In 2008, President George W. Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act bill, which gave U.S. service members and their families many forms of financial assistance as a further means of thanking and compensating them for their service in the ongoing war against terrorism. The HEART Act contains several provisions designed to allow service members and reservists to make a smooth financial transition both into active duty and then back into their civilian lives. Military families should take care to familiarize themselves with the provisions of this bill, as it offers a wealth of benefits for those who qualify.
Roth IRA/Coverdell ESA Contribution Limit ExceptionOne of the most important provisions of the HEART Act pertains to retirement and education savings account contributions. The beneficiaries of service members who are killed in the line of duty are typically eligible to receive two forms of compensation. One is the death benefit from a Servicemembers' Group Life Insurance (SGLI) policy that automatically pays a maximum of $400,000 to the beneficiary of each deceased service member. The other is a military death gratuity that pays $100,000 (also automatically). The HEART Act allows (but does not require) beneficiaries to lump both of these amounts together and rollover directly to a traditional IRA, Roth IRA or a Coverdell Educational Savings Account. These contributions are permitted above and beyond the standard amounts that may be contributed to them.
A total of $500,000 may be contributed to a Roth and then be withdrawn tax-free at retirement by the beneficiaries or else used to pay for higher education expenses. This effectively constitutes the largest single tax break for retirement plan contributions in the entire code for anyone under any circumstances. A widow who receives this amount at age 40 and lets it grow inside a Roth IRA for 20 years at 5% will have over a million dollars of tax-free cash at retirement.
Other Tax BreaksThe HEART Act provisions also extend to several other areas of employer-related compensation and tax savings for service members. Some of the provisions include:
