Roth IRA Planning
1998; American Institute of Certified Public Accountants; Volume: 186; Issue: 2 Linguagem: Inglês
ISSN
0021-8448
AutoresGary R. Stout, Robert L. Barker,
Tópico(s)Financial Literacy, Pension, Retirement Analysis
ResumoHow can clients achieve the maximum benefits from this new retirement saving vehicle? If cash for retirement savings is limited, taxpayers should fund their Roth IRAs before making maximum contributions to their 401(k) plans. The highly publicized Both IRA, created by the Taxpayer Relief Act of 1997, is familiar to most CPAs. The new retirement saving vehicle became available after December 31, 1997, under new IRC section 408A. Roth IRAs offer clients a third option in addition to deductible and nondeductible IRAs. Many clients with IRAs must decide whether they should convert those accounts to Roth IRAs and pay tax on them now. Others must decide what type of IRA to contribute to in 1998. This article explains the available options and provides a worksheet CPAs can use to help clients make the right choice. THE OLD LAW Under prior law, taxpayers could deduct contributions to IRAs in computing their adjusted gross incomes if they were not active participants in employer-sponsored retirement plans or if their incomes were below specified levels. Contributions were partly deductible for active participants whose incomes fell within a specified phase-out range. Taxpayers ineligible to make deductible contributions could make nondeductible contributions. Total contributions (deductible and nondeductible) for a tax year could not exceed the greater of $2,000 or earned income. Earnings on IRA contributions (deductible or nondeductible) were includable in gross income only when distributed. A taxpayer was required to begin IRA distributions by April 1 of the year after he or she attained age 70 1/2, subject to a minimum distribution excise tax. Distributions to beneficiaries generally were required to begin within five years of the IRA owner's death. Taxpayers could not make IRA contributions after age 70 1/2. THE 1997 ACT AND ROTH IRAs Except as described below, a Roth IRA (a section 408A IRA) is treated the same as a conventional IRA (a section 219 IRA). While contributions to a Roth IRA are nondeductible, distributions are tax-free after age 59 1/2 if the account is at least five years old. Contributions and AGI limitations. A Roth IRA must be designated as such by the taxpayer at the time it is established. After 1997, an individual can make an annual nondeductible contribution to a Roth IRA equal to the lesser of $2,000 or 100% of his or her compensation, minus any contributions for me tax year to an other non-Roth IRAs. This means the total annual contributions to all three types of [RAs cannot exceed $2,000. For higher income individuals, the allowable contribution is phased-out pro rata for single taxpayers with AGIs of $95,000 to $110,000 and for married taxpayers filing jointly with AGIs ranging from $150,000 to $160,000. Under section 408A (c) (3) (C) (ii), the AGI limit for married taxpayers filing separately is zero. This means they cannot make contributions. These AGI limitations apply without regard to whether a taxpayer actively participates in an employer-sponsored retirement plan. It is important for CPAs to note that active participants in qualified plans can still contribute to nondeductible IRAs without regard to AGI and taxpayers who are not active participants in qualified plans can contribute to deductible regular IRAs with no AGI limits. However, in 1998, with the introduction of the Roth IRA, there is no reason why any taxpayer would contribute to a nondeductible regular IRA if he or she is eligible for a deductible contribution to a regular IRA or a nondeductible contribution to a Roth IRA. A taxpayer can contribute to a Roth IRA even after he or she reaches age 7034. Roth IRA contributions (similar to regular IRAs) may be treated as funded for year one if the taxpayer makes a contribution by April 15 of year two. Example. Ronald is single. His 1998 AGI is $75,000. Because he is covered under his employer's defined-benefit pension plan, Ronald is not eligible to make a deductible contribution to a regular IRA. …
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