Terminal Leave: Take it or Sell it Back? – Pros and Cons of Both Options

There are any number of articles out in the web-space about whether you should take terminal leave upon retirement or separation, vice selling back your unused leave. Ryan Guina’s Cash Money Life article is a very good primer on why this should be considered on a case-by-case basis, and why each decision on whether to take terminal leave is a personal one.
Advertising Disclosure.

Advertiser Disclosure: Opinions, reviews, analyses & recommendations are the author’s alone. This article may contain links from our advertisers. For more information, please see our Advertising Policy.

default image

There are any number of online articles that discuss whether you should sell or take terminal leave.  Ryan Guina’s Cash Money Life article is a very good primer on why this should be considered on a case-by-case basis, and why each decision on whether to take terminal leave is a personal one. This article aims to put numbers on paper.  This should allow you to visualize the difference between taking and selling your terminal leave.

How Do I Decide Whether to Take or Sell Terminal Leave?

First of all, terminal leave is one small aspect of your entire financial situation.  To learn more about how it fits in the bigger picture, I encourage you to think about the entirety of your military transition.

Part of the terminal leave decision is within your control. However, there may be circumstances that require you to stay until the last possible day.  If so, you may find yourself being forced to sell back leave, even if that’s not what you wanted to do. If this is the case, then deal with it, make your adjustments, and move on.

However, there are a lot of people wondering what they should do if given the choice. This goes back to your personal circumstances, opportunities, cash flow needs, and other considerations. Instead of a set of rules to go by, below are a set of questions you should ask yourself:

1. How much money do I get if I sell my terminal leave?

Run the numbers, just like above, based on the amount of leave you have accumulated (don’t forget the taxes). If it’s significant ($10,000 or more), you may also want to see if this puts you into a higher tax bracket (i.e. in example 1, Sgt X could easily break through the 15% tax bracket which tops out at $37,650 for single filers). If this seems difficult, you might want to talk with an accountant. Your goal here is to get a number. That’s it.

Keep in mind that when you sell leave you only get the value from your base pay. You do not receive additional pay or allowances such as Basic Allowance for Subsistence (BAS) or Basic Allowance for Housing (BAH).

2. What are my available options?

You could be comparing your number to another job, school, or some other opportunity that may require you to start before you’re officially out. Or, perhaps you already have a job lined up, and would like the additional time to spend with friends and family before you start. Whatever it is, you should think about what option B (as well as options C or D) look like.

3. When possible, compare apples to apples. However, you decide what really matters.

Perhaps that job doesn’t pay as much as you would earn by selling your leave back. However, it might be worthwhile if you’re helping a future company by filling a position that’s been vacant for months. You might get the clock running on something that matters to you, like automatic salary increases (think GS civilian salaries where your first step increase occurs at the end of year 1). You might just appreciate the peace of mind that happens because you’ve finally ‘cut the cord’ on your old career. Whatever it is, you pick what criteria it is that you’re going to decide against.

4. Make your terminal leave decision, then move on.

You’ve got so many things going on that you can’t afford to second-guess yourself.  Don’t worry about if you got the most money from your accrued leave. Make your decision, schedule it, then move on to the next priority item that is on your to-do list.

Next, let’s take a look at two terminal leave case studies, where the decision is pretty clear in each situation.  Your particular situation might not be this straightforward, but looking at the numbers might help you put things into context.

Case #1:  E-5’s End of Enlistment

Sgt X, an Army E-5, is separating after a little more than 4 years from Fort Hood, so he can go to college, using the post-9/11 GI Bill. He has 30 days of leave and is trying to decide whether to sell it back or to use terminal leave. He has deployed to a combat zone, and ½ of his accrued leave is considered combat zone tax exclusion (CZTE) leave. His EAOS is 30 June, and his first class doesn’t start until September, so he’s got plenty of time.

In this case, the primary concern is calculating how much Sgt X would receive in exchange for his 30 days of leave, and whether he feels that this money is worth it. Since his base pay is $2,614.20 (or a daily pay of $87.14), we should use that as the basis of calculation.

Normally, you pay taxes on leave that you sell back to the government. However, leave earned in a CZTE is not taxable when sold back, so Sgt X would only be taxed on ½ of his sold back leave. Let’s assume that Sgt X is in the 15% tax bracket, which is fairly reasonable for his pay grade, and that he pays no state income tax. In this case, he is entitled to $2,418.14:

CZTE:     $87.14 X 15 days = $1,307.10

Taxable:  $87.14 X 15 days = $1,307.10 – 15% ($196.06) = $1,111.04

Total:   $1,307.10 + $1,111.04 = $2,418.14

Now, Sgt X has to decide whether his time is worth $2,418.14. First of all, he might not receive this amount.  He would have to check with his pay office to see what his tax withholding rate is. If taxes are withheld at a higher rate, he might receive less than his entitlement.  Then he’d have to wait until the next year to file his tax return and apply for a refund. This might not meet his cash flow needs, but in his case, he might not have a whole lot of other priorities besides getting as much money as he needs before he starts college.

