SGLI Payment Rollover to Roth or ESA

Introduction

On May 20, 2008, Congress passed H.R. 6081, the Heroes Earnings Assistance and Relief Tax Act (the HEART or Heroes Act), which was signed into law by President Bush on June 17, 2008. One of the major provisions related to retirement accounts (IRAs and qualified accounts) is the ability to rollover SGLI (Serviceman’s Group Life Insurance) payments to a Roth IRA or a Coverdell ESA.

Contributions of military death gratuities to Roth IRAs and Coverdell ESAs

The Act permits an individual who receives a military death gratuity or Servicemembers’ Group Life Insurance (“SGLI”) program payment to contribute the funds to a Roth IRA, or to one or more Coverdell education savings accounts.

Such contributions will be treated as rollover contributions to the Roth IRA or Coverdell ESA accounts, not subject to normal income or contribution limits. The maximum amount that can be contributed to a Roth IRA or one or more Coverdell education savings accounts in the aggregate under the provision is limited to the sum of the gratuity and SGLI payments that the individual receives.

In the event of a subsequent distribution from a Roth IRA that is not a qualified distribution or a distribution from a Coverdell education savings account that is not a qualified education distribution, the amount of the distribution attributable to the contribution of the military death gratuity or SGLI payment is treated as nontaxable investment in the contract. This provision is generally effective with respect to payments made on account of deaths from injuries occurring on or after June 17, 2008.

In addition, the provision permits the contribution to a Roth IRA or a Coverdell education savings account of a military death gratuity or SGLI payment received by an individual with respect to a death from injury occurring on or after October 7, 2001 and before June 17, 2008 if the individual makes the contribution to the account no later than June 17, 2009.

Action Now

If, heaven forbid, you happen to have received SGLI payment or military death gratuity as described above with respect to a death that occurred between October 7, 2001 and  June 17, 2008: first of all, God Bless You and your family for the sacrifice you’ve endured. I can’t say enough how deeply we feel for you.

On a second, far less important note, you have until June 17, 2009 to rollover those benefit funds into an ESA or Roth IRA.  This could make a profound difference for your taxes in the future. For SGLI or military death gratuity payments due to a death that occurs (or occurred) after June 17, 2008, you have one year to make the rollover.  As always, if you have questions, talk to your financial advisor – she should be able to help you out with this.

Photo by mikeensor

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Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 20 years of experience in the industry.  . Read more from this author