New laws create more flexible IRAs - individual retirement accounts - Brief Article

USA Today (Society for the Advancement of Education), Dec, 1997

Congress created a more powerful and flexible individual retirement account with the passage of the Small Business Job Protection Act and the Health Insurance Portability and Accountability Act. They affected IRAs in three significant ways, indicates the Institute of Certified Financial Planners, Denver, Colo.

Full spousal contribution. Beginning in 1997, the Business Act allows each jointly filing spouse to deposit annually up to $2,000 tax-deferred to an IRA, for a total of $4,000-even if one of the spouses has less than $2,000 (or none) in earnings. Total IRA contributions for the spouses, however, can not exceed their combined earnings for the year.

The contributions still are limited under previous law regarding the deductibility of the contribution. That is, if neither spouse is eligible to be covered by a qualified retirement plan such as a 401 (k) or 403(b), the contributions are deductible. If either is covered, the full contributions may be deducted as long as joint adjusted gross income (AGI) does not top $40,000. The deduction gradually is phased out between $40,000 and $50,000. people are eligible for a qualified plan and their income is too high, they still can contribute up to $2,000 each to their IRAs, but the deductions are not tax-deductible (earnings are tax-deferred).

Medical expense withdrawal. Employees under age 59 1/2 have been able to withdraw funds from qualified retirement plans free of the 10% early withdrawal penalty tax to help pay for certain medical expenses, but that option was not available for IRAs. The Health Act allows IRA investors to tap their accounts to pay for qualified medical and dental expenses that exceed 7.5% of their adjusted gross income. The amount withdrawn would be subject to regular income tax, though the tax would be partially offset, assuming they take an itemized deduction for qualified medical and dental expenses that exceed the 7.5% floor.

Withdrawals by the unemployed. Those who receive unemployment compensation for at least 12 consecutive weeks may be able to tap their IRAs penalty-free to help pay for medical insurance premiums for themselves and their family. For the unemployed, paying out of pocket for medical insurance premiums often is critical since they typically no longer are covered by an employer-paid health insurance.

Under the Health Act, an unemployed person younger than 59 1/2 can take out of his or her IRA, free of the 10% early withdrawal penalty (but not regular income tax), an amount equal to, or less than, that paid for medical insurance premiums. In this case, it doesn't make any difference whether they exceed the 7.5% AGI floor, though any expenses incurred over that amount would be tax-deductible.

The IRA withdrawal must be made during the year unemployment compensation is received or in the following year. The penalty-free IRA withdrawals can be made up to 60 days after returning to work. Self-employed individuals typically are not eligible for unemployment compensation, but regulations are expected to be issued that will allow them to take advantage of this provision.