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Vets get help for savings

Two recently enacted provisions are giving military personnel a leg up on saving for retirement.

The Heroes Earned Retirement Opportunities Act, or HERO, signed in May, allows military personnel to count combat pay toward IRA contributions, while a provision of the Pension Protection Act of 2006 permits early withdrawal exceptions from retirement plans, for qualified reservists.

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"Because combat pay isn't taxable and doesn't go on the W-2, it didn't used to count toward IRA contributions because you had to have earned income, and combat pay wasn't treated as earned income," says Omega Hartman, Certified Financial Planner, of Omega Financial Management in Cranford, N.J.

"Now it can be used as earned income for IRA contributions and, even better, has been made retroactive to the 2004 tax year, so military personnel could amend their returns and make contributions to their IRAs for 2004 and 2005 as well."

Hartman works with a group of financial planners in New Jersey who are providing planning assistance to New Jersey-based reservists and active-duty personnel.

For military personnel who are in combat overseas, retirement planning most likely isn't uppermost in their minds, so Congress has also given them a special extension in terms of when they can make their IRA contributions for 2004 through 2009. The special extension expires on May 28, 2009.

As long as they make the catch-up contributions by then and send in their amended tax returns, they'll still make it in under the deadline. Those extra years will provide veterans with time to get back on their feet financially as well, Hartman notes.

In terms of the Pension Protection Act, the law allows what Hartman terms as "de facto loans" for members of the reserves who find themselves in tough financial situations and have been or will be deployed for more than six months between Sept. 11, 2001 and Dec. 31, 2007.

Basically, reservists can take distributions from their IRAs without having to pay the 10 percent early-withdrawal penalty, although they still have to pay income tax on any distributions from traditional IRAs.

In addition, reservists can re-contribute funds to the IRA that were removed under this provision for up to two years after the active-duty period ends, basically enabling them to replenish depleted funds and preserve retirement savings benefits.