Case #2:  O-5’s Retirement

Commander Y, a Navy O-5, is retiring after 20 years in Washington, D.C. He has a job lined up at $105,000 per year and his employer wants him onboard as soon as possible. Commander X hasn’t deployed recently, so he doesn’t have any CTZE leave, but he does have 60 days accrued leave (includes leave he will have earned at his date of retirement). He also has a family.

In this case, we need to calculate what his entitlement would look like if he sold his leave back, then compare that to how much he would have earned at $105,000 per year. Let’s assume that as a family man, Commander X is in the 25% tax bracket. He has a decent job lined up, so he’s leaning towards taking terminal leave, but wants to know if he’d be better off staying in and selling it back. His base pay is calculated at O5 > 18 years ($8,388.90).

  • If he sells his leave: Calculate 2 months’ pay (16,777.80) and subtract 25%. This gives you a total of $12,583.35
  • If he takes his terminal leave to start work early: Calculate 2 months’ pay at $105,000 ($17,500), and subtract 25%. This gives you a total of $13,125 in civilian pay.  This is more than what he would have earned by selling his terminal leave back. Additionally, he has two extra months to accrue employer benefits (401(k), health savings plan, etc.).

In Commander X’s case, there is a monetary & non-monetary incentive for him to take terminal leave instead of selling it back.

Conclusion

Terminal leave is just one of many financial issues you need to address as you transition from active duty.

If you are feeling overwhelmed by everything, you should talk to your command’s financial counselor, or find a fee-only financial planner.  Working with a professional should help you achieve the peace of mind you deserve as you transition.

Get Instant Access
FREE Weekly Updates! Enter your information to join our mailing list.

About Forrest Baumhover

Forrest Baumhover is a Certified Financial Planner™ and financial planner with Lawrence Financial Planning, a fee-only financial services firm. As a retired naval officer, Forrest helps veterans, transitioning servicemembers and their families address the financial challenges of post-military life so they can achieve financial independence and spend more time doing the things they love.

Reader Interactions

Comments

    Leave A Comment:

    Comments:

    About the comments on this site:

    These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.

  1. YoureWelcomeSix says

    There is a problem with your math in scenario 2: You didn’t take into account that if he sells his leave and stays in the army an extra two months he will continue to receive his O-5 Paycheck plus BAS plus DC BAH. This is far more money than two months of his civilian pay job.

    • JD says

      If he takes terminal leave for those two months, he will also get his O-5 paycheck plus BAS plus DC BAH for those same two months.

      The article was correct. By selling, he gets ~$12K in addition to his pay for those two months. By using terminal leave, he gets the income from his new job (~$13K) in addition to his pay for those two months.

  2. Free To Sell says

    Buy and Sell Products at your expected price. We are Selling Quality Products all over New Zealand. It is totally online and free to sell on Eekom.

The Military Wallet is a property of Three Creeks Media. Neither The Military Wallet nor Three Creeks Media are associated with or endorsed by the U.S. Departments of Defense or Veterans Affairs. The content on The Military Wallet is produced by Three Creeks Media, its partners, affiliates and contractors, any opinions or statements on The Military Wallet should not be attributed to the Dept. of Veterans Affairs, the Dept. of Defense or any governmental entity. If you have questions about Veteran programs offered through or by the Dept. of Veterans Affairs, please visit their website at va.gov. The content offered on The Military Wallet is for general informational purposes only and may not be relevant to any consumer’s specific situation, this content should not be construed as legal or financial advice. If you have questions of a specific nature consider consulting a financial professional, accountant or attorney to discuss. References to third-party products, rates and offers may change without notice.

Advertising Notice: The Military Wallet and Three Creeks Media, its parent and affiliate companies, may receive compensation through advertising placements on The Military Wallet; For any rankings or lists on this site, The Military Wallet may receive compensation from the companies being ranked and this compensation may affect how, where and in what order products and companies appear in the rankings and lists. If a ranking or list has a company noted to be a “partner” the indicated company is a corporate affiliate of The Military Wallet. No tables, rankings or lists are fully comprehensive and do not include all companies or available products.

Editorial Disclosure: Editorial content on The Military Wallet may include opinions. Any opinions are those of the author alone, and not those of an advertiser to the site nor of  The Military Wallet.