What Is the Heroes Earned Retirement Opportunities (HERO) Act?
The Heroes Earned Retirement Opportunities (HERO) Act, enacted in 2006, provides a significant benefit for military personnel by enabling them to use their combat pay to contribute to Individual Retirement Accounts (IRAs). This law was specifically designed to offer tax advantages to those who have served in combat zones. Essentially, combat-related compensation received since January 2004, which is typically tax-free, can now be utilized for funding IRAs.
Key Takeaways
- The HERO Act empowers military personnel to allocate their combat pay towards Individual Retirement Accounts (IRAs).
- While combat pay is usually tax-exempt for military members, conventional IRA rules necessitate that contributors have taxable income.
- Under the HERO Act, military personnel can bypass the requirement of having earned taxable income when making IRA contributions.
Understanding the HERO Act
Before the enactment of the HERO Act, military personnel primarily compensated with combat pay faced a significant obstacle in contributing to traditional or Roth IRAs. This challenge arose because combat pay is typically not subject to taxation, and since only taxable income can be invested in an IRA, individuals reliant on combat pay had no taxable income to contribute. Essentially, individuals earning all their income in combat zones had no taxable income.
The HERO Act, passed on May 18, 2006, resolved this dilemma and retroactively applied the change to January 2004 for the affected individuals. This legislation now allows military personnel to establish IRAs and fund them using combat pay, up to the yearly limits established by the IRS. For the year 2022, the limit is $6,000, with an increase to $6,500 for 2023. Individuals aged 50 and above can make an additional catch-up contribution of $1,000 annually.
According to the Internal Revenue Service (IRS), individuals qualify for combat-related tax benefits if they meet specific criteria, including service in combat or support areas designated by the Department of Defense and receive special pay for duties in hostile fire or imminent danger situations.
As a military member receiving combat pay, you can now contribute to an IRA, with limits set at $6,000 in 2022 and $6,500 in 2023 for those under 50 years of age.
Special Considerations
With the implementation of this law, combat veterans can establish traditional IRAs or Roth IRAs and contribute up to the annual limit. Military personnel also have the option to create both types of accounts and divide their contributions, assuming they adhere to the income and contribution regulations for Roth IRAs.
In a traditional IRA, taxes are deferred until withdrawal post-retirement. Conversely, with a Roth IRA, income taxes on the contributed amount are paid in the tax year, but the withdrawals are tax-free in the future.