One of the requirements of establishing and contributing to an individual retirement account (IRA) is that the contributions are made from taxable earned income. This is true for both the traditional and Roth IRA. This stipulation is in place for all taxpayers, however exceptions are made for military servicemembers who are on active duty. Due to the fact that combat pay is tax-free, servicemembers who spent an entire calendar year in a designated tax free zone were previously not permitted to contribute to IRAs because they did not have “earned income.” But that was prior to the Heroes Earned Retirement Opportunities Act being signed into law. The HERO Act as it is now know allows military members to contribute to IRAs even if their sole source of income is tax free compact pay and other non taxable income.
What is the Heroes Earned Retirement Opportunities (HERO) Act ?
The HERO Act was signed into law on Memorial Day 2006, allowing military servicemembers receiving combat pay to use that income as contributions toward IRAs. Prior to this legislation, servicemembers who received all of their income from tax free combat pay, were ineligible as contributors to a traditional or Roth IRA. Once the legislation was signed into law, servicemembers were able to not only begin making contributions to their retirement accounts but also amend previous tax returns (retroactive two years) to make and include contributions from previous years.
How does the HERO Act Benefit Military Members?
The HERO Act benefits members of the military by offering them the same opportunities to save toward retirement as other working Americans. Military servicemembers can choose to make contributions to a traditional or Roth IRA as well as the federal government sponsored Thrift Savings Plan. To better understand how this opportunity benefits servicemembes, consider the benefits of these retirement plans themselves.
Benefits of traditional IRA. The main benefit of the traditional IRA is that contributions made to the retirement account can be used as a tax deduction when you file your income tax return. This tax deferred option, allows your money to grow over the years. The main drawback of the traditional IRA is the fact that you will pay income at the time of distribution.
Benefits of a Roth IRA. The Roth IRA is similar to the traditional IRA, however they are taxed differently. Contributions to the Roth IRA are included in the amount of earned income you report on your tax return. Essentially this means you are paying tax on that money at the time of contribution. The benefit of course is that your money grows tax free due to the fact that you can withdrawal contributions and earnings without taxation after you reach the age of 59 ½. Here is more information about the best Roth IRA companies.
The HERO Act gives military members investing opportunities
Clearly the biggest benefit of the HERO Act is that members of the military are not longer excluded from some of the best retirement vehicles available to American citizens. Saving for retirement is essential to ensure the financial independence of individuals and families once you are no longer earning an income from employment. In allowing servicemembers the opportunity to take advantage of the benefits of IRAs as well as the Thrift Savings Plan, the HERO Act provides financial security for the men and women who have answered the call of duty.