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| Individual Retirement Accounts after the Taxpayer Relief Act of 1997 | ||||||
| by Robert J. Barrett, J.D. (pdcinc@ix.netcom.com), Plan Design Consultants, San Mateo, CA | ||||||
| 11/7/97 | ||||||
| [1] | [2] | [3] | [4] | [5] | ||
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DEDUCTIBLE IRA IRC sec. 408 |
NONDEDUCTIBLE IRA IRC sec. 408(o) |
ROTH IRA IRC sec. 408A |
EDUCATION IRA IRC sec. 530 |
Rollover from [1] or [2] to [3] | ||
| Effective | Now | Now | 1/1/98 | 1/1/98 | 1/1/98 | |
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Annual dollar contribution limit IRC Sec. 219(b) |
Lesser of $2,000 or 100% of compensation | Lesser of $2,000 or 100% of compensation | Lesser of $2,000 or 100% of compensation | $500 per child under age 18 unless rollover | No limit | |
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Annual dollar
deduction limit IRC sec. 219(b) |
$2,000 maximum if income limits met or not active participant in qualified plan | 0 | 0 | 0 | 0 | |
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Income* limits to qualify IRC sec. 219(g) *Modified A.G.I. (Total income minus income adjustments other than IRA's) |
If active participant: Full deduction if AGI below given range. No deduction if AGI above range. Pro-rata phaseout for AGI within range. 1998: Phaseout ranges increased annually until 2007 as shown 2007: |
None | Phaseout begins in 1998 at $150,000 for couples and $95,000 for individuals. Phaseout ends in 1998 at $160,000 for couples and $110,000 for Individuals. | (Same Phaseouts as Roth IRA) Note -- Law appears to allow parents who exceed limits to give $500 to another family member who is under the limits, who, in turn, could set up the IRA. | Individuals with income of $100,000 or less may do this unless married filing separately | |
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Tax-free accumulations IRC sec. 408(e) |
Yes | Yes | Yes | Yes | Yes | |
| "Active Participant" rules liberalized IRC sec. 219(g) | Non-working spouse can do deductible IRA in 1998, even if spouse is plan participant. Phaseout begins at $150,000 and ends at $160,000 instead of phaseouts above. | OK now | Non-working spouse can do in 1998 | Non-working spouse can do in 1998 | XXX | |
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Penalty-free withdrawals IRC sec. 72(t) 1. First-time homebuyer ($10,000 lifetime limit) 2. "qualified higher education expenses" |
Yes
Yes |
Yes
Yes |
Yes
Yes |
No
Yes |
Yes
Yes |
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Income tax free withdrawals IRC 408A(d), 530(a) 1. First-time homebuyer 2. "qualified higher education expenses" |
No
Yes |
No
Yes |
Yes
Yes |
No
Yes |
Yes
Yes |
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Tax treatment of distributions IRC sec.72, sec. 408(d) |
Ordinary income tax | Each distribution would consist of a nontaxable portion (return of nontaxable contributions) and a taxable portion (return of deductible contributions), if any, and account earnings | No tax if had account at least 5 years and over 59½, has died or is disabled or account used for certain purposes. Otherwise, ordinary income tax + penalties less contributions. -Can pull out contributions at any time without penalty | No tax if used for undergrad or grad tuition, room, board or books. Money must be withdrawn before child reaches age 30. Otherwise, ordinary income tax + penalty tax | No tax but must pay income tax (no penalty tax) on account transferred (unless transferred from non-deductible IRA). Tax can be spread over 4 yrs if done in 1998 | |
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Distributions required by April 1 following age 70½ IRC sec. 401(a)(9) |
Yes | Yes | No | No | XXX | |
| Comments | Tax-free growth in the future through Roth IRA may be more valuable than deduction today and pulling out money later at ordinary income tax rates. Key is tax bracket at retirement. | For taxpayers whose income exceeds the eligibility requiremets for Deductible IRAs or Roth IRAs | For people who still have money left to save after making 401(k) contribution | People will have to choose between certain tax credits and the education IRA - can't do both | Most attractive to people who expect to remain in high income tax brackets after retirement. 60-day rollover rules apply | |
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