If you’re a survivor of a fallen service member and don’t have an immediate need for your ServiceMembers Group Life Insurance (SGLI) payout, you can invest your life insurance money to provide for your retirement or your child’s education.
The HEART Act, passed in 2008, 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.
Normally, Roth IRAs have contribution limits, but the HEART act relaxed the rules for survivors of fallen service members.
You may be able to invest your entire military life insurance payout – up to $500,000 if you received the maximum $400,000 SGLI benefit and the $ 100,000 death gratuity.
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 immediately withdraw these contributions, but earnings from your initial contribution must remain in your IRA until you turn 59 ½ to avoid taxes. (You may qualify for tax-free withdrawals for birth or adoption expenses, the purchase of your first home, or other circumstances.)
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. As with the Roth IRA, the Heart ACT relaxed the contribution rules for survivors while contributions and earnings grow tax-free.
If you are looking at funding some or all a child’s education, the Coverdell ESA may make sense. Coverdell ESAs allow you to avoid taxes on investments, 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 expenses from the time a student is in kindergarten all the way through college. Coverdell ESAs can also be used for graduate school, but the student must empty the account by age 30.
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 to reduce your tax liability, but they have different purposes and limitations.
Survivors should plan based on their individual goals. When in doubt, consult a qualified tax professional (EA, CPA, etc.) or a Certified Financial Planner.
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