Restrictions Bring Re-Evaluation of Individual Retirement Accounts

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This is the fifth installment in a series of articles on tax strategies scheduled to appear in each Saturday edition of The Journal Record through April 9.

By Gary Klott N.Y. Times News Service WASHINGTON - With new restrictions on individual retirement account deductions, millions of Americans have to decide whether to continue what has been the annual tradition of contributing to an IRA - but now without the lure of a $2,000 deduction.

Under the Tax Reform Act of 1986, many middle- and upper-income taxpayers covered by a retirement plan at work are no longer eligible for an IRA deduction. But they can still contribute to an IRA as before and have the money grow and compound tax-free until withdrawn.

Despite the new law's restrictions, most people will still be eligible to claim an IRA deduction. Regardless of whether they are covered by a retirement plan at work, couples with adjusted gross income below $50,000 and single individuals with adjusted incomes under $35,000 qualify for at least a partial IRA deduction.

Couples with incomes below $40,000 and single people with incomes below $25,000 can claim full IRA deduction. So can people of any income group who were not covered by an employer retirement plan last year.

Even for those eligible for a full deduction, the tax saving will not be as large as before because of the lower tax rates. Someone in the 40 percent tax bracket under the old law, for example, saved $800 of taxes by contributing $2,000 to an IRA. Under the new law, however, this person slips into the 28 percent tax bracket, so the tax saving would be only $560.

Nevertheless, tax advisers are unanimous in their recommendation that those taxpayers who remain eligible for an IRAdeduction and who can afford to put the money away until retirement should contribute again this year - at least to the extent they can earn a deduction.

The contribution will help save not only on federal income tax but also on state income tax. Contributing to an IRA will also provide a larger nest egg for retirement because earnings in the account are not taxed each year as they are in a regular savings account. None of the money in an IRA is subject to tax until withdrawn. Withdrawals before age 59 1/2 are subject to a 10 percent penalty.

``If you can still get a deduction on an IRA, it's still an excellent vehicle to save for your retirement,'' said Andrew Zuckerman, an employee benefits specialist at the accounting firm of Arthur Andersen & Co. and a former Internal Revenue Service lawyer. ``Anybody who can afford to put that money away until they are 59 1/2 should seriously consider putting their $2,000 into an IRA. You're not going to find a better vehicle, with the exception of a 401(k) plan.''

The 401(k), offered by a growing number of companies for their employees, can provide even bigger tax savings than IRAs. But 401(k)s, named for the section of the tax code that authorizes such plans, do not provide the last-minute opportunity for tax savings that IRAs do. Contributions to an IRA made by this April 15 qualify for a deduction on 1987 returns. The deadline for making 1987 contributions to a 401(k), which help reduce the amount of a worker's salary subject to tax on 1987 returns, was Dec. 31.

To determine eligibility for the IRA deduction, taxpayers can quickly tell whether they are covered by a retirement plan at work by looking at Box 5 on the W-2 wage form they receive from their employers. An employee does not have to be vested in a pension plan to be considered covered by a plan for IRA eligibility.

In the case of a married couple, if either spouse is covered by a retirement plan at work, then both are considered covered for purposes of the IRA provision. (That is not the case if the couple files separate returns, but legislation is pending in Congress that would close the loophole for spouses who were not separated. …