Appropriately signed into law on Memorial Day, the Heroes
Earned Retirement Opportunities (HERO) Act allows military personnel to count tax-free combat pay when calculating whether they qualify to contribute to traditional or Roth IRAs.

Additionally, the bill is retroactive, allowing military personnel to go back to 2004 and 2005 and make IRA contributions for those years if their income was tax-free combat pay. A special extension applies to making these contributions, extending the deadline to May 28, 2009.

Contributions to IRAs normally can only be made on “taxable” income. Military personnel on active duty may not have filed tax returns for 2004 and 2005 if they received only tax-free combat pay during that time. If returns have been filed, they will need to file an amended return.

For more information, visit the IRS website.

A Roth IRA, named for the late Senator William V. Roth Jr., came about as a result of the Taxpayer Relief Act of 1997.

A Roth IRA differs from traditional IRAs in that your contributions are after-tax rather than tax-deferred. You get no tax deduction for contributions to a Roth IRA now, but there are many advantages to a Roth IRA.

If you meet certain requirements, all earnings are tax-free when you withdraw them. Under certain circumstances you can make early withdrawals without penalty. In addition, there is no requirement that you start taking minimum withdrawals after age 70½. The money in your Roth IRA can continue to grow and all earnings will still be tax free when you or your beneficiary start withdrawing them.

Because you don’t get tax deductions for your contributions, they do not lower your taxable income for the year in which you make the contribution. However, traditional IRA funds are taxed at the time you withdraw them. If tax rates were to drop in the years until you retire, then a traditional IRA might be more profitable in the long run. But tax rates usually increase and it seems unlikely that the government would not raise taxes in the future to deal with the costs associated with the retirement of the large population of baby boomers.

The maximum contribution for a Roth IRA for 2006 and married, filing jointly, is $4,000 if your total adjusted gross income is less than $150,000. If your total adjusted gross income exceeds $160,000 you are not eligible to contribute to a Roth IRA. If you file head of household or married filing separately, you can contribute $4,000 if your AGI is under $95,000. In either case, you can contribute more, up to %5,000 for the year 2006 if you are age 50 or older.

Whether a Roth IRA is right for you depends on your individual financial picture. If you are considering a Roth IRA, consult your fnancial advisor.