By Paul N. Gada, Toolkit Staff Writer
It's probably safe to say that one of the last things somebody serving in a combat zone thinks about is saving for retirement. However, members of the armed forces serving in Iraq, Afghanistan and other combat-designated localities will be happy to learn that they may now put more money in their traditional or Roth individual retirement account courtesy of the Heroes Earned Retirement Opportunities (HERO) Act enacted May 29, 2006.
If you blinked, you probably missed the enactment of this new law earlier this year. Fortunately, the IRS recently issued a news release summarizing this important development for members of the military and their families.
In a nutshell, the HERO Act amends the tax code to allow tax-free combat pay to be included as earned income for determining the contribution amount for traditional and Roth IRAs. Prior to this change, a military member whose earnings consisted only of tax-free combat pay was barred from contributing to either IRA.
"The HERO act is one more way to let our fighting forces in combat areas know that we support them," said IRS Commissioner Mark W. Everson. "This is a good way for people serving in combat zones to save more of their earnings for retirement."
Prior to amendment, the deduction for a military taxpayer's retirement savings plan contributions was generally limited to the lesser of the taxpayer's earned income or an annual maximum deduction (e.g., $4,000 for 2005 and 2006). Thus, in cases where the earned income of a taxpayer did not include his or her combat zone compensation that was excluded from gross income, the taxpayer's allowable retirement savings plan deduction may have been less than the maximum allowed for the year.
Further, contributions to retirement savings plans were required to be made by the due date (not including extensions) for filing the return for a taxable year in which a retirement plan contribution is claimed, and claims for credit or refund of income tax had to be filed within three years of the due date (or date filed, if later) of each such return.
Tax savings and refund opportunity. Under the HERO Act, an eligible taxpayer may make an additional contribution to his or her retirement savings plan that is attributable to the combat zone compensation within three years of enactment (May 29, 2006). A taxpayer may file an amended return within one year of making such additional contribution to claim a credit or refund resulting form the additional deduction.
In addition, the HERO Act allows military personnel to retroactively make an IRA contribution for 2004 and 2005 if, taking combat pay into account, they qualify for making the contribution. These retroactive contributions can be made as late as May 28, 2009. In addition, retroactive contributions may qualify military personnel for tax refunds for 2004 and 2005. The contribution limits for taxpayers under 50 to either a traditional or Roth IRA were $3,000 for 2004, $4,000 for 2005, and $4,000 for 2006. For those taxpayers over 50, the contribution amounts increased to $3,500 for 2003, $4,500 for 2005 and $5,000 for 2006.
With their nest eggs increased and allowed to grow, our combat veterans should worry about only one thing: returning home safely.
- Related items:
- Congress Passes Comprehensive Pension Reform Bill
- Introducing the New Roth 401(k) Retirement Plan
- Estate Tax/Minimum Wage Bill Falls in Senate; Pension Legislation Approved
Added to the news on August 29, 2006.
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