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Military Tax Benefit: Rollover of SGLI Proceeds to a Roth IRA

Taxes Military Pay and Benefits Insurance

Military Officers Need to be Aware of this Benefit

I hope that your family and the families of those you serve with never have the opportunity to use this benefit. But if you're an officer still on active duty or a retired officer still "closely" connected with the military, you need to be aware of it.

Completely Tax-Free Retirement Savings

The IRS allows the beneficiary of a Servicemembers Group Life Insurance (SGLI) to deposit the proceeds and the military death gratuity into a Roth IRA.  As you may be aware, SGLI proceeds and the death gratuity are income tax free.  That could mean a total income tax free amount to deposit into a Roth of $500,000.  This could significantly improve the long-term financial prognosis for the widow(er).

There are a few Restrictions

It isn't too hard to take advantage of this tax benefit.  But, there are a few things you need to get right.

  • The funds must be deposited into the Roth IRA within one year of receipt
  • If some of the proceeds were deposited into a Coverdell ESA (which is an option), you must reduce the amount deposited to the Roth IRA by the amount contributed to the Coverdell ESA

Their are Options

If possible, the military widow(er) should try to preserve these assets for retirement.  The tax-free compounding in the Roth is very powerful.  But, if the widow(er) needs some funds prior to age 59 1/2, the original contributions (potentially up to $500,000) can be withdrawn from the Roth IRA with no taxes or penalties.

Understanding Military Benefits is Critical

I hope that the Casualty Assistance Officer will be aware of this benefit.  I'm not sure that he or she will fully comprehend the value of the tax benefit.  If you're aware of this benefit you might be able to positively affect that life of a military widow(er) significantly.  The widow(er) might also want to work with a financial planner that specializes in working with military members.


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