2013-08-11

Saving While Deployed: The Savings Deposit Program

In a previous article, I discussed two powerful tools that servicemembers have for retirement preparation: the US Military Pension and the Thrift Savings Plan (TSP).  In this article, I'll cover one more: the Department of Defense Savings Deposit Program (SDP).

The SDP is a zero-risk savings account with a guaranteed 10% interest rate on deposits up to $10,000, only available to members of the uniformed services deployed in designated combat zones and receiving Hostile Fire/Imminent Danger Pay (HFP/IDP). If you're eligible, this is the best deal in town. Contributions Contributions are made by cash, check, or paycheck allotment; no matter how you choose to contribute, monthly contributions can't exceed your current payrate, special pay, and bonuses, minus deductions and allotments. Only the first$10,000 in the account receives interest, so there is no point in contributing more.  You are free to change your contribution rate, in $5 increments, at any time. Contributions are managed through Military MyPay. Earnings Your money earns 10% interest, compounded quarterly. This interest is taxable, even if you are contributing non-taxable combat pay. Duration You may continue contributing to the SDP until your day of departure. Money in the account continues to earn interest for an additional 90 days after deployment ends, so you should leave it in the SDP account to take advantage of this. Withdrawals Optimally, you will wait until 90 days after your deployment ends to withdraw the money. In the case of an emergency, you can withdrawal a full or partial amount if you can demonstrate to your unit commander that the health or welfare of you or one of your dependents is at stake. This flexibility allows you to use the SDP money as a component of your Emergency Fund. So What's The Plan? You'll be hard-pressed to find another savings and investment opportunity that yields a guaranteed 10% — 1% is a more reasonable expectation with an FDIC-insured civilian savings account, and even the stock market rarely goes up 10% in a year (with considerable short-term risk). Contribution to the SDP should take precedence over contribution to accounts with a lesser interest rate, including accelerated payoff of debts with an interest rate less than 10%. If you're choosing between paying more than the minimum on your mortgage at 5.5% or your student loans at 7% or your car loan at 9%, choose the SDP until you hit your maximum monthly contribution limit or the$10k SDP acccount maximum.  If you have debts with an interest rate higher than 10% — for instance, most credit card debt — pay that down first.

Financial windfalls are psychologically dangerous, so make sure you have a plan for your SDP money when you withdraw it 90 days after your deployment ends.  Prioritize paying down debts with an interest rate of 6% or higher, then consider contribution to the Roth IRA and the Thrift Savings Plan.