A lot of transitioning service members compare a civilian job offer to their base pay and feel good about the number. Then the first paycheck arrives, and it is smaller than expected.
Nothing went wrong. Civilian pay simply works differently from military pay, and the differences are easy to miss when you are focused on everything else that comes with leaving the service. Here is what changes.
Your allowances were tax-free. Your salary is not.
While you served, a meaningful part of your compensation likely came as allowances. According to IRS Publication 3, the Basic Allowance for Housing (BAH) and the Basic Allowance for Subsistence (BAS) are excluded from gross income — they were not taxed.
A civilian salary is taxed in full. So when you compare offers, compare them to your total military compensation, with the tax advantage of those allowances in mind — not to base pay alone. A salary that looks higher on paper can mean less money in hand.
Deductions you did not have before
Expect to see new lines on your pay stub:
- Health insurance premiums for you and your family, unless you are covered another way
- Dental and vision premiums
- Retirement contributions to a 401(k) or similar plan
- State income tax, depending on where you live and work
- Life insurance, disability insurance, and other benefits you elect
Some of these are good deductions. They are still deductions, and they need to be in your budget.
Get your withholding right
When you start a job, you fill out a Form W-4, which tells your employer how much federal tax to withhold. The IRS recommends checking your withholding whenever you start a new job or have a major income change.
Your first year out can be complicated: military pay for part of the year, civilian pay for the rest, maybe a gap in between, maybe VA compensation. The free IRS Tax Withholding Estimator helps you set withholding so you are not surprised by a tax bill in April.
Pay frequency may change
Military pay arrives twice a month on a familiar schedule. A civilian employer may pay every other week, twice a month, or on another schedule, and the first check can take several weeks to arrive after you start.
Plan for that gap. Your final military pay, any terminal leave, and your savings may need to cover more time than you think.
Do not lose your life insurance
Your SGLI coverage does not simply continue. According to the VA:
- SGLI continues free for 120 days after you leave the military.
- You can convert to Veterans' Group Life Insurance (VGLI) within 1 year and 120 days of separation.
- If you apply within 240 days, you do not need to prove you are in good health. After that, you do.
If you have a family relying on you, compare VGLI to coverage through your new employer or a private policy, and do not let the window close while you decide.
Decide what to do with your TSP
According to the Thrift Savings Plan, if your balance is $200 or more, you can leave it in the TSP when you separate. You stop contributing, but your money stays invested. You may also be able to move it to a new employer plan or an IRA.
Two cautions:
- TSP loans must be repaid within 90 days of separation, according to the TSP. An unpaid balance can be treated as taxable income, and possibly hit with an early withdrawal penalty.
- Cashing out early can be expensive. Withdrawals can be taxed, and early withdrawals can carry additional penalties. Read the TSP's tax guidance before taking money out.
Build the new budget before the first check
The best time to build a civilian budget is before the first civilian paycheck. List:
- Your expected take-home pay, after taxes and deductions
- Housing, now that you may not have BAH or on-base housing
- Transportation, insurance, and utilities that may have been simpler in uniform
- VA compensation, if you receive it, as a separate line with its own date
- Debts and minimum payments
- An emergency fund contribution, even a small one
If the numbers do not work, you want to know that before the lease is signed.
Protections that end at separation
The Military Lending Act caps the cost of many loans for active duty service members. After you separate, those protections no longer apply to new credit. Lenders who advertise to veterans are not required to offer those same terms. Read any offer carefully.
Where we fit
Transition is one of the most important financial moments in a veteran's life, and one of the busiest. We help veterans build a civilian budget, check their credit before big moves, and avoid mistakes that take years to undo.
If you are separating soon or recently got out, Credit4Vets can help you plan the first year — free.
Sources: IRS Publication 3 — Armed Forces' Tax Guide · IRS — Tax Withholding Estimator · VA — Veterans' Group Life Insurance · VA — Servicemembers' Group Life Insurance · TSP — Leaving uniformed services · TSP — Loans booklet