HERO Act Helps Military Personnel Save for Retirement

Dear Friends,
I don’t have to remind you of the sacrifices our troops are making on our behalf in Iraq, Afghanistan, and other war zones. In addition to the constant danger and being separated from their families for months, if not years, many have also sacrificed financially: They had to leave higher-paying civilian jobs when they were called to active duty.

That means they have given up contributions to company retirement plans that they or their employers would have made on their behalf. And since combat pay is not considered taxable income, they haven’t been eligible to contribute to IRAs.

Until now.

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Earlier this year Congress passed the “Heroes Earned Retirement Opportunities Act,” a.k.a. HERO Act. For military personnel serving in a combat zone, this law specifically makes an exception to the requirement that you can only contribute to an IRA if you have taxable, “earned” income.

Even better: It’s retroactive.

Members of the armed forces who have served, or are still serving, in a combat zone can actually make contributions for 2004 and 2005, as well as subsequent tax years for which they earn combat pay.

According to an IRS spokesperson, qualifying service members “actually have until May 29, 2009” to make their 2004 and 2005 IRA contributions.

Because military personnel serving in a combat zone get an extension on filing their income tax returns, there’s a good chance you haven’t filed for 2004 or 2005 yet. If that’s the case, you’ll simply report your tax-deductible IRA contributions when you do file. You could get a bigger refund.

Not reporting or re-filing is necessary if your contributions are going into a Roth IRA because Roth contributions aren’t tax-deductible. Instead, your money grows tax-free.

As a reminder, the maximum IRA contribution in 2004 was $3,000. It rose to $4,000 in 2005. “Catch-up” contributions for those over age 50 were $500 in each of these years. You may also be able to contribute to an IRA on behalf of your spouse. (IRS Publication 590 explains spousal IRAs. You can access it at www.irs.gov.)

The key is to be sure your IRA custodian earmarks your contributions for the proper years.

Spread the word,


Dear Gail-
I’m 70 years old and hoping you can save me a significant amount of money.

Shortly after last Thanksgiving I was hospitalized. I got out in a week, but was confined to bed until just after the first of this year.

While all that was going on I made the classic mistake with one of my IRAs: I forgot to take a mandatory withdrawal last year. I just learned that the penalty for missing this is 50%!

Since I should have withdrawn $12,000, this would amount to $6,000. Obviously, this is a huge amount of money for someone like me who is living on fixed income. Is there as chance I could get out of this?


Dear Esther,

I have good news for you: there’s a chance you will not have to pay this hefty penalty. First of all, the IRS actually has to discover that you missed your 2005 withdrawal.

However, this isn’t as unlikely as you might think. Ed Slott, a CPA in Rockville Center, New York, who speaks extensively on IRA issues says that ever since 2003, IRA custodians have had to notify IRA owners if they must take a “required minimum distribution,” or “RMD.” (These don’t start until after you reach age 70½.) A copy of this notice also goes to the IRS.

Slott, who authored “Parlay Your IRA Into a Family Fortune,” says your best bet is to “double up” and take out both the missed 2005 withdrawal as well as your 2006 RMD this year. These amounts will be reported on your 2006 income tax return.

Even if the IRS eventually catches your mistake, you have the opportunity to request a waiver of the penalty. You would do this by filing Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and other Tax-Favored Accounts.”

This is a catch-all form that covers a lot of different issues, but the only section you have to fill out is Part VIII, “Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs).” (The reason you’re reporting an “excess accumulation” is that by leaving the $12,000 in your IRA, you earned income on this money that you weren’t entitled to.)

Very important! Be sure to attach a letter explaining the circumstances that caused you to overlook your 2005 distribution.

According to Slott, the fact that you took corrective action and withdrew your 2005 RMD as soon as you realized your mistake will weigh heavily in your favor.

The good news is that if you end up having to sending Form 5329, you don’t have to remit the penalty when you mail it in. The IRS can always deny the waiver and tell you to send in the $6,000, “but at least you don’t have to pay up front,” says Slott.

Hope this helps,

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