By Andy Ives, CFP®, AIF®
With Veterans Day being just last week, an overview of two military retirement benefits felt like an all-important and appropriate topic of discussion. One benefit pertains to a penalty exception for accessing retirement dollars prior to the age of 59 ½. The other relates to the treatment of military benefits when a soldier has made the ultimate sacrifice.
Active Reservists’ Exception
The Pension Protection Act of 2006 created the Active Reservists’ Exception. This penalty exception allows active reservists to avoid the 10% penalty if they withdraw funds from either their IRA or workplace retirement plan before reaching the age of 59 ½.
What is an “active reservist”? Each branch of the military has a Reserve component. While a person who is “active duty” is in the military full time, people in the Reserve or National Guard are not considered full-time active duty military personnel. However, they can be deployed at any time should the need arise. Deployment duration is the basis for this penalty exception.
The exception dictates that distributions from IRAs or other retirement plans to military reservists taken before reaching age 59½ are penalty free (but still taxable) 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. In addition, these distributions can be repaid (rolled back) to an IRA or employer plan within two years of the end of the reservist’s active service.
Repayments will not impact annual contribution limits and will not be an excess contribution. However, the repayments will go back in as basis and cannot be deducted. As such, the reservist making a repayment should consider putting them into a Roth IRA.
Contributing Military Death Benefits to a Roth IRA
A provision in the HEART Act allows a beneficiary of military death gratuities and Service Members Group Life Insurance (SGLI) to contribute those funds to a Roth IRA or a Coverdell Education Savings Account (ESA). This provision applies to beneficiaries of all military personnel, not just active reservists. The Roth contribution can be made without regard to the annual contribution or income limits that typically apply to those accounts. However, the contribution must be done within one year from the date of receipt of the death benefit.
A partial contribution of the benefits is permissible. For example, some of the funds can go to a Roth, some to an ESA, and some can be retained for immediate needs. Of course, the total amount contributed to the Roth and/or ESA cannot exceed the total amount of the benefits received.
Example: Jennifer receives an SGLI beneficiary distribution of $125,000. She immediately contributes $50,000 to an ESA account for her son. Jennifer also contributes another $50,000 to a Roth IRA for herself. She keeps the remaining $25,000 to help pay for daily expenses.
From the Ed Slott team to all military personnel, active, retired and deceased: Thank you for your service, and thank you for your sacrifice.