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
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withdrawn.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
``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
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. …