The HEART Act and the $400,000 Roth IRA

John Hamling, BridgeTower Media Newswires

Over the last couple of weeks, our family, like many others across the nation, gathered on July 4 to celebrate Independence Day. Invariably, when the discussion turns to me, family and relatives ask benign questions about the investment world, stock and bond markets, when is the next correction coming, etc.

Everything was going fine until my son-in law, a veteran who served in Afghanistan, asked me “What’s this thing about a $400,000 Roth IRA that’s available to the family if a soldier dies in the line of duty?”

I had to admit that I had never heard of such a thing, but promised to get back to him with an answer. I immediately started researching what it was all about. Here is what I discovered.

In 2008, then-President George W. Bush signed the Heroes Earnings Assistance and Relief Tax (HEART) Act bill, which gave U.S. Service members and their families many forms of financial assistance as a further way of thanking and compensating them for their service in the ongoing war against terrorism.

It is important to note that the HEART Act contains many provisions designed to help service members and reservists to make a smooth transition both into active duty and then back into their civilian lives. This report will focus solely on one provision of the HEART Act, namely the “Roth IRA Contribution Limit Exception.”

According to Investopedia:

“One of the most important provisions of the HEART Act pertains to retirement account contributions. The beneficiaries of service members who are killed in the line of duty are typically eligible to receive two forms of compensation. One is a death benefit from a Servicemember’s Group Life Insurance (SGLI) policy that automatically pays a maximum of $400,000 to the beneficiary of each deceased service member. The other is a military death gratuity that pays $100,000, also automatically. The HEART Act allows, if desired, for beneficiaries to lump both of these amounts together. Please note that these contributions are permitted above and beyond the standard amounts that may be contributed to them. “

Therefore, thanks to the HEART Act, a total of $500,000 ($400,000 from SGLI and $100,000 military death gratuity) can now be contributed to a Roth IRA and then be withdrawn tax-free at retirement by the beneficiaries. This is a tremendous opportunity to grow a significant sum into an even much greater one, TAX-FREE!

It is important to note that the HEART Act is not an all or nothing proposition. Families who receive the death-related benefits have a choice to roll over a portion of their funds to a Roth IRA, and reserve the rest for everyday needs or unforeseen expenses. That said, not rolling over a significant portion of the death benefits might not be in the beneficiary’s best interest. It is unlikely that, in my opinion, the widow or widower will ever receive another single opportunity that has the potential to make such a difference in his or her family’s financial future.

In reading several different reports on the HEART Act, a common thread I came across is that it has been underutilized since inception in 2008. I’m sure some of it has to do with the fact that many military families, (like many other families), typically do not have the financial knowledge to properly take advantage of this great benefit. Finding a knowledgeable financial advisor is key to providing the education and guidance needed to take advantage of this once-in-a-lifetime opportunity.

So, thanks to my son-in-law, I realized once again that it is never too late to learn something new like the HEART Act, and that maybe someday I’ll be able to help a military family make the best of a tragic situation.
For additional information, please reference: Public Law 110-245 June 17, 2008 Heroes Earnings Assistance and Relief Tax Act of 2008.

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John N. Hamling is a vice president at Karpus Investment Management, a local independent, registered investment advisor managing assets for individuals, corporations, nonprofits and trustees. Offices are located at 183 Sully’s Trail, Pittsford, NY 14534; phone (585) 586-4680.

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