Retirement Benefits Planning Update provides information on developments in the field of retirement benefits law. The editors of Probate & Property welcome information and suggestions from readers. TRA 97 Effects The Taxpayer Relief Act of 1997 (TRA 97), enacted last August, changes and expands planning possibilities for IRAs.

Expanded Availability

For 1997, the annual deductible contribution to an IRA is limited to the lesser of 100% of compensation or $2,000. However, if a person is an active retirement plan participant and adjusted gross income (AGI) exceeds $40,000 (married individual) or $25,000 (single individual), the limit is reduced pro rata for AGI above those amounts until it becomes zero at $50,000 (married) and $35,000 (single). Nondeductible contributions may be made up to the dollar limit to the extent deductible contributions are not made.

Section 301(a)(1) of TRA 97 amends Code 219(g)(3)(B) to increase the AGI levels for maximum contribution to $50,000 (married) and $30,000 (single) for 1998 and then gradually to $80,000 (married in 2007) and $50,000 (single in 2005). The phase-out ranges remain $10,000 over the full deduction dollar amount for both married and single taxpayers until 2007, when the married tax-payer phase-out range becomes $20,000. Revised Code 219(g)(1) provides a new separate limit for the spouse of an active qualified plan participant, permitting a $2,000 contribution if AGI is $150,000, phasing out when AGI on the joint return reaches $160,000.

The New "Backloaded" Roth IRA Section 302(a) of TRA 97 introduces Code 408A (a), creating the Roth IRA. Starting in 1998, an individual can make nondeductible annual contributions to a Roth IRA in an amount equal to the lesser of 100% of compensation or $2,000 reduced by the aggregate contributions to all other IRAs maintained for that individual's benefit. If AGI exceeds $150,000 (married) or $95,000 (single), the limits are reduced pro rata until they become zero at $160,000 and $110,000 respectively.

What are the incentives to contribute to a Roth IRA? Four unique rules apply. First, the Roth IRA is "back-loaded," meaning that a distribution from a Roth IRA is not included in taxable income if the distribution is made after the end of the five tax-year period beginning with the first tax year in which the individual (or spouse) made a con-tribution to the Roth IRA and the distribution is made (1) when or after the individual reaches age 59 1/2 or dies, (2) on account of the individual becoming disabled or (3) as a distribution for first time home buyer expenses under Code 72 (t)(2)(F). Similarly, distributions are not subject to the 10% tax on distributions before age 59 1/2. If a distribution does not meet these criteria, the amount of the distribution attributable to earnings on contributions is included in income. The amounts contributed are considered to be distributed first.

As an alternative to a regular IRA for retirement planning, a Roth IRA may produce more net benefits if an individual's income is expected to rise in later years. If regular IRA distributions are rolled over to a Roth IRA and income taxes on the amounts being rolled over are paid from non-IRA sources, it appears that the longer the Roth IRA is left untapped, the better the projected net benefits are compared to continuing the regular IRA account.

Distribution Planning

The second unique Roth IRA rule is that the minimum required distribution rules for IRAs generally only apply to a Roth IRA after the account owner's death. An individual has the option of receiving no distributions from the IRA during his or her lifetime, or naming a younger generation beneficiary and having the post-death required distributions spread over the life expectancy of the named younger beneficiary. It may thus be possible for an account owner to make an irrevocable beneficiary designation divesting any retained interest in the account that would cause inclusion of the account balance in the account owner's gross estate. In this case, generation-skipping transfer tax exemption could be assigned to the gifted account balance, permitting the potentially substantial growth in the account to pass to a lower generation beneficiary free of further tax.

Contribution Rules

Third, with a Roth IRA, unlike other IRAs, an individual may make contributions after attaining age 70 1/2. Fourth, a special rollover rule permits an individual who has AGI of $100,000 or less to roll over distributions from regular IRAs to a Roth IRA. The amount rolled over is includable in the individual's taxable income in the year of rollover (or, in the case of a 1998 distribution that is rolled over, in taxable income for 1998, 1999, 2000 and 2001, in equal amounts). The amounts rolled over do not count towards the $100,000 AGI amount. An individual who has current AGI of $100,000 or more might consider making nondeductible contributions to a regular IRA that could be rolled over to a Roth IRA in a future year at minimal tax cost.


Retroactive changes to the Roth IRA provisions may be enacted to impose a 10% premature distribution tax on a distribution of rolled over amounts within five years of rollover if the distributed amounts were included in taxable income at the time of rollover. An additional 10% tax (for a total of 20%) will apply if the rollover occurs in 1998, when the four year tax averaging provisions apply.

Retirement Benefits Planning Editor_Harvey B. Wallace II, Joslyn Keydel & Wallace, 211 West Fort St., Suite 2211, Detroit, MI 48226-3270.



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