IRA-Related Tax Breaks for Certain Military Members and Their Families

By Jeffery Levine, IRA Technical Expert  

Follow Me on Twitter: @IRAGuru4EdSlott

Memorial Day is almost here, and it should serve as a reminder that we owe a great deal of thanks to all the members of our armed forces, both past and present. With that in mind, today we chose to highlight a couple of IRA-related tax breaks that are available to certain members of our military and their families.

10% Penalty Exception for Active Reservists
In general, a 10% penalty applies to any IRA distributions you take before reaching age 59 ½. The tax code does, however, provide a number of exceptions to this rule that will allow penalty-free distributions from an IRA at a “young” age. One such exception is for active reservists who are called away to active duty for more 180 days.

In order to qualify for this exception, the distribution must be taken while the reservist is on active duty. Although this provision was initially a temporary benefit, it was made a permanent addition to the tax code as part of the Heroes Earning Assistance Relief Tax (HEART) Act of 2008.

Repayment of Distributions Taken Under Active Reservist Exception
If an active reservist takes a distribution from his IRA that qualifies for the active reservist exception, he or she may repay all or a portion of that distribution to an IRA provided they do so within two years of the end of their active service. The repayment is not taken into consideration for annual contribution purposes and is not deductible. As a result, any such repayment would create basis that should be kept track of on Form 8606 or the repayment should be made to a Roth IRA.

Contribution of SGLI Benefits to a Roth IRA
When you join the military, you know you’re making a big commitment and that some day you may be called upon to risk your life in defense of the United States. Unfortunately, that risk sometimes requires the ultimate sacrifice.

When a member of the armed forces dies, their loved ones may receive proceeds from a Service Group Life Insurance (SGLI) policy. These proceeds can be contributed to a Roth IRA within one year of receipt. The funds go in as contributions (and without regard to the annual contribution limits) so they can be withdrawn at any time by the Roth IRA owner without any income tax or penalty, regardless of the Roth IRA owner’s age.

You may not be a member of the armed forces yourself, but chances are you know someone who is, or the family members of such individuals. If so, please take a moment to pass this information along to them. The brave men and women who risk their lives in defense of our country deserve all the help they can get.

Thank you, servicemen and women, for your service!