As Veteran’s Day approaches, I want to touch on some topics that are unique to the military families whom I serve.  One such financial planning consideration that a (thankfully) small segment of that population needs to know about is the Heart Act of 2008.  President Bush signed the Heroes Earnings Assistance and Tax Relief Act to help alleviate some of the financial burdens that could befall the families of our Servicemembers who die while on active duty.  The Act applies equally to National Guard and Reservists on active orders, and it includes some special pension considerations for that group as well.  I want to focus on the section that deals with the death of a service member and the life insurance and special pays that are due to the surviving spouse and children.

The Heart Act allows the surviving spouse to invest tax-free and penalty-free the death gratuity (yes, terrible term — write your Congress person) of up to $100,00 and the SGLI (Servicemembers Group Life Insurance) payment of up to $400,000.  Under normal IRS rules, you can contribute only $5,500 per year ($6,500 per year over age 50, in 2018) to a Roth IRA and $15,000 per year to a 529 college savings plan.  The Act allows the spouse to contribute the entire amount to a Roth IRA in the spouse’s name or a combination of Roth IRA and 529 plans for the spouse and children, without regard to the annual limits imposed by the IRS.  Furthermore, the surviving spouse can make tax-free, penalty-free withdrawals at any age up to the amount of the original deposit.  The bottom line is that these large tax-free payments after the death of service member can remain tax-free throughout the lifetime of the surviving spouse.  The “fine print” only stipulates the deposits to the investment accounts be made within one year of receipt of the payments into the bank account of the surviving spouse.

If this is a scenario that affects your family or the family of someone you know, I am available as a pro bono fiduciary to help guide them through this process and make sound decisions.

Tomorrow:  retirement planning for future veterans

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