The Pentagon said Thursday it will let transgender personnel serve openly, a major milestone for America's vast military, and said it would pay for related medical treatment.
Lifting the ban on transgender service members "is the right thing to do for our people and for the force," Defense Secretary Ashton Carter said in a statement.
"We're talking about talented Americans who are serving with distinction or who want the opportunity to serve. We can't allow barriers unrelated to a person's qualifications prevent us from recruiting and retaining those who can best accomplish the mission."
Up until five years ago, the US military still banned gay troops from openly discussing their sexuality under a "Don't Ask, Don't Tell" policy.
The new transgender policy will be phased in during a one-year period, but effective immediately, the military can no longer discharge or deny reenlistment to troops based solely on their gender identity.
Transgender service members currently on duty can now serve openly.
By July 1 next year, the services will begin allowing transgender personnel to sign up, assuming they have met the necessary physical and mental standards to do so, the Pentagon said.
The US military has about 1.3 million service members.
According to a RAND study, about 2,500 of these active-duty service members are transgender, as well as about 1,500 out of approximately 825,000 reserve troops.
The military will start paying for medical treatment related to being transgender no later than October 1, Carter said.
Carter last year ordered all military roles -- including combat positions -- to be opened to women.