Heroes Earned Retirement Opportunities Act (HERO)
What Is Heroes Earned Retirement Opportunities Act (HERO)?
The Heroes Earned Retirement Opportunities Act (HERO) is a U.S. federal law enacted in 2006 that allows eligible military personnel to contribute tax-exempt combat pay to their Individual Retirement Accounts (IRAs). This legislation addresses a specific challenge within retirement planning, particularly for those serving in combat zones whose income, due to its tax-exempt status, would previously prevent them from making IRA contributions based on earned income. The HERO Act effectively broadens access to tax-advantaged accounts for service members, enabling them to build their retirement savings regardless of whether their compensation is subject to taxation.47,,46
History and Origin
Before the passage of the Heroes Earned Retirement Opportunities Act, military personnel whose primary income came from tax-exempt combat pay faced a unique hurdle: general IRA rules require contributions to be based on taxable income. This meant that service members whose earnings consisted entirely of combat pay were typically unable to contribute to a traditional IRA or Roth IRA.,45 The HERO Act, formally known as Public Law 109-227, was signed into law on May 29, 2006, by President George W. Bush.44,43,42 Its primary purpose was to amend the Internal Revenue Code of 1986 to allow members of the Armed Forces serving in a combat zone to make contributions to their individual retirement plans, even if the compensation for such contributions was excluded from gross income.41,40 The act also provided a retroactive benefit, allowing eligible service members to make contributions for the 2004 and 2005 tax years, with a deadline of May 28, 2009, to make these catch-up contributions.39 The Internal Revenue Service (IRS) subsequently issued guidance to clarify the provisions of the Act for affected military personnel.38,37
Key Takeaways
- The Heroes Earned Retirement Opportunities Act (HERO) enables military personnel to use tax-exempt combat pay as eligible income for IRA contributions.,36
- This law expanded eligibility for both traditional IRA and Roth IRA accounts for service members.35,
- Prior to the HERO Act, tax-exempt combat pay did not count as earned income for IRA contribution purposes, creating a barrier to retirement savings for those deployed in combat zones.,34
- The Act was signed into law in 2006 and had retroactive provisions for contributions dating back to January 2004.33,
Formula and Calculation
The Heroes Earned Retirement Opportunities Act does not introduce a new formula for calculating IRA contributions. Instead, it modifies the definition of "compensation" for military personnel serving in combat zones.
The amount a service member can contribute to an IRA is still subject to the annual IRA contribution limits set by the Internal Revenue Service (IRS). The key change is that tax-exempt combat pay is now included in the definition of earned income when determining these limits.,32
The formula for determining the maximum IRA contribution remains:
Where:
- (\text{Annual Contribution Limit}) = The maximum amount allowed by the IRS for IRA contributions in a given year, with potential additional amounts for catch-up contributions for those aged 50 and over.
- (\text{Compensation}) = For eligible military personnel, this now includes tax-exempt combat pay in addition to any other earned income.
For example, if the annual contribution limit is $6,500 and a service member's only income is $10,000 in combat pay, they can contribute up to $6,500 to their IRA. Before the HERO Act, if their only income was combat pay, their eligible compensation for IRA purposes would have been $0, preventing any contribution.
Interpreting the HERO
The Heroes Earned Retirement Opportunities Act is primarily interpreted as a measure to ensure equitable access to retirement savings opportunities for military personnel. Before its enactment, military members deployed to combat zones, whose compensation was often entirely tax-exempt, found themselves unable to contribute to individual retirement accounts because IRA eligibility was tied to taxable income.,31
The HERO Act rectified this by designating tax-exempt combat pay as eligible compensation for IRA contributions.30,29 This interpretation means that service members can now fully participate in retirement savings plans, such as a Roth IRA or traditional IRA, utilizing their unique compensation structure. It ensures that serving in a combat zone does not disadvantage military personnel in their long-term financial planning and ability to build retirement savings.28 The Act recognizes the unique sacrifices of military personnel and provides a mechanism for them to benefit from tax-advantaged accounts in a way that was previously unavailable.27
Hypothetical Example
Consider Sergeant Rodriguez, a 28-year-old active-duty service member deployed to a combat zone for the entire tax year. All of Sergeant Rodriguez's income for the year, totaling $40,000, is classified as tax-exempt combat pay.
Before the Heroes Earned Retirement Opportunities Act, Sergeant Rodriguez would have had $0 in taxable income. As IRA contributions generally require earned taxable income, Sergeant Rodriguez would not have been able to contribute to an IRA that year.
With the HERO Act in place, Sergeant Rodriguez's $40,000 in tax-exempt combat pay is considered eligible compensation for IRA purposes. If the annual IRA contribution limit for their age group is $7,000, Sergeant Rodriguez can now contribute the full $7,000 to either a traditional IRA or a Roth IRA. This allows them to invest in their retirement savings, grow their assets over time, and benefit from the tax advantages associated with these accounts, a critical component of sound financial planning.
