Having served overseas in Iraq, this should have caught my attention earlier. It wasn't until I recently lost a brother in arms that I happened on a little blurb in the IRS publication 590 on the SGLI. If you are not in the military or have a family member in the military, it probably wouldn't mean anything to you. SGLI stands for Servicemen's Group Life Insurance. It's the life insurance that the government provides to all our military members. When I first got in the military the most you were allowed to get insured for was $250,000. Right about the time I was deployed, the government increased that amount to $400,000. The cost is minimal; $0.65 per $1000 of life insurance. While serving overseas, it's a no-brainer.
On May 20, 2008 our congress passed one of the best laws for our military. That law was the Heroes Earnings Assistance and Relief Tax Act other wise called the Heroes or Heart Act. George W. Bush, who I recently just saw speak at a work conference, signed the law on June 17, 2008. Before getting into the whole law itself, this is what I came across in the IRS pub 590 regarding it and the SGLI.
Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments
If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. The contribution is treated as a qualified rollover contribution.
The amount you can roll over to your Roth IRA cannot exceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between rollovers.
The rollover must be completed before the end of the 1-year period beginning on the date you received the payment. However, if you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, and before June 17, 2008, you have until June 17, 2009, to make the contribution to your Roth IRA.
The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed.
The Roth IRA is My Hero
Basically, the surviving beneficiary of a lost soldier soldier serving overseas is allowed to rollover the full amount into a Roth IRA. As you know, I'm a huge fan of the Roth IRA and this provides a tremendous opportunity to put an enormous chunk into for tax free growth. Remember, the full SGLI amount is $400,000 and that amount could be completely rolled into the Roth. To illustrate how that might impact someone, look at this calculation:
More from GFC, Below
Let's assume a 25 year old widow were to invest the full $400,000 and average 8% return over a 25 year period, she will have accumulated $2,739,390.08. She won't be able to get it all yet. (She'll have to wait until 59 1/2 for that). But she will have access to the original $400,000 since it's treated as a “rollover contribution” and as you know or may not know, you always have access to your contributions in a Roth IRA. Another aspect is that if there are surviving children, they will inherit the money tax free. Another great aspect of the Roth that often goes overlooked.
Don't forget the Coverdell ESA
If education is more of a priority, you could also fund a Coverdell Education Savings Account. Personally, I would lean towards the Roth IRA since, like I said, you have access to the contributions, but you also have access to the earnings for higher education. Remember though, that you have to pay the tax on it.
What's the Max?
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. As I mentioned, the most on the SGIL is $400,000; but, there could be more with a death gratuity. I'm not as familiar with this amount, but adding any more will just balloon the above number that much more.
Don't Miss the Timeline
Beneficiaries have one year after receiving the check from the government to effectively roll it into either the Roth IRA or Coverdell ESA. This is a deadline that you don't want to miss if you're interested.
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.
Other Provisions of the HERO Act:
- Effective on the date of enactment of the 2008 Heroes Act, active duty reservists can withdraw any unused amounts held in a flexible health spending account;
- The Act makes it permanent that active duty reservists can make penalty-free withdrawals from retirement plans;
- Retirement plans can allow reservists who are called to active duty and then killed or disabled in the line of duty to be treated as though they were rehired on the day before death or disability, making the employee eligible for all benefit accruals throughout the period of active duty (for deaths occurring after 2006);
- Effective on the date of enactment, small employers can take a twenty-percent tax credit for differential wages paid to employees who are called to active military duty; and
- Differential wages paid to an employee called to active duty may be included in the calculation of wages for retirement plan, IRA, and federal income tax withholding purposes, effective for amounts paid after 2008.
There is nothing that can replace the loss of a loved one. $400,000 is nothing compared to having that loved one by your side. Since I'm a financial planner and I've served overseas, I do see some value in knowing that if the surviving spouse were to to take advantage of this opportunity, they and their children could essentially be taken care of for the rest of their lives. Grieving over the loss of loved one is enough of a emotional strain on someone. But if grief is compounded by worrying about finances, then it becomes almost unbearable. If you know of someone who has lost a loved one overseas, when the time is right, be sure to let them know that this opportunity exists.
God bless those that given the ultimate sacrifice to protect our country!