How the Tax Law May Affect Your IRA Savings

Roth IRAs

Education IRAs

Expanded Availability of Traditional IRAs

Early Withdrawals from Traditional IRAs

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We all want a secure economic future, and Congress has made it even more attractive to save for retirement. This 1998 legislation established:

• Roth IRAs



• Education IRAs



• Expanded availability of traditional IRAs for taxpayers already covered by a company retirement plan



• Penalty-free withdrawals from traditional IRAs before age 59 1/2 for educational purposes or for first-time homebuyers

To help you decide whether to take advantage of these IRA rules, we have summarized some of them below, although you may wish to check with your Financial and/or Tax Advisor for specific planning information.

A Roth IRA (also called an "IRA Plus"), available through TruSource, replaces the former "non-deductible IRA." Like the traditional version, it permits nondeductible contributions of $2,000 per individual per year, and the earnings accrue free from federal income tax. In the Roth IRA, withdrawals (including withdrawals of earnings) are tax-free only if they are made after five tax years for the following reasons:

• Buying a first home ($10,000 maximum withdrawal)



• Reaching age 59 1/2



• Death, or becoming disabled

A distribution to pay for college expenses (for yourself, your spouse, or your children or grandchildren) would be subject to income tax on the earnings but not to the 10 percent excise tax that might otherwise apply.

Since earnings from a Roth IRA can sometimes be withdrawn tax free, you may want to consider rolling over or converting your current traditional IRA to a Roth IRA. The new law permits this before 1999, but your adjusted gross income must be under $100,000. A conversion would result in tax consequences to you (although the taxes would be payable over four years), so you should first check with your tax advisor.

Single individuals earning less than $95,000 may open a Roth IRA. The $2,000 contribution is limited, however, if the individual's income falls between $95,000 and $110,000. No Roth IRA contribution is permitted if the income exceeds $110,000. For married individuals filing jointly, the rules are similar, except the numbers are reckoned below $150,000, between $150,000 and $160,000 and above $160,000.

Unlike traditional IRAs, contributions to Roth IRAs are permitted after age 70 1/2, and the mandatory distribution rules do not apply. You should be aware that, although you may maintain both traditional IRAs and Roth IRAs, the combined annual contribution limit for both is $2,000 per individual.

Education IRAs, also available through TruSource, are similar to Roth IRAs. Annual contributions (up to a maximum of $500 per child, until the child reaches age 18) are not deductible, but earnings accrue tax free. One child's account can be rolled over to another child's account without tax consequences. If the child doesn't attend college, the money in his or her account must be withdrawn by time the child reaches age 30.

Individuals with children can establish Education IRAs, so long as they fall within the income levels described earlier under "Roth IRAs."

The new tax legislation may also benefit holders of traditional IRAs.

Individual Retirement Accounts were initially designed to allow an annual $2,000 deductible contribution per taxpayer. However, if either you or your spouse was covered by an employer-sponsored qualified retirement plan (including a 401(k) plan), your ability to contribute was limited, depending on your income. The limitations were imposed if you earned more than $25,000 (if single) or $40,000 (if married). Effective in 1998, these limitations apply.

• If you are single and covered by a company retirement plan, you may contribute a deductible $2,000 to an IRA if your earnings do not exceed $30,000. The $2,000 is phased out for earnings between $30,000 and $40,000 (and these last two numbers gradually rise to $50,000 and $60,000 by the year 2005)



• If you are married and covered by a company retirement plan, you may contribute a deductible $2,000 if your joint earnings do not exceed $50,000. The $2,000 is phased out for earnings between $50,000 and $60,000 (and these last two numbers gradually rise to $80,000 and $100,000 by the year 2007)



• If you are the spouse of a participant who is participating in a company retirement plan, you may contribute a deductible $2,000 contribution if your joint earnings do not exceed $150,000. The $2,000 is phased out for earnings between $150,000 and $160,000.

Until now, most withdrawals from a traditional IRA before age 59 1/2 were subject to a 10 percent excise (penalty) tax, as well as a regular income tax. Under the 1998 law, the 10 percent excise tax does not apply if monies are withdrawn from your traditional IRA for educational purposes or for first-time purchase of a home.

TruSource can help you establish a Roth IRA, an Educational IRA, or a traditional IRA. All TruSource IRAs carry a low annual fee, and if you are already investing your 401(k) account at TruSource in mutual funds, your IRAs may all be invested in the same family of mutual funds.

We can also help you with other products, like Health Savings Accounts. For information, just call our IRA department at (800) 274-8798. We'll be glad to discuss how the IRA changes may affect your individual situation.