Practical Applications
The Heroes Earned Retirement Opportunities Act has several practical applications for military personnel and their financial well-being:
- Expanded Retirement Savings Options: The primary application is enabling service members to contribute to Individual Retirement Accounts (IRAs) using their tax-exempt combat pay. This significantly expands their opportunities for retirement savings that were previously limited due to the nature of their compensation.26,25
- Tax Efficiency: By allowing contributions to Roth IRAs with tax-exempt income, service members can benefit from tax-free withdrawals in retirement, provided certain conditions are met. This can be a substantial advantage, especially if they anticipate being in a higher tax bracket in their retirement years.24
- Financial Planning for Deployment: The Act allows military personnel to maintain continuity in their financial planning even during extended deployments to combat zones. It ensures that their period of service does not disrupt their long-term investment strategies.23,22
- Catch-Up Contributions: The retroactive provisions of the original HERO Act allowed service members to make up for missed contributions from previous years, providing an immediate boost to their retirement nest egg.21
The Servicemembers Civil Relief Act (SCRA) also offers broader financial and legal protections for active-duty service members, encompassing areas like interest rate caps on existing debt, protection against default judgments, and the ability to terminate leases without penalty, ensuring military personnel can focus on their duties without undue financial stress.20,19,18 More information on the SCRA is available from official government sources like the U.S. Courts website.17
Limitations and Criticisms
While the Heroes Earned Retirement Opportunities Act (HERO) broadly benefits military personnel, it is important to understand its specific scope. The Act primarily addresses the issue of combat pay qualifying as earned income for IRA contribution purposes. It does not, for instance, alter the overall IRA contribution limits, which are still set annually by the IRS.
One potential limitation is that the HERO Act focuses solely on individual retirement plans (IRAs). It does not directly modify rules for employer-sponsored retirement plans like the Thrift Savings Plan (TSP), which is the federal government's version of a 401(k). However, military members serving in a combat zone can often benefit from special rules for their TSP, including being able to invest 100% of their pretax base pay and all of their tax-exempt pay up to the overall contribution limits.16
Furthermore, while the Act allows for contributions from tax-exempt income, service members still need to understand the nuances of traditional IRA versus Roth IRA contributions and how distributions are taxed. For instance, Roth IRA contributions are not deductible, but qualified distributions are typically tax-free, whereas traditional IRA contributions may be deductible, but distributions are generally taxable.15 Financial planning for military personnel, especially those with unique compensation structures, can be complex, and understanding how various tax exemptions and benefits interact with their retirement savings is crucial.
Heroes Earned Retirement Opportunities Act (HERO) vs. Servicemembers Civil Relief Act (SCRA)
While both the Heroes Earned Retirement Opportunities Act (HERO) and the Servicemembers Civil Relief Act (SCRA) are federal laws designed to provide financial protections for military personnel, they address distinct aspects of their financial lives. The HERO Act specifically focuses on retirement planning, enabling service members to use their tax-exempt combat pay as eligible income for contributions to Individual Retirement Accounts (IRAs). Its aim is to ensure that active-duty military members can save for retirement, overriding a previous restriction that linked IRA contributions to taxable income.,14
In contrast, the Servicemembers Civil Relief Act (SCRA) provides broader legal and financial protections for active-duty service members and their dependents. Enacted in 2003, and formerly known as the Soldiers' and Sailors' Civil Relief Act of 1940, the SCRA addresses a wide range of civil obligations.13,,12 These protections include reducing interest rates on pre-service loans to a maximum of 6%, preventing default judgments in civil court proceedings, protection against foreclosure and repossession of property, and allowing for the termination of residential and automobile leases without penalty due to military orders.11,10,9,8 The SCRA aims to mitigate financial and legal burdens that could distract service members from their duties. Therefore, the HERO Act is a targeted tax law facilitating retirement savings, whereas the SCRA is a comprehensive civil law offering a safety net for various financial and legal challenges encountered during military service.
FAQs
What type of income does the HERO Act allow to be contributed to an IRA?
The HERO Act specifically allows tax-exempt combat pay to be counted as earned income for the purpose of contributing to an Individual Retirement Account (IRA).7,6
Can I contribute to both a traditional IRA and a Roth IRA under the HERO Act?
Yes, the HERO Act allows eligible military personnel to contribute to either a traditional IRA or a Roth IRA, or both, using their combat pay, provided they meet other income and contribution limits.,5
Was the HERO Act retroactive?
Yes, the original Heroes Earned Retirement Opportunities Act was retroactive, allowing eligible service members to make IRA contributions for tax years dating back to January 2004.4,
Does the HERO Act change the maximum amount I can contribute to my IRA?
No, the HERO Act does not change the annual contribution limits set by the IRS for IRAs. It only changes what types of income, specifically tax-exempt combat pay, can be used to qualify for those contributions.
Where can I find official information about the HERO Act?
Official information regarding the Heroes Earned Retirement Opportunities Act can be found through U.S. government sources such as Congress.gov, which hosts public laws and legislative history, and the Internal Revenue Service (IRS) website, which provides tax guidance.3,2,1