HERO Act Expands IRA Options for Military
August 18th, 2006
Members of the military serving in Iraq, Afghanistan and other combat zone localities
can now put money into an individual retirement account, even if they received tax-free
combat pay, according to the Internal Revenue Service.
Under the Heroes Earned Retirement Opportunities (HERO) Act, signed into law on
Memorial Day, taxpayers can now count tax-free combat pay when determining whether
they qualify to contribute to either a Roth or traditional IRA. Before this change,
members of the military whose earnings came entirely from tax-free combat pay were
generally barred from using IRAs to save for retirement.
“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.”
In addition, the HERO Act allows military personnel who received tax-free combat
pay in either 2004 or 2005 to go back and make IRA contributions for those years.
Eligible military members will have extra time, until May 28, 2009, to make these
special back-year contributions.
For those under the age of 50, the IRA contribution limit was $3,000 for 2004 and
$4,000 for 2005. For those 50 and over, the limit was $3,500 for 2004 and $4,500
Taxpayers choosing to put money into a Roth IRA don’t need to report these contributions
on their individual tax return. Roth contributions are not deductible, but distributions,
usually after retirement, are normally tax-free. Income limits and other special
On the other hand, contributions to a traditional IRA are often, though not always,
deductible, and distributions are generally taxable.
Deductible or not, contributions to a traditional IRA must be reported on the return
for the year made. Deductible contributions are claimed on Form 1040, 1040A or 1040NR.
Nondeductible contributions are reported on Form 8606, which is normally attached
to one of these individual return Forms.
If a return has already been filed for a particular year, contributions should be
reported on an amended return, Form 1040X. Depending upon the circumstances, military
personnel who choose to put money into a traditional IRA for 2004 or 2005 may qualify
for additional tax refunds.
For those planning ahead, the IRA contribution limit for 2006 is $4,000 for those
under age 50 and $5,000 for those 50 and over.
Source: Internal Revenue Service