt from income tax.
- California: Military retirement pay is fully taxed.
- Colorado: Taxable exclusions based on age. $20,000 exclusion for ages 55-64 and $24,000 for 65+.
- Connecticut: Military retirement benefits are exempt from income tax.
- Delaware: Taxable exclusions based on age. $2,000 exclusion for those under 60 and $12,500 exclusion for those 60+.
- Florida: Florida doesn’t utilize an income tax of any kind.
- Georgia: Military retirement pay is fully taxed.
- Hawaii: Military retirement benefits are exempt from income tax.
- Idaho: Military retirement benefits are partially taxed. Single taxpayers over 65 can qualify to have up to $34,332 excluded (married taxpayers up to $51,498).
- Illinois: Military retirement benefits are exempt from income tax.
- Indiana: Military retirement benefits are exempt from income tax as of January 1, 2022.
- Iowa: Military retirement benefits are exempt from income tax.
- Kansas: Military retirement benefits are exempt from income tax.
- Kentucky: Military retirement benefits are fully exempt from taxes if you retired before 1997. Anyone retiring after 1997 will be taxed for everything above $41,110.
- Louisiana: Military retirement benefits are exempt from income tax.
- Maine: Military retirement benefits are exempt from income tax.
- Maryland: Military retirement benefits are partially taxed. Members can exclude the first $5,000 up to age 55 and $15,000 for 55+.
- Massachusetts: Military retirement benefits are exempt from income tax.
- Michigan: Military retirement benefits are exempt from income tax.
- Minnesota: Military retirement benefits are exempt from income tax.
- Mississippi: Military retirement benefits are exempt from income tax.
- Missouri: Military retirement benefits are exempt from income tax.
- Montana: Military retirement pay is fully taxed.
- Nebraska: Military retirement benefits are exempt from income tax as of 2022.
- Nevada: Nevada doesn’t utilize an income tax of any kind.
- New Hampshire: New Hampshire doesn’t utilize an income tax of any kind
- New Jersey: Military retirement benefits are exempt from income tax.
- New Mexico: Military retirement benefits may be excluded for low-income families.
- New York: Military retirement benefits are exempt from income tax.
- North Carolina: Military retirement benefits are exempt from income tax.
- North Dakota: Military retirement benefits are exempt from income tax.
- Ohio: Military retirement benefits are exempt from income tax.
- Oklahoma: Military retirement benefits are exempt from income tax up to 75% or 10,000, whichever is greater.
- Oregon: Military retirement benefits are partially taxed based on your retirement date. You can exclude pension earned before October 1, 1991. However, if you retired after that date, your entire pension is fully taxable.
- Pennsylvania: Military retirement benefits are exempt from income tax.
- Rhode Island: Military retirement pay is fully taxed.
- South Carolina: Taxable exclusions based on age. $17,500 exclusion for those under 65 and $30,000 for those 65+.
- South Dakota: South Dakota doesn’t utilize an income tax of any kind.
- Tennessee: Tennessee doesn’t utilize an income tax of any kind.
- Texas: Texas doesn’t utilize an income tax of any kind.
- Utah: Military retirement pay is fully taxed.
- Vermont: Military retirement pay is fully taxed.
- Virginia: Military retirement pay is fully taxed.
- Washington: Washington doesn’t utilize an income tax of any kind.
- Washington DC: Taxable exclusions based on age. $3,000 exclusion for those 62+.
- West Virginia: Service members can exclude the first $2,000 of retirement benefits from taxable income.
- Wisconsin: Military retirement benefits are exempt from income tax.
- Wyoming: Wyoming doesn’t utilize an income tax of any kind.
Your Retirement: Your Choice
Retiring from the military is a great honor that is granted to a small percentage of veterans. Because each state determines its own tax laws, your military retirement take-home pay will vary based on where you live. Take a look at the numbers and see how your state compares. Of course, there’s more to life than money, and you may choose to stay near your loved ones, even if you pay a higher tax on your pension. Regardless of what you decide—congratulations on your retirement! Enjoy your golden years!
You might also be interested in: 9 Ways To Start Saving For Retirement And Watch Your Money Grow
