Restrictions Bring Re-Evaluation of Individual Retirement Accounts

By Gary Klott, Ny Times | THE JOURNAL RECORD, March 19, 1988 | Go to article overview
Save to active project

Restrictions Bring Re-Evaluation of Individual Retirement Accounts

Gary Klott, Ny Times, THE JOURNAL RECORD

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 But they can still contribute to an IRA as before and have the money grow and compound tax-free until withdrawn.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 None of the money in an IRA is subject to tax until withdrawn.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.

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
Loading One moment ...
Project items
Cite this article

Cited article

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited article

Restrictions Bring Re-Evaluation of Individual Retirement Accounts


Text size Smaller Larger
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

While we understand printed pages are helpful to our users, this limitation is necessary to help protect our publishers' copyrighted material and prevent its unlawful distribution. We are sorry for any inconvenience.
Full screen

matching results for page

Cited passage

Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

Cited passage

Welcome to the new Questia Reader

The Questia Reader has been updated to provide you with an even better online reading experience.  It is now 100% Responsive, which means you can read our books and articles on any sized device you wish.  All of your favorite tools like notes, highlights, and citations are still here, but the way you select text has been updated to be easier to use, especially on touchscreen devices.  Here's how:

1. Click or tap the first word you want to select.
2. Click or tap the last word you want to select.

OK, got it!

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.

Are you sure you want to delete this highlight?