Heroes Earned Retirement Opportunities Act (HERO)

What Is the Heroes Earned Retirement Opportunities Act (HERO)?

The Heroes Earned Retirement Opportunities Act (HERO) is a 2006 law that permits military personnel to fund their individual retirement accounts (IRAs) with combat pay. It is a tax break intended for the people who have served in combat zones. Under the law, combat-related compensation paid since January 2004, which is tax-free, can be utilized to fund IRAs.

Understanding the HERO Act

Past to the act's passage, military personnel whose principal source of compensation was combat pay wouldn't have the option to add to an IRA — either traditional or Roth IRAs. This was on the grounds that combat pay isn't normally taxable, and just income that is taxable can be contributed to an IRA. Assuming that a person's whole income was earned in a combat zone, that person had zero taxable income.

The act passed on May 18, 2006, fixed this Catch-22, and backdated the change to January 2004 for those impacted. Presently, military personnel can make an IRA and fund it with combat pay, up to the annual limits set by the IRS. For 2021 and 2022, the limit is $6,000 each year. Individuals age 50 and more than can add another $1,000 a year as a catch-up contribution.

As per the Internal Revenue Service (IRS), "to fit the bill for combat-related tax benefits, you must be an eligible member who meets one of the accompanying options with service in an area.

1. Service in an active combat area as designated by Executive Order, and… Receive special pay for duty subject to hostile fire or fast approaching risk as certified by the Department of Defense.
2. Service in a support area as designated by the Department of Defense in direct sustainment of military operations in the combat zone, and… Receive special pay for duty subject to hostile fire or unavoidable risk as certified by the Department of Defense.
3. Service in a contingency operation as designated by the Department of Defense, and… Receive special pay for duty subject to hostile fire or impending risk as certified by the Department of Defense."

In the event that you receive combat pay as a military member, you can now fund an IRA (up to $6,000 a year in 2021 and 2022, assuming you are under age 50) with that income.

Special Considerations

With the passage of this law, combat veterans can make either a traditional IRA or Roth IRA account and contribute up to the annual limit. Military personnel can likewise make the two types of accounts and split the money up, accepting they meet income and contribution requirements for Roth IRAs.

With a traditional IRA, no taxes are due until the account holder makes a withdrawal, probably subsequent to resigning. With a Roth IRA, the income taxes on the amount paid are due in that tax year, yet the proceeds are tax-free down the road.

Features

• The Heroes Earned Retirement Opportunities Act (HERO) permits military personnel to utilize combat pay for individual retirement accounts (IRAs).
• Combat pay is tax-free income for military personnel, yet broad IRA rules require the account holder have taxable income before contributing.
• The HERO act permits such personnel to get around the requirement that IRA contributions accompany earned taxable income.