New tune: recent changes in IRA laws should be music to investors' ears

Entrepreneur, March, 1997 by Lorayne Fiorillo

Money paid for health insurance premiums for unemployed individuals can be withdrawn without penalty under certain circumstances as well. If you have received unemployment compensation for 12 consecutive weeks under any federal or state employment compensation program, a withdrawal made in the same year or the following year may also be deductible; consult your tax advisor.

6. Swing into a new source of capital. If you're over 59 1/2 and have been putting off taking large distributions from a retirement account because of the 15 percent excise tax on withdrawals over $160,000, changes in the tax law can be a bonanza. You'll be eligible for a major tax break - for the next three years anyway. From 1997 to 1999, you won't be subject to the 15 percent penalty tax on what the IRS calls "excess distributions." If you're not over 59 1/2 but want to borrow from someone who is (Hi, Dad!), this change could make it easier to negotiate that loan.

7. We are family. Thinking of making a child your beneficiary so you'll have to take out the least possible amount in your annual distribution? The younger your beneficiary, the longer your joint life expectancy and the longer you'll have to take distributions. That can translate into lower annual distributions. This can be a great idea, but if your spouse is still alive, you may want to make him or her your beneficiary instead. When you die, the funds accumulated in your IRA can be rolled directly from your IRA to that of your spouse. Before you make your decision, consult your tax and legal advisors.

8. It was a very good year. If you're a sole proprietor who wants to make retirement plan contributions after age 70 1/2, IRA contributions are out. The good news: If you have self-employment income, you can still make tax-deductible contributions through a Simplified Employee Pension Plan, or SEP (see "A Quick Guide To Investing" on page 21).

9. Deductibility is a many-splendored thing. If neither you nor your spouse are considered active participants in a qualified retirement plan, your contribution to an IRA is tax-deductible regardless of your income level. However, if you or your spouse are active participants in a plan, the amount you can deduct for your IRA contribution is determined by your tax filing status and your adjusted gross income (AGI). Following are the deductibility limits based on filing status and AGI:

Full deduction

* Single: AGI, $25,000 or less

* Married filing jointly: AGI, $40,000 or less

Partial deduction

* Single: AGI, over $25,000 but less than $35,000

* Married filing jointly: AGI, over $40,000 but less than $50,000

No deduction

* Single: AGI, $35,000 or more

* Married filing jointly: AGI, $50,000 or more

For each $1,000 of adjusted gross income in excess of $25,000 for single taxpayers and $40,000 for those married filing jointly, the IRA deduction is reduced by $200.

10. Beautiful harmony. If you decide to make nondeductible contributions to your IRA, you will eventually receive those contributions back tax-free. But do not open a separate IRA specifically for these contributions. Segregating these funds will not make figuring the tax on your distributions easier when you start taking them out at retirement. You are required to aggregate all your IRAs for taxation purposes, and only a portion of each distribution from the combined total of your IRAs will consist of your original contribution; the rest will be the compounded interest you have earned, which is taxable at the time of withdrawal. Finally, don't forget to fill out Form 8606 to let the IRS know you're making nondeductible contributions. Your tax advisor can tell you more.