The new HERO Act is about to become law.

Congress has found another way to honor our service men and women who are serving in combat zones. It has passed the Heroes Earned Retirement Opportunities Act (HERO) Act and it is expected that the President will sign it into law. The Act provides a rare opportunity to make retirement contributions for tax years that are closed.

The HERO Act applies to both individual and spousal Traditional IRAs and Roth IRAs.

The tax code excludes combat zone pay from compensation. This exclusion means that IRA contributions cannot be made if combat zone pay is a taxpayer�s only source of earned income. The HERO Act allows this excluded compensation to be included in earned income for the purpose of making an IRA contribution.

The act is retroactive. Individuals with excluded combat zone compensation earned between January 1, 2004 and the date the act is signed into law have three years from the date the act is signed into law to make IRA contributions for 2004 and 2005. Those contributions will be treated as having been made on the last day of the tax year for which the contribution is being made.

What to do now?

I expect that military service personnel are like most of the rest of the U.S. population in that the money they earned in 2004 and 2005 is already spent. However, parents and grandparents and any other interested parties can gift the necessary funds to the serviceperson for the IRA contribution. The maximum contribution for 2004 was $3,000 (plus $500 if you were 50 or older), the contribution limit for 2005 was $4,000 (plus $500 if you were 50 or older), and the contribution limit for 2006 is $4,000 (plus $1,000 if you are 50 or older.

The President is expected to sign this bill into law any day.