Should We Take Military Separation Pay?
Gretchen's husband is going to receive military separation pay. If he goes into the National Guard, they will need to repay it. Dave advises Gretchen to check into whether or not they can decline separation pay.
QUESTION: Gretchen in Germany is calling because her husband is about to separate from the military and will receive a year’s salary in separation pay. It is taxable. He is considering going into the National Guard. If he does, they will need to repay that separation pay. Dave advises Gretchen to check into whether or not the separation pay can be declined.
ANSWER: I would just assume not receive the pay. The problem is if they pay you a year’s pay, you get to pay taxes on it. But then you have to turn around and have to pay the whole thing back. They just cost you 40% to get the opportunity to sign up for the Guard. That’s not very good. I think I’d decline the separation pay if you think you’re going to go in. I would look into seeing if you can do that. If you can’t, it’s costing you 40% or 30% of a year’s pay.
This is like a reverse signing bonus.
This is a $20,000 hit. You’re going to lose $20,000 for the opportunity to get to sign up for the Guard. The $10,000 Guard signing bonus offsets you $10,000, so it’ll only cost you $10,000 to get to take the new job.
I’m really looking into this. I can’t believe that the military—I can believe it, but it’s not logical—the right hand doesn’t know what the left hand is doing. You would think that they would want guys coming out of the military in the Guard and that there’d be a way to avoid this issue.
If you take the money, it’s taxable. If you have to pay the money back, it doesn’t save you on taxes. You’re going to lose the taxation on $75,000, which is probably $20,000. That’s just a rip. That’s awful, especially when you’ve been serving your country for 10 years and you’re going to turn around and serve your country again. That’s just craziness.
I would get in there with the military office and say, “Hey, we’d rather not have the separation pay,” if you’re going to take the Guard job. And I’d take the Guard job in time to refuse the separation pay if that is an option. I don’t know if it’s an option. It should be, but otherwise, you’re going to lose $10,000 net on this transaction.
It’s worse than an ugly loan because you’ve got a full taxation on it. That’s the problem. It’s not even a good loan. It’s not even an ugly loan. It’s just nastiness.
So if he’s going to take the job, I would try to avoid the separation pay, and I’d try to find out in time to avoid it if that is an option. If not, you know taking the job is going to cost you $20,000 in taxes. The Guard’s going to give you $10,000, so your net loss is $10,000. It just takes the fun out of this.