What Is the Heroes Earned Retirement Opportunities (HERO) Act?
Let me explain the Heroes Earned Retirement Opportunities (HERO) Act directly to you: it's a 2006 law that lets military personnel like you fund your individual retirement accounts (IRAs) with combat pay. This is essentially a tax break tailored for those who've served in combat zones. Under this act, any combat-related compensation you've received since January 2004—which is tax-free—can go straight into your IRA.
Key Takeaways
Here's what you need to know upfront: the HERO Act allows you, as military personnel, to use your combat pay for IRAs. Remember, combat pay is tax-free income, but standard IRA rules demand taxable income for contributions. The HERO Act lets you bypass that rule, so you can contribute even if your income is entirely from combat zones.
Understanding the HERO Act
Before this act, if your main compensation was combat pay, you couldn't contribute to a traditional or Roth IRA. That's because combat pay isn't taxable, and only taxable income qualified for IRA contributions. If all your earnings came from a combat zone, you'd have zero taxable income, creating a real barrier.
The act, passed on May 18, 2006, fixed this issue and made it retroactive to January 2004. Now, you can set up an IRA and fund it with combat pay, up to the IRS annual limits. For 2022, that's $6,000 per year, increasing to $6,500 in 2023. If you're 50 or older, add another $1,000 as a catch-up contribution.
The IRS defines eligibility for these combat-related benefits clearly: you must be a qualifying member with service in a recognized area. This includes service in an active combat area designated by Executive Order, where you receive special pay for duty subject to hostile fire or imminent danger, as certified by the Department of Defense. It also covers service in a support area designated by the DoD in direct support of combat operations, with the same special pay certification. Finally, it includes service in a statutorily designated Qualified Hazardous Duty Area, again with that special pay for hostile fire or imminent danger.
Important Note
If you're a military member receiving combat pay, you can now fund an IRA with that income—up to $6,000 a year in 2022 and $6,500 in 2023 if you're under 50. This is a straightforward benefit you should consider for your retirement planning.
Special Considerations
With this law in place, you as a combat veteran can open either a traditional IRA or a Roth IRA and contribute up to the annual limit. You can even set up both types and divide your contributions, as long as you meet the income and contribution rules for Roth IRAs.
In a traditional IRA, you won't pay taxes until you withdraw the funds, likely in retirement. For a Roth IRA, you pay taxes on the contribution in the year you make it, but all future withdrawals are tax-free.
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