Government Helps Fighting Men and Women to Secure Retirement

Service members receiving combat pay now have a rare opportunity to put away money for retirement and, in some cases, to get tax refunds for years that have already passed. The Heroes Earned Retirement Opportunities Act (HERO Act) was signed by President Bush on May 29, 2006. Prior to the HERO Act, service members with little or no earned income other than combat pay could contribute very little or no money to an IRA.

The new law recognizes that combat pay (which is not subject to income tax under the Internal Revenue Code) does count as compensation for IRA contribution purposes. This means that many thousands of fighting men and women can now contribute their hard-earned combat pay (and other earnings) to an IRA (an individual retirement account).

The Act gives service members who received non-taxable combat pay in 2004 and/or 2005 until May 29, 2009 to make IRA contributions for those years. Service members will also be able to make IRA contributions for 2006 and subsequent years. The time limit for IRA contributions for tax year 2006 is April 15, 2007.

Total annual IRA contributions are limited by law. The contribution limit for 2004 is $3,000 (or $3,500 for those age 50 and older). The contribution limit for 2005 is $4,000 (or $4,500 for those age 50 and older). The contribution limit for 2006 also $4,000 (or $5,000 for those age 50 and older).

Due to extensions of income tax return filing deadlines for those in combat zones, some service members have not yet filed 2004 and 2005 tax returns. Military combatants in this category can simply report their IRA contributions when the returns are filed. Service members who contribute to 2004 and/or 2005 IRAs, and have already filed returns for those years, should seek the help of a tax professional to amend their 2004 and 2005 returns. In many cases, such amended returns will result in additional refunds for the service members and their families.

Whether it means thousands of dollars in additional refunds, or just the important chance to sock away tax-free dollars toward retirement, the HERO Act creates an excellent opportunity for all service members whose earnings are primarily tax-free combat pay. A full-service estate planning firm can help you to make the right decision for your retirement and your family (

Whether your money is earned in combat for your country or not, it is critical to know the importance of saving for retirement. In fact, if you put $1,000 away for someone graduating from college today, it would be worth over $72,000 by the time they start collecting social security. (This assumes graduation at age 22, social security at age 67, and a 10% rate of return.) Albert Einstein called the power of compounding the eighth wonder of the world.

Today’s workers can accomplish this retirement savings with pre-tax dollars in their 401k or IRA. But, what happens when the time comes and you withdraw the money? The entire withdrawal is subject to income tax. If you die and leave your 401k or IRA to your children or other beneficiaries, it is taxable upon withdrawal by them. Further, if you die with more than $2 million, including your retirement assets, the balance of the retirement plan before the impact of income tax will be included in determining the tax on your estate.

The combined effect of estate and income taxation could result in the majority of the assets going to pay taxes. For example, assets over $2 million are estate taxed at 45%. In addition, if some of the assets are withdrawn to pay the estate tax, the withdrawal would incur federal and state income tax of as much as 35% or 40%. So, you could easily have 2/3 of your retirement assets lost to taxes.

There are some strategies to help soften the blow of the tax bite on retirement plans. First, you can defer the income taxes as long as possible. After you reach age 70 ½, you must start taking distributions based on the “Uniform Lifetime Table.” Based on this table, you would take approximately 1/27th the first year, and slowly increasing percentages each subsequent year. For example, at age 85, your required withdrawal will be approximately 1/15th.

After your death, you can achieve the maximum stretch for the income taxation deferral by naming younger beneficiaries who can stretch the required distributions over their longer life expectancies. However, you often want to keep younger beneficiaries from having control of assets. In that situation, you can use a Family Retirement Preservation Trust™ to get the maximum stretch for distributions after your death. This trust allows you to keep the assets in trust and still use the ages of the individual beneficiaries do determine the required withdrawals.

You can also start taking withdrawals from your retirement plan and use those distributions to pay for premiums on a life insurance policy. While you need not take withdrawals until after you reach 70 ½, you may start taking withdrawals from retirement plans beginning at age 59 ½ without penalty. The life insurance policy can be owned by an irrevocable trust you set up. If done properly, the life insurance can be outside your taxable estate. This can help avoid estate taxation and converts an asset that is subject to income and estate taxation into an asset that is subject to neither.

Saving for retirement is important, as is planning for your family’s protection if something should happen to you. However, it is also important to consider how to avoid the unexpected tax trap into which retirement assets can put you. That is why intelligent retirement planning is a critical part of any effective estate plan. A qualified estate and retirement planning attorney can help you enjoy the trappings of retirement without the tax traps (


More Posts

Is Your Estate Plan Still Relevant?

Estate planning isn’t just a one-time task; it’s an ongoing process that needs attention as your life evolves. Ignoring to update your estate plan can

The Comprehensive Legacy Checklist

Ensure your estate is fully prepared for any eventuality with The Comprehensive Legacy Checklist. This essential tool is designed to help you and your family face the future with confidence, covering all critical areas from asset protection to healthcare decisions. Whether you’re setting up a plan for the first time or updating an existing one, this checklist highlights potential vulnerabilities and ensures nothing is overlooked.