If there are any members here who could help me out with some tax planning and investing, with specific experience for former military, I could really use some unbiased advice. All of my calls to USAA remind me that they are not allowed to make tax advice, and inevitably they seem to just want me to buy into another one of their products. I have enjoyed banking with USAA, but I need to know what is the right route for my particular situation.

I'm one of the guys that got a pink-slip in the recent round of cuts (which was ironic, because I already had my papers in to leave the service, but anyway). The obvious upside of being "fired" rather than "quitting" was the (as of now still pending) separation pay. The formula for calculating that is 10% of base pay ($5415), x 12 (months), x years service (for me, 7). That works out to around $45k, gross. I am anticipating losing 20-25% to taxes right away.

I've got about $89k in TSP, $40k in a regular mutual fund, and $39k in a Roth IRA. My service concludes at the end of August, so I have a pay check for 8 months of CY14...and I have no idea when the separation pay is going to drop, so no idea yet of the effect on my income for tax purposes.

I was also recently accepted to grad school (starting early August), which will run about $47k per year in tuition, plus living expenses. I regard my IRA and TSP as inviolable, so I had planned to live off the regular mutual fund ($40k), and a portion of the separation pay while I get through school (I may work if necessary, but I am just trying to succeed academically first).

With 7 years, I will be 100% Post 9/11 eligible, but only after the end of August, which is exactly the 7 year mark, (3 years of my 7 total AFS counted toward full Post-9/11). SO, I will be getting the max $19k (private school) from Post-9/11, and $10k each from the VA and the school under the Yellow Ribbon Program (once I am 100% eligible...I think I've got it worked out with the school, and the VA reps tell me it is no problem to update your status and get the YRP funds retroactively).

Now, that still leaves me with a $8k annual shortfall on tuition, and I still need to eat. Thank goodness for that separation pay.

~$36k
-$16k (2 year tuition gap)
-$11k (2 year Roth contributions)
-$8k (living expenses, brings total to $48k for that purpose)
$1k (hookers and blow)

So here is my main question:

I need to get that $40k OUT of the mutual fund, and into something else that I can pull cash from at the rate of about $2k a month, in order to live while I get through school.

Similarly, once that separation pay shows up, I need to park it somewhere with the same access...because it is going to go out rapidly to meet the above mentioned expenses.

I was considering a 529 College Savings Plan, because there is a specific IRS exemption for those receiving veteran's educational benefits, that the distributions from the CSP DO NOT have to be strictly for educational purposes (it is a broad category anyway, but it definitely makes it easier for me).

I was looking at the Georgia 529, which has very high marks, and several options based on the amount of time before school (which in my case though, is now). Their "you're in school now" options are a money market and what sounds basically like an annuity--in other words, very low risk, but also very low return. My thinking is that it is more important to have ready access to the cash, and for that cash to come from a vehicle that has the least (or no) tax implications. I need the money to survive a slow draw down over two years, so I don't expect it to work miracles as it just gets whittled away.

Am I looking at this situation correctly? What is the least tax liability option for me, while still protecting my principle? Does it even make sense to move out of the mutual fund, and take the tax hit all at once? (I don't know my cost basis for certain, I will check on that.)

Any help you guys could offer would be appreciated.

Why are you attending such an expensive school? 47k a year tuition ? That is crazy. I don't know what you are going to school for but I doubt you will see a return on that investment.

Quite honestly given all the numbers you posted there is no way school that costs that much fits. Getting more education is a good thing but breaking the bank in the process is not. There are numerous studies showing that spending more on college doesn't translate into higher earnings.

Please for your sake reconsider your plans.

As to your question I don't really know but taxes seem to be least of your concerns at this point.

Top 25 MBA program, private school. The $40k and the separation package are for the express purpose of living and paying for school.

(And let's recall from the OP, that $39k of the $47k in tuition is covered, as well as my housing for 9 months of the year and a book allowance, courtesy Post 9/11 GIB. My out of pocket for tuition only is $16k, it would probably cost me as much to live anyplace else.)

Next question?

After a little research it seems that he 529 offers little tax advantages for you. Only the earnings from the 529 are exempt from state and federal taxes, and considering the options you listed are money market/annuity, the only benefit would be a $2,000 deduction on your state income taxes each year you make contributions.

What is your mutual fund invested into? If it is invested heavily in stocks, you face the risk of a market pull back that could knock a significant chunk off the value.

Your tax burden is going to be very low for 2015 if you are only relying on post 9/11 and money in the bank. BAH and the education benefits are not taxed to my knowledge.

I am not a tax expert so I can't give you any great tips or advice, but the best option may just be a normal money market account that allows you to write checks.

