Retirement Savings Benefits for Veterans | Lord Abbett
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Retirement Perspectives

Military families may want to review our government’s policies on retirement savings for servicemen past and present. 

Read time: 2 minutes

This Veterans Day, as we honor those who gave their life to defend democracy and their achievements, it’s also a good opportunity for military families to review our policies on retirement savings for service members past and present. For example, service members may not know that they are eligible to roll all or part of a military death benefit payout directly into a Roth IRA. This is one of the many provisions of the Heroes Earnings Assistance and Relief Tax (HEART) Act of 2008 that contains powerful retirement planning provisions for military service personnel.

“Rolling” Death Benefits to a Roth IRA

Under the HEART Act, the entirety of the up-to-$400,000 Service member’s Group Life Insurance (SGLI) policy, plus an additional $100,000 that is paid in the event of a combat-related fatality, may be rolled over directly, tax-free into a Roth IRA, effectively allowing for a $500,000 Roth contribution.

When a member of the armed forces dies, his or her heirs are often the beneficiaries of the SGLI policy–which can be upward of $400,000, tax-free to the beneficiary. This provision allows a beneficiary who receives life insurance proceeds through the SGLI program to fund or, more specifically, make a qualified rollover of an SGLI payment to either a Roth IRA or an Educational Savings Account (ESA). Moreover, the rollover is accomplished without regard to the annual Roth IRA or ESA contribution limit. Notably, in order to take advantage of the provision, the rules require that the rollover into the Roth IRA (or ESA) must occur within one year of the death benefit being received. 

Funds rolled into a Roth IRA are subject to the standard distribution rules applicable to Roth IRAs, including the rule that the contributions (basis) may be withdrawn tax- and penalty-free whereas earnings may be both taxable (if the five-year hold rule isn’t satisfied) and subject to potential 10% early withdrawal penalty tax. In other words, in the event of a nonqualified Roth IRA distribution, the amount of the distribution attributable to life insurance proceeds will be characterized as basis and can be distributed at any time without being subject to income tax or penalty.

Notably, upon repayment, an individual is not eligible for a tax deduction (amount repaid to the account). Therefore, in order to avoid having aftertax dollars in a traditional IRA, consider making the repayment to a Roth IRA. Repayments made to a traditional IRA created basis requiring tracking and report aftertax dollars (basis) on IRS Form 8606. The repayment amount is not subject to the annual $6,000 contribution limit or eligibility rules that otherwise apply to Roth IRAs.

Qualified Reservist Distributions

Distributions from IRAs and salary deferrals from a 401(k), 403(b), or 457(b) plans to military reservists taken before age 59½ are exempt from the 10% early distribution penalty tax if the reservist is called to active duty for more than 179 days, and the distribution is taken between the date of the call up and the end of the active duty period, although the funds withdrawn continue to be subject to ordinary income taxes. However, a portion or all funds withdrawn may be “re-contributed” or repaid during the two-year period starting on the day after active duty is ended. Although multiple repayments may be made, repayments may be made only to IRAs, even if the distribution came from an employer sponsored retirement plan. For example, a qualifying distribution taken by a reservist in 2018 whose active service ended on February 14, 2019, can be repaid to an IRA up to February 14, 2021.

A distribution is considered a Qualified Reservist Distribution if the following requirements are satisfied:

  • Called to active duty after September 11, 2001
  • Called to active duty for a period of 180 days or more or for an indefinite period because you are a member of a reserve component
  • Distribution was made no earlier than the date called to active duty and no later than the end of the active duty period

If you have additional questions, please contact your Lord Abbett representative at 888-522-2388.

 

To comply with Treasury Department regulations, we inform you that, unless otherwise expressly indicated, any tax information contained herein is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties that may be imposed under the Internal Revenue Code or any other applicable tax law, or (ii) promoting, marketing, or recommending to another party any transaction, arrangement, or other matter.

The information is being provided for general educational purposes only and is not intended to provide legal or tax advice. You should consult your own legal or tax advisor for guidance on regulatory compliance matters. Any examples provided are for informational purposes only and are not intended to be reflective of actual results.

The information provided is not directed at any investor or category of investors and is provided solely as general information about Lord Abbett's products and services and to otherwise provide general investment education. None of the information provided should be regarded as a suggestion to engage in or refrain from any investment-related course of action as neither Lord Abbett nor its affiliates are undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity. If you are an individual retirement investor, contact your financial advisor or other fiduciary about whether any given investment idea, strategy, product or service may be appropriate for your circumstances.

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

401(k) is a qualified plan established by employers to which eligible employees may make salary deferral (salary reduction) contributions on an after-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or nonelective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings accrue on a tax-deferred basis.

403(b) plan is a retirement savings plan that allows employees of public schools, nonprofit, and 501(c)(3) tax-exempt organizations to invest on a pretax and or Roth aftertax basis. Contributions to a 403(b) plan are conveniently deducted directly from your paycheck. In addition, your employer may elect to make a contribution on your behalf.

457(b) is a nonqualified, deferred-compensation plan established by state and local governments, tax-exempt governments, and tax-exempt employers. Eligible employees are allowed to make salary deferral contributions to the 457 plan. Earnings grow on a tax-deferred basis and contributions are not taxed until the assets are distributed from the plan.

Coverdell Education Savings Account (ESA), formerly known as an Education IRA, is an attractive tax-advantaged college saving vehicle that allows an investor to save and pay for higher education for the account beneficiary (typically a child).

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