Individual Retirement Accounts after TRA '97

By Naegele, Richard A.; Altieri, Mark P. | The CPA Journal, July 1998 | Go to article overview

Individual Retirement Accounts after TRA '97


Naegele, Richard A., Altieri, Mark P., The CPA Journal


In Brief

Pulling It All Together

In the past year, The CPA Journal has published a number of articles relating to the many changes brought about by the Taxpayer Relief Act of 1997 (IRA). Included in those have been several dealing with specific uses for individual retirement accounts (IRAs). Last month it was about using IRAs for qualified educational expenses and whether to choose a Roth or a deductible IRA. This month's article summarizes the new provisions of TRA relating to all kinds of IRAs and integrates them with the prior, unchanged aspects of IRAs.

The discussion includes the changes caused by TRA on traditional deductible IRAs and a brief description of the new Roth and educational IRAs, including examples of the interaction between the new and old law. The article goes on to explain matters common to all IRAs, including contributions, limitations, rollovers from qualified plans, and distributions. The Taxpayer Relief Act of 1997 CRA) brought many revisions to existing tax law relative to Individual Retirement Accounts ("IRAs") and additionally created a number of new IRA vehicles. Readers may find a summary of all the IRA rules, the old and the new, of value.

Modification of Prior Law

Eligility for Establishing Individual Retirement Accounts. The TRA gradually increases the prior law adjusted gross income ("AGI") phaseout limits for deductible IRA contributions for individuals who are active participants in tax-qualified, employersponsored retirement plans. For 1998, the phaseout range is from $30,000 to $40,000 for single taxpayers and from $50,000 to $60,000 for married taxpayers filing jointly. Active participants who are below these thresholds may make deductible IRA contributions. The IRA contribution deduction available to an active participant is reduced proportionately over the phaseout range. Active participants with AGI above the phaseout range are not entitled to any deduction for a contribution to an IRA.

Active Participant Status Is Not Attributed to Spouse After 1997. For years commencing prior to 1998, an individual is considered to be an active participant in a plan if such individual's spouse is an active participant. For years commencing after 1997, however, an individual will not be considered to be an active participant in an employer sponsored plan merely because the individual's spouse is an active participant during such year.

Significantly, the AGI phaseout limit for a spouse of an active participant has been set at a relatively high amount. The maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, will be phased out for AGI between $150,000 and $160,000 for tax years commencing after 1997.

Another significant change to prior law, detailed at the end of this article, involves new permissible nonpenalty distributions from traditional IRAs.

Roth IRAs

The TRA establishes a new type of nondeductible IRA called a "Roth IRA." For Roth IRA rules to apply, an IRA must be designated as a Roth IRA at the time of its establishment. Roth IRAs are effective for tax years commencing after December 31, 1997.

Contribution limits. The contribution limits on Roth IRAs and traditional deductible and nondeductible IRAs are coordinated and limited to $2,000 per taxpayer per year (not including rollovers) for all three types of IRAs. The maximum yearly contribution that may be made to a Roth IRA is phased out for single taxpayers with AGI between $95,000 and $110,000 and for joint filers with AGI between $150,000 and $160,000. Contributions may be made to a Roth IRA even after the individual for whom the account is maintained has attained age 70 2.

Contributions Are Nondeductible.

Contributions to Roth IRAs are nonde-. ductible. Rather than deducting the contribution "up front" as with a traditional deductible IRA, the tax benefits are backloaded. …

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