With the advent of the Roth IRA and the continued legislative manipulation of the regular IRA qualifications, it seems that there are many out there who are still unsure about the regular IRA rules and deduction limitations. For many of you, this recent deductibility change is massive, and will allow you a deductible IRA in future years that may not have been allowed in the past. So let's take a few minutes to understand the changes to the deductible IRA limitations.

The rules limiting deductible contributions to Individual Retirement Accounts (IRAs) have been eased by the Taxpayer Relief Act of 1997 ("97 Tax Act"). The limits apply to taxpayers who are active participants in employer-sponsored retirement plans.

In general, up to $2,000 a year in deductible IRA contributions can be made by a taxpayer, as long as he earns compensation at least equal to the contributed amount. For married couples filing jointly, up to $4,000 can be contributed, as long as their combined compensation at least equals the contributed amount.

OLD RULES: The limitations applied to a taxpayer who was an active participant in an employer-sponsored retirement plan. Under pre-'97 Tax Act law, if a taxpayer was a participant in such a plan, the amount that could be deducted for an IRA contribution was limited (or completely eliminated) depending on the taxpayer's adjusted gross income (AGI). For single taxpayers, no deduction was allowed if AGI was $35,000 or more. If AGI was between $25,000 and $35,000, the $2,000 maximum deduction was reduced depending on the AGI. For married taxpayers filing jointly, the same approach was taken but the figures were different: no deduction was available if AGI was $50,000 or more, and the deduction was phased out for AGI between $40,000 and $50,000. Additionally, and more importantly, even if only one spouse participated in an employer's plan, the limitation applied to both spouses. To the extent the deduction limitation applied, the $2,000 maximum IRA contribution could still be made -- it just was not fully deductible (or deductible at all, depending on AGI).

NEW RULES: Beginning in 1998, the '97 Tax Act eases these rules in two respects. First, for married couples filing jointly, if only one spouse is a participant in an employer's plan, the limitation applies only to that spouse. However, the maximum deductible IRA contribution for an individual who is not an active participant, but whose spouse is, is phased out for taxpayers with AGI between $150,000 and $160,000. Second, the amounts triggering the limitations are increased starting in 1998 for both single taxpayers and married couples filing jointly. For single taxpayers the limitation range is increased to $30,000-$40,000 for 1998 (i.e., the maximum IRA deduction is reduced if AGI exceeds $30,000 and is zero if it is $40,000 or more). For 1999 the range increases to $31,000-$41,000; for the year 2000 to $32,000-$42,000; for 2001 to $33,000-$43,000; for 2002 to $34,000-$44,000; for 2003 to $40,000-$50,000; for 2004 to $45,000-$55,000, and for 2005 and later years to $50,000-$60,000.

For married couples filing jointly for 1998, the maximum IRA deduction starts being reduced at an AGI of $50,000 but only reaches zero for AGI of $60,000 or more. That is, for married couples the "phase-out range" is lengthened to $10,000 so as AGI increases above $50,000 (to $60,000) the maximum allowable IRA deduction is reduced more slowly. For 1999 the range increases to $51,000-$61,000; for the year 2000 to $52,000-$62,000, for 2001 to $$53,000-$63,000; for 2002 to $54,000-$64,000; for 2003 to $60,000-$70,000; for 2004 to $65,000-$75,000; for 2005 to $70,000 - $80,000; for 2006 to $75,000-$85,000 and for 2007 and later years to $80,000-$100,000. But note: For married couples filing separately, the phase-out range remains at zero to $10,000 as under pre-'97 Act law.

Let's look at an example. Jack and Jill file jointly in 1998 with joint AGI of $75,000 comprised largely of compensation income. Jack is an active participant in his employer's plan but Jill is not. Any IRA contribution Jack makes is not deductible, but Jill can deduct up to $2,000 in IRA contributions. Why? Because Jack is a participant in his employer's plan, and his joint AGI is greater than $60,000. But Jill, who is NOT a participant in her employer's plan, is available to make a deductible $2,000 IRA contribution because her joint AGI is less than $150,000. Jill's deductible IRA contribution is no longer "tainted" just because Jack is a participant in his employer's pension plan.

Note: In this example, if the joint AGI were $55,000 instead of $75,000, Jack would be able to deduct up to $1,000 in IRA contributions. Since their AGI is only halfway between the $50,000-$60,000 range, the deduction limitation would only be reduced 50%: from $2,000 to $1,000. Jill would still be able to deduct her entire $2,000 contribution, since the joint AGI would be under the $150,000 limitation.

As you can see, beginning in 1998, many more of you will be able to make deductible IRA contributions. This is something that you should give consideration to NOW in order to plan for the year ahead.

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- 06/04/98

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