What are the new IRA provisions?

Starting with regular or Traditional IRAs, more people will be able to deduct their annual contributions - good news to investors who were formerly disqualified. Under the old rules, only investors who didn't have access to an employee-sponsored plan, such as a 401(k), or whose incomes fell below a certain level, could deduct their IRA contributions. Under the new law, these income caps will rise significantly over the next several years, and most people will be eligible to contribute to an IRA - even