How to Invest Your SGLI Payout Without Taxes

Suppose you’re a survivor of a fallen servicemember and don’t have an immediate need for your Service Members Group Life Insurance (SGLI) payout. In that case, you can invest your life insurance for retirement or your child’s education.

The Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act) expanded tax relief options for service members, their families, and survivors.

Under the law, SGLI investments aren’t subject to normal contribution limits and taxes. So, you can accrue significant tax benefits by investing all or part of the insurance payout into a Roth IRA or a Coverdell Education Savings Account (ESA).

Here’s how it works.

Investing Your SGLI Payout in a Roth IRA

A Roth IRA is an Individual Retirement Account (IRA) where your contributions and earnings can grow tax-free. 

Typically, Roth IRAs have contribution limits, but the HEART Act relaxed the rules for survivors of fallen servicemembers. 

You may be able to invest your entire military life insurance payout – up to $600,000 if you received the maximum $500,000 SGLI benefit and the $100,000 death gratuity. However, the death must be combat-related.  

You don’t need to worry about losing access to your SGLI benefit by investing it. Under the law, the normal five-year waiting period to withdraw your money doesn’t apply to your SGLI contributions. 

“(Survivors) can be nervous about not having access to their SGLI proceeds if they put it in a Roth IRA,” said Mark Dunlop, a certified financial planner and financial counselor for Survivor Outreach Service. “I assure them that they can always take out their basis without penalty or taxes.”

You can withdraw these contributions immediately, but earnings from your initial contribution must stay in your IRA for five years until you turn 59 ½ to avoid taxes. If you take out the earnings before either of these times, you could face taxes and penalties. (You might qualify for tax-free withdrawals for birth or adoption expenses, buying your first home, or other situations.)

Investing Your SGLI Payout in a Coverdell ESA

A Coverdell ESA is an Education Savings Account (ESA) used solely to fund a beneficiary’s education. Like the Roth IRA, the Heart ACT relaxed the contribution rules for survivors, while contributions and earnings grow tax-free.

The Coverdell ESA may make sense if you are looking at funding some or all of a child’s education. Coverdell ESAs allow you to avoid investment taxes, so long as the distributions fund students’ qualified education expenses.

Qualified education expenses include tuition, fees, books, school supplies, and other equipment. An ESA can cover costs from kindergarten through college. You can also use Coverdell ESAs for graduate school, but the student must empty the account by age 30.  

Alternative Investment Options

While a Roth IRA or Coverdell ESA offers military beneficiaries a tax-advantaged way to invest SGLI benefits, there are other options you can consider as well. Depending on your situation and needs, one of these might be a better solution.

529 Plans

529 plans are similar to Coverdell ESAs because they let you save for K-12 and college expenses. However, 529 plans tend to be more flexible than Coverdell ESAs.

For example, if you’re only planning to use a small part of the SGLI benefits for the college fund, a 529 has fewer restrictions on contributions. Coverdell ESAs will limit future contributions to just $2,000 yearly, while 529 plans allow $300,000 or more, depending on your state.

One disadvantage of Coverdell ESAs is that the funds must be used before the beneficiary turns 30. With a 529 plan, all funds can be used for education expenses regardless of the beneficiary’s age. 

Trusts

Consider a trust if you’re less worried about the tax advantages of a Roth IRA or a Coverdell ESA and want more control over how the SGLI benefits are spent. 

Both Roth IRAs and Coverdell ESAs have strict rules about how the funds are used. However, with a trust, you can directly control how the benefits are allocated. For example, you could specify that 50% of the benefit will be given to a child at 18 for their college education, and then the other 50% will be given to a child when they turn 25 for a down payment on a home. 

Trusts are also great because they can provide you with asset protection. Your SGLI funds can be shielded from creditors, lawsuits, or even divorce settlements in certain cases, which isn’t the case with a Roth IRA or Coverdell ESA.

Rules for Investing Military Life Insurance

You must invest your SGLI proceeds in a Roth IRA and/or a Coverdell ESA within one year of receiving them. 

Your total contribution to both can’t exceed the SGLI proceeds received.

The Roth IRA and Coverdell ESA are great options for reducing tax liability, but they have different purposes and limitations. 

Survivors should plan based on their individual goals. Consult a qualified tax professional (EA, CPA, etc.) or a Certified Financial Planner when in doubt.

Meet the Author

Ryan Guina

Ryan Guina is The Military Wallet's founder. He is a writer, small business owner, and entrepreneur. He served over six years on active duty in the USAF and is a current member of the Tennessee Air...

Read full bio