HEART Act Potential Tax Benefit for Military Families

Tina Haapala |

By Gary Silverman, CFP®

My home of Wichita Falls is an oil town, a cowboy town, a farming town, an industrial town, a college town, a center for finance and medicine, and a military town. Interesting things happen when these different faces of the community interface. Today we’ll look at finance and the military by way of a little provision in a relatively unknown law: The HEART Act.

HEART is the Heroes Earning Assistance and Relief Act of 2008. Within the Act is a wonderful provision for our military families that I hope none have the opportunity to use as it deals with the Servicemember Group Life Insurance (SGLI) and the Death Gratuity for in-service death.  Still, if needed, it creates a substantial tax advantage. The HEART Act allows up to $500,000 of benefits ($400,000 of SGLI and $100,000 of the Death Gratuity) to be rolled into either a Traditional or Roth IRA for a surviving spouse.

While seldom taxable, life insurance proceeds aren’t usually allowed to be rolled into an IRA of any kind. IRAs normally require money going into them to come from earnings, a company retirement plan, or another IRA. The effect of rolling over up to one-half million into a Roth IRA is that the earnings from that point on can effectively be tax free.

That tax savings can be significant. Let’s look at an example. A 35-year-old woman loses her husband while he’s serving in the military. At that time, she receives the $500,000 in insurance proceeds. She may already have a job, but it’s difficult for her to save for retirement, so she rolls those proceeds into her IRA. That $500,000 can grow over the next 30 years to well over $2 million, assuming a modest 5% annual return. However, let’s assume that the $1.5 million-plus in growth is taxed at a mixed rate of 20% as she withdraws it. She’ll end up paying over $300,000 in federal income taxes on the gains. If the proceeds were instead rolled into a Roth IRA, she’d owe no taxes on the gain upon retirement.

I do hope that neither you nor anyone you know ever needs this information. But we are a nation at war, and even in peace the military can be a dangerous occupation. It is nice to have this little-known tax feature that can make a big difference in a family’s life.

There’s a lot more to the HEART Act than the IRA rollover feature. In fact, most of the act covers the living service member as well including the ability to tap retirement plans without penalty and tax-free status for certain kinds of normally taxable income. These tend to be more well known, but I’m sure many are still unaware of them.  Your military family assistance center can be a good place to start your education as well as the dol.gov, gpo.gov and irs.gov web sites.

Gary Silverman, CFP® is the founder of Personal Money Planning, LLC, a Wichita Falls retirement planning and investment management firm and author of Real World Investing.