Financial Management of VA Disability and Military Retirement

Getting out of the military can be an exciting and daunting time mixed into one. In addition to starting new careers, potentially moving to a new location, and shifting your identity away from service member, there are VA disability compensation, military retirement pay, and tax planning to conquer.

In this episode, Curt Sheldon a former fighter pilot and highly respected financial expert, dives into the essential financial and tax considerations for service members and veterans navigating VA disability compensation and military retirement. Curt explains the key differences between VA disability compensation and military retirement pay, breaking down how programs like Concurrent Retirement and Disability Pay (CRDP) and Combat-Related Special Compensation (CRSC) work together. Plus he sheds light on the little talked about Strickland Decision.

Curtis (Curt) Sheldon is a CERTIFIED FINANCIAL PLANNERTM Practitioner, Enrolled Agent, Accredited Investment Fiduciary® Designee and President of C.L. Sheldon and Company, LLC. He also is the author of Well and Faithfully Discharged: Financial TTP for Military Retirement.

Curt provides comprehensive financial planning, including integration of Military and Veterans Administration benefits, tax planning and preparation, college and retirement plans. He specializes in working with transitioning Senior Military Officers.

Key Differences Between VA Disability and Military Retirement

The primary distinction between VA disability compensation and military retirement pay lies in taxability:

VA Disability Compensation

  1. Tax-Free: VA disability benefits are not subject to federal or state income taxes.
  2. Deductions Impact: While it doesn’t appear on your federal tax return, it can influence deductions, such as sales tax deductions, when itemizing.

Military Retirement Pay

  1. Taxable: Military pensions, whether earned through longevity or medical retirement, are taxable at the federal level, with some states offering exemptions.

How VA Disability and Military Retirement Work Together

Understanding how these benefits interact is crucial.

Offset Rules

  • For retirees receiving both benefits, every dollar of VA disability compensation typically reduces military retirement pay by one dollar.
  • Exception: Retirees with a VA disability rating of 50% or higher qualify for Concurrent Retirement and Disability Pay (CRDP), allowing them to receive both benefits without offset.
  • Combat-Related Special Compensation (CRSC): CRSC is tax-free and compensates retirees for combat-related disabilities. However, this benefit applies only to the percentage of your disability deemed combat-related.
  • Choosing between CRDP and CRSC requires careful analysis to determine the best financial outcome.

Related podcast: Gaining Actionable Intelligence on Veteran Disability and Other Benefits

The Strickland Decision: A Lesser-Known Tax Consideration

One critical yet under-discussed topic is the Strickland Decision. It allows retirees rated less than 50% disabled to reduce taxable retirement pay by the amount of VA disability compensation they should have received while their claim was being processed.

  • This deduction applies only for the delay period and requires citing Internal Revenue Ruling 78-161 when filing taxes.
  • Retirees may need professional assistance to correctly apply this ruling, as tax software like TurboTax often doesn’t accommodate it.

Financial Planning Tips for Transitioning Service Members

Prepare for Tax Changes

  • Dual income streams (retirement pay + civilian job income) can lead to under-withholding and unexpected tax bills.
  • Adjust your W-4 form or use the IRS’s W-4 Calculator to avoid surprises.

Build a Financial Buffer

  • If you’re medically retiring or transitioning, create a cash reserve to cover 6-12 months of expenses. This gives you flexibility during the transition period.

Understand Benefit Limits

  • Contributions to Roth IRAs may be restricted if your combined income exceeds IRS limits.
  • Consider options like backdoor Roth contributions to maximize tax-advantaged savings.

Survivor Benefits Planning

  • Electing the Survivor Benefit Plan (SBP) ensures a portion of your retirement pay continues to support your spouse or designated beneficiary.
  • Dependency and Indemnity Compensation (DIC) may also be available to survivors under specific conditions related to VA disability.

Related content: 4 Effective Ways Service Members Can Use the TSP F Fund

Misconceptions to Avoid

  • Tax-Free Retirement Pay: Some rumors suggest that high disability ratings make military retirement pay tax-free. This is false and has been debunked by court cases, including Valentine v. Commissioner.
  • Spending Disability Pay in Advance: Don’t rely on VA disability ratings until they are officially awarded, as the process can take months and outcomes vary.

Wrapping Up VA Disability and Military Retirement

Transitioning from the military requires careful planning, especially when it comes to VA disability compensation and military retirement pay. With the right knowledge and tools, service members can optimize their benefits, minimize tax liabilities, and create a stable financial future.


Resources From VA Disability and Military Retirement Episode

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