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Rescue someone’s retirement with ‘HERO’ gift

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President Bush signed the Heroes Earned Retirement Opportunities Act of 2006, aka “The HERO Act.” This federal legislation creates retirement saving opportunities for armed forces members.

Strategy: If your child or grandchild qualifies, give the soldier cash for an IRA contribution. That way, you won’t face gift-tax consequences, and your relative can benefit from the contribution.

Here’s the drill: The HERO Act reverses prior law, which did not allow military personnel to count their tax-free combat pay as earned income, often making them ineligible to contribute to an IRA. Under the new law, military personnel can count combat pay as earned income retroactive to tax years beginning after 2003.

Result: That provides some of them with a unique opportunity to contribute to a retirement account for tax years that have already closed.

Of course, the combat pay your child or grandchild earned in prior years may already be spent. But you can give him or her up to $12,000 without paying any gift tax. Then, he or she can pile up to $3,000 into an IRA for 2004; $4,000 for subsequent years.

Tip: This strategy also works for Roth IRA contributions. Roth IRA contributions are never tax-deductible, but future distributions may be tax-free.

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