Look into putting your severance pay into your non taxed (really taxed upon withdrawl) TSP account. Before you do that, make sure there are no penalties for transferring it to a ROTH. You will probably pay income taxes on that money when you transfer it. If you wait until you are a student, and your income is low, the taxes will probably be added to your income the year you transfer/withdraw from the retirement account. This is just a guess, and something I'd ask an accountant or tax professional about, and read the applicable tax code if I were you. There may not be a way to transfer from a non taxed 401 to a Roth without penalties, or the IRS may add the tax liability to the year the money was contributed to the account. I honestly don't know.

Roth withdrawals do not incur any penalties, taxes (it's already been taxed) or fees beyond normal trading fees (buying/selling mutual funds or stocks) on the principle you originally invested. So to sum it up, you can withdraw the money you put into a ROTH, and not pay any additional taxes or early withdrawl fees. I withdrew some Roth funds this year to buy a house. Lots of people use Roths as an emergency fund, because withdrawls are so easy, and you still earn income and stay invested, vs a worthless money market or savings account with minimal return. Do the math, and use the Roth money first (Contributions only). If you can get through school by using your Roth contributions, that is the easiest way. If you are looking to minimize tax liability this year, the easiest way to do that is to add as much as possible to your tax deferred TSP.

It seems you have no income during your education beyond the GI bill. Are you considering part time work? Nat'l Guard? Reserves? A little income is way better than none. With 7 years of service, I'm guessing you would get $350-$500 a month just for a drill, and maybe get some tuition assistance as well. Worth considering/looking into if you haven't already. It's pretty easy to keep a single part time job of 20-30 hours, with a flexible schedule, while getting a 4 year degree. I always worked (usually 2 sometimes 3) part time jobs during college. If you don't want to work or drill, you can usually take a few extra credits a semester, and graduate a semester (maybe even two) early (I graduated in 3.5 years while working).

Good luck

Sorry, I thought distributions from a 529 were tax free (normally only when for educational purposes, for vets there is the above mentioned exemption).

The fund source for the 529 would be the mutual fund. Cash out of one, roll into the other. The mutual fund is heavily into international stocks, that vulnerability is why I want to move it.

I agree, 2015 will be a lot easier on taxes. Aside from that though, I can't control when the sep pay shows up....I could take the taxes this year or next, but I was kinda hoping not to take those and the taxes that have to paid out of dividends in the mutual fund in the same year.

Shift some funds around into safer investments within the ROTH or TSP. I think Non Roth withdraws made the same year you are making a good income, and getting a severance, is signing up for an IRS kick to the nuts. Putting it into a savings or money market that earns next to nothing is another self induced kick to the nuts.  

It might make you "feel" better to look at an FDIC account with all of the education money you need in it, before you start class, but I think that approach will cost you dearly in near term taxes, and potential long term interest earnings.

I've checked the TSP web site, they don't allow contributions to their Roth plans from outside Roth vehicles. I don't think there is a way to dump cash in there either, it has to come from an eligible plan, and then, it could only go into their traditional IRA pool.source here

I will be working 2 years toward an MBA. I will definitely consider working, but I want to see how school goes first. The sep pay is contingent upon a 3 year IRR commitment. I elected not to find a drilling unit for the same reasons as for not working. Whether during school or after I can always sign up with somebody and drill in the next 3 years (I am also likely to move for whatever work I find after school, so I'd be changing units anyway). That might count as a break in service, but I'm not sure....I've honestly had enough, where the idea of having one foot in and one foot out makes me a little queasy.

I can't take a loan from my TSP since I won't be in a pay status, though I agree 100% that I need to delay taxable withdrawals until my income drops to zero next year. I also agree that savings or MM is not making my money work for me....I don't place that much emphasis on the security (if it tanked, I could work), but the ease of access is necessary.

If I am only in school for two years, will I really be giving up that much in returns? How long have we gone without a 10% market correction? Aren't we due for one?

Can you put some of your military severance into the TSP traditional, then transfer it to a Roth (and the tax liability) next year without penalty? I think that is the question. If the answer is yes, then you can reduce some of this year's tax liability doing that. Even if you can't put your severance in there, you could increase your contributions from your  your last few paychecks from the military to reduce some of this year's tax liability.

There are plenty of other places (pretty much every bank) that offer Roths. I bank with USAA, so that's who I went with for my Roth. That's something I would consider strongly, since you are leaving the TSP eligible club anyway.

I get your reasons for not wanting to drill. You might check the states tuition assistance program. We all have a price, and it might be worth it to you. Your approach of focusing on school first, and then income is a smart move. Any way to graduate a semester early from the program? From what you've already explained, I'm guessing there's not.

I see we are on the same page about taxes already. As far as ease of access, have you done a Roth withdrawl yet? Roth IRA withdrawls are very easy, at least through USAA they are. It takes 3-5 business days to sell the stock or mutual fund, then it's like a regular bank transfer after that (instantaneous transfer to another USAA checking or savings account).

Withdrawing from the TSP traditional might be a little more time consuming and PITA process, I don't know, but you don't want to start that until January '15 anyway.

My point still stands. I assume 39k of tuition anywhere will be covered? Can you not find a school that costs 16k less so you could go for free?

I am a business owner and I hire employees. I know lots of other business owners. I don't know anyone that really cares where someone went to school or if it was public or private. What we care about is what the person knows and what they can do. I have seen people from these top schools and I did not really see any advantage they had over other people. Many times they are spoiled kids from rich families and they actually do a worse job than someone who busted their butt at a state school.  If you wanted to go into politics or maybe being an executive in a huge company then pedigree would matter but for most jobs out there nobody cares.

Do what you want I just am a firm believer that a lot of colleges are way overpriced and the majority of people will not see a return on that investment.

Maybe I missed it, but are you considering in that you'll be getting E5 with dependents BAH for the zip code where you'll be going to school (except for online students)? Find somewhere to live that costs considerably less than that amount. Roommates, RV parks, parents basement, etc.  You'll also receive 1000/year for books. Buy old edition books off of Amazon. They're the same thing, just some chapters rearranged so they can keep charging you a premium for the new edition. Or check out the book at the library and photocopy it. Pocket the difference. Those 2 things should make up your shortfall right there.

Do whatever you got to do to keep your savings in the mutual fund or stocks or whatever, that will be a very nice down payment on a house once you graduate. Or as an emergency fund.

School isn't that damn hard where you can't work PT.I had huge success joining the reserves during school. I did all the Navy funerals in the area for drill pay, sometimes every day (depends on location, where I was in school in a high population center, we had way more funerals than up here in no-mans land). Extremely rewarding work for decent pay for the hours put in, and perfect for college students if you can schedule your classes early morning or later in afternoon or knock them all out in 1 or 2 days/week. Drill weekends are easy, and for the most part you can study and work on school stuff most of the day. I also had offers to work at the school for some sort of work/study thing. Students would just "supervise" the computer lab for minimum wage while getting research done. Easy money, even if it's not a lot. Or get a PT job at some food place waiting tables, and live out your fantasy of banging college student waitresses while earning rent/gas money. Every vet should do this for awhile after separation to readjust to civilian life.

I easily made it with much less than you, on the old GI Bill (SUCKED) for 2 years while paying out-of-state tuition, and then life got really simple under the post 9/11 when it became available.

And for fucks sake, find a cheaper school! A good flagship state school will be half that cost. It'll probably get you more bonus points anyways if the person hiring you after graduation is alumni or college football fan.

As far as any other tax advise, I don't know. It just sounds like you're trying to cheat the system to keep an extra couple hundred bucks. You'll be getting enough continuing education tax breaks the over next few years as a full time student, so I wouldn't worry about it too much.

You are going to lose WAY more than 25% of that severance pay if it is paid lump-sum. You may, however, get a bunch back at tax time.

IN terms of moving money out of your long term vehicles - that is very disadvantageous. While I normally abhor student loans, if you are headed to a top flight MBA program, graduating with a few K in debt won't hurt you.

-shooter

Have you factored in your monthly BAH?

Hi all, sorry for the delay, got distracted.

Rooster, I won't be eligible to make a withdrawal from TSP either, as I won't be on a pay status, and it comes due after 90 days once I ETS...I am not sure that is an appropriate avenue for me. I will look into the IRA transfer, to see what advantages it may have.

The real PITA is that tuition comes due well before my sep pay will show up.

Doodlebug, I don't disagree that with private schools that is oftentimes the case, but this is where I got accepted. I was a public school kid and went to an in-state school for undergrad. I am trying to go to school for as near to free as I can get. I was going to incur living expenses no matter where I went, so I don't think $16k out of pocket is un-survivable, especially when I have no other debts. You are absolutely correct that it remains to be seen whether it is worth all that money or not. I think a lot of that is contingent upon the effort I am willing to put in.

RRANRA, your points are well taken; if school eases up, then I don't have a problem finding part time work.

I didn't mention it earlier because I didn't want to complicate the issue for guys not completely familiar with vets benefits, but yes, I'll be getting the BAH and book allowance. I am already splitting rent, and plan to bike to school as often as possible (to save on parking, gas, and maintenance).

I called the GA 529 plan hotline, but I am no longer certain I could use it like I planned. For simplicity's sake, I may just move the MF into a regular old savings account....I don't have the option to wait until January, because tuition comes due (mid-August), and my sep pay won't show up until after ETS (late August).

So I will eventually get reimbursed, but I don't see a way to avoid (or at least defer) the tax hit. And yes, I would like to avoid the taxes, because I'm not asking how to do anything that isn't legal. Rich people hire professionals to avoid taxes in creative but legal ways every day, so please don't begrudge me the few extra bucks for ramen and beer.