There is a little-known rule connected to Roth IRAs that can benefit the surviving spouse of a deceased military member. It allows for a one-time, 6-figure contribution to a Roth IRA.
In the military, the death gratuity program provides a tax-free payment of $100,000 to eligible survivors of military members who die while on active duty or while serving in certain reserve statuses. Servicemembers’ Group Life Insurance (SGLI) provides low-cost term life insurance to eligible service members. They are automatically issued the maximum $400,000 coverage limit.
In 2008 the Federal Government passed the Heart Act (Heroes Earnings Assistance and Relief Tax Act) allowing surviving spouses of military personnel who receive an SGLI payment to put up to $500,000 into a Roth IRA all at one time. While the contribution is about 9 times the normal Roth contribution, withdrawals are still subject to the provisions of a standard Roth IRA.
The Heart Act also permits surviving spouses to deposit death gratuity and SGLI payments into Coverdell Education Savings Accounts (ESA). Distributions from ESAs are generally tax-free as long as the funds are used for the beneficiary’s qualified education expenses. Unqualified education expenses are subject to penalties and taxation similar to those for qualified retirement plans.
To be eligible for the tax-free deposit, the contribution must be made within one year from the date the beneficiary receives the money. Contributions can be made to a Roth IRA and an ESA but the combined contribution cannot exceed the combined amount of military death gratuity and SGLI payments.
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