A Special Retirement Benefit for Our Veterans

Some service members may not know that they are entitled to roll part or all of their military death benefit payout directly to a Roth IRA.  This provision was embedded in the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008. 

Under the HEART Act, the entirety of the up-to-$400,000 Service Members Group Life Insurance (SGLI) policy, plus an additional $100,000 that is paid in the event of a combat related fatality, may be rolled over directly to a Roth IRA, tax free.  This is effectively a tax-free Roth conversion. 

So Why Would You Want To Do This?

When any person passes away and they have a life insurance contact, their beneficiaries receive the death benefit proceeds tax-free.  These proceeds can be used to pay down debt or use toward college expenses for children.  However, if these proceeds are invested and used towards income supplemental planning, the gains and income may be taxable to the surviving spouse. 

Under the HEART Act provisions we are reviewing, part or all the death benefit proceeds from an SGLI policy can be rolled into a Roth IRA or an Educational Savings Account (ESA), effectively growing tax-free.  When the surviving beneficiary starts withdrawing from the Roth or ESA, the income is also tax-free.  

Funds rolled into a Roth IRA are subject to the standard distribution rules applicable to Roth IRAs, including the rule that the contributions (basis) may be withdrawn tax and penalty-free.  In other words, any funds rolled over to a Roth can be withdrawn at any time without taxes or penalties. 

For any additional questions or clarification with these provisions please feel free to reach out to me at any time.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

Disclosure: A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.