by Al Giovetti

The recently passed Taxpayer Relief Act of 1997 (the Act) has expanded the deductibility of existing Individual Retirement Accounts (IRAs), created new types of IRAs, and eased the rules for certain withdrawals from your accounts. If you are not already taking advantage of an IRA, you may want to reconsider your options.

The deductibility of IRAs has been expanded for taxpayers covered by an employer's pension plan. Previously, if your adjusted gross income (AGI) was above $35,000 (single filers) or $50,000 (married filing joint), you could not claim a deduction for your IRA contribution. Starting in 1998, the AGI levels at which IRA deductions are "phased-out" slowly increase, until they reach a range of $50,000 to $60,000 for single filers in 2005 and $80,000 to $100,000 for joint filers in 2007. More news on IRA deductions: beginning in 1998, when one spouse is covered by an employer's pension but the other isn't, the "non-covered" spouse can claim an IRA deduction. The new deduction phases-out when joint income is between $150,000 and $160,000.

Starting in 1998, you can invest your IRA funds in gold, silver, and platinum bullion or coins of a certain quality. Previously, these investments were treated as collectibles, which otherwise are prohibited investments.

A new type of IRA, called a Roth IRA, begins in 1998. After a 5-year holding period, which begins in the year you make your first contribution, withdrawals from Roth IRAs are tax-free and penalty-free, as long as the distribution is made after age 59½ or on account of death, disability, or first-time home purchase. If a non-qualified withdrawal is made, it still isn't taxable until your withdrawals exceed your total contributions and you begin tapping into your earnings. For a non-qualified withdrawal before age 59½, a 10% penalty applies. AGI phase-out limits apply to Roth IRA contributions: $95,000 to $110,000 for single filers and $150,000 to $160,000 for married persons filing a joint return. Unlike most other IRAs, taxpayers over age 70½ can contribute to a Roth IRA. The maximum total contributions you can make to all IRAs -- deductible, nondeductible, and Roth IRAs -- is $2,000 per year. Because Roth IRA withdrawals are tax-free after 59½, the Act includes special rules allowing most taxpayers to convert existing IRAs into Roth IRAs, paying the tax due over four years; you'll need to do this before 1999.

Education IRAs are available in 1998 to help save for college expenses. Contributions are nondeductible and limited to $500 per year for each child under age 18. Distributions are tax-free as long as they do not exceed education expenses. AGI phase-out limits apply (the same ones as for Roth IRAs). Funds remaining in the account at age 30 must be distributed, subject to tax and penalty. Alternatively, remaining funds can be transferred before age 30 to an education IRA for the benefit of another family member.

You can make withdrawals from IRAs for first-time home purchases and education expenses staring in 1998. Amounts withdrawn are still included in gross income and subject to tax, but the 10% penalty tax is waived. In the case of first-time home purchases, the funds must be used within 120 days, and there is a $10,000 lifetime limit on withdrawals. Even if you have previously owned a home, you can take advantage of this new rule as long as you (and your spouse) have not owned a residence within two years of your purchase.

Beginning in 1998, the 10% penalty on early IRA withdrawals also is waived for distributions used to pay qualified education expenses. These include tuition, fees, books, room and board, and supplies and equipment for post-secondary education, including graduate-level courses. The amount of qualified education expenses is reduced by any scholarships, educational assistance, or other tax-free assistance received. The money can be used to pay for education expenses for yourself, your spouse, or any of your children or grandchildren after 1997.

This information is provided as a public service, and should not be construed as individual accounting or tax planning advice. For information on how these general principles apply to your situation, please consult an accounting or tax professional.

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