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Believe it or not, members of the military often get overlooked when our legislature is crafting new tax laws. And sometimes, it takes a bit to get it right. For 2006, the legislature finally fixed some problem issues for our military.
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For one, military members serving in Iraq, Afghanistan and other combat zone localities can now count tax-free combat pay for purposes of contributions to a Roth or traditional IRA. This change is retroactive to 2004, and eligible taxpayers have until May 28, 2009 to make contributions for 2004 and 2005.
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Additionally, military reservists, including National Guard, who are on active duty can receive payments from their individual retirement accounts, 401(k) plans and 403(b) tax-sheltered annuities, without being subject to the additional 10% penalty, which normally applies to retirement distributions received before age 59 ½. There is still income tax on the distributions. The penalty waiver only applies for reservists called to active duty for at least 180 days activated after September 11, 2001 and before December 31, 2007.