IRAs
Individual Retirement Accounts

In general, up to $2,000 a year in deductible IRA contributions can be made by a taxpayer, as long as he earns compensation at least equal to the contributed amount. For married couples filing jointly, up to $4,000 can be contributed, as long as their combined compensation at least equals the contributed amount.

The '97 Tax Act eases these rules in two respects. First, for married couples filing jointly, if only one spouse is a participant in an employer's plan, the limitation only applies to that spouse. However, the maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, is phased out for taxpayers with AGI between $150,000 and $160,000. Second, the amounts triggering the limitations are increased starting in '98, both for single taxpayers and married couples filing jointly. For single taxpayers the limitation range is increased to $30,000-$40,000 for '98 (i., e., the maximum IRA deduction is reduced if AGI exceeds $30,000 and is zero if it is $40,000 or more). For '99 the range increases to $31,000-$41,000; increasing each year up to year 2005, and for 2005 and later years to $50,000-$60,000.

For married couples filing jointly for '98 the maximum IRA deduction starts being reduced at an AGI of $50,000, but only reaches zero for AGI of $60,000 or more. That is, for married couples the "phase-out range" is lengthened to $10,000 so as AGI increases above $50,000 (to $60,000) the maximum allowable IRA deduction is reduced more slowly. For 1999 the range increases to $51,000-$61,000; increasing each year up to year 2007; and for 2007 and later years to $80,000-$100,000.

Beginning after December 31, 1997, two new types of IRA's have been established:

Roth IRA and Education IRA:

Education IRA was created to help taxpayers save for education expenses. Joint filers may contribute up to $500 per child per year for each qualifying beneficiary to an education IRA if your joint modified adjusted gross income is below $150,000 ($95,000 for single filers). The contribution is not deductible and is not apart of your maximum $2,000 individual retirement account. Earnings on contributions will be distributed free if they are used to pay postsecondary educational expenses for the beneficiary. The exclusion is not available in the year in which the HOPE credit or LIFETIME learning credit is claimed. Contributions may not be made for a child (the beneficiary) after they reach age 18. Contributions to education IRAs are considered taxable gifts for gift tax purposes, but are eligible for the $10,000 per donee gift tax exclusion.

Distributions from an education IRA for qualified higher education expenses of the beneficiary for the year are excludable entirely from gross income. Tax-free transfers or rollovers of account balances from one education IRA benefiting one beneficiary to another account benefiting another beneficiary are allowed, provided that the new beneficiary is a member of the family of the old beneficiary. Any other non-qualified distributions will trigger income tax and 10% penalty.

ROTH IRA:

In 1998, you can invest in a new type of IRA called the "Roth IRA." You can't deduct your contribution to a Roth IRA, but if you meet certain requirements, withdrawals from a Roth IRA will be entirely tax-free. You can contribute up to $2,000.00 of your earnings in a year to a Roth IRA, less any contributions you make to a regular IRA for that year. Unlike regular IRAs, you can continue making contributions after reaching age 70 ½ as long as your combined income is greater than your combined Roth IRA contribution. No Roth IRA contribution is allowed if you are married and file separately.

If your AGI for a year exceeds $160.000.00 for a married couple and $110,000.00 for a single person, you can't contribute to a Roth IRA. There is a phase out for the Roth IRA if your AGI is between $150,000.00 and $160,000.00 for a married couple and between $95,000.00 and $110,000.00 for a single person. You can even contribute to a Roth IRA whether or not you are an active participant in your employer's plan; you can make a $2,000.00 contribution as long as you are under the AGI phase out limits. However, in no case can contributions to all an individual's IRAs for a tax year exceed $2,000.00.

Unlike regular IRAs, there is no requirement that you must begin to take distributions from your Roth Ira AT AGE 70 ½. A qualified distribution from a Roth IRA is not taxable if it is: (1). Not made within the five-tax-year period starting with the year of the contribution, (2). Made at or after age 59 ½, or in the event of death or disability, or for first-time homebuyers expenses and (3). Withdrawal of funds to pay higher education expenses. Qualified higher education expenses include tuition at a post-secondary education institution, as well as room and board, fees, books, supplies, and equipment required for enrollment or attendance. Expenses for graduate level courses are also covered. Covered under this is the taxpayer, spouse, or any child or grandchild of the taxpayer or his spouse. The taxpayer's child (or grandchild) need not be a dependent.

Be sure to consult with a tax advisor for proper planning and implementation of tax savings ideas to be sure they are right for you.

C. David Pitzer, CPA, PC
118 Two Mile Pike
Goodlettsville, TN 37072
(615) 851-2727
Fax: (615) 851-8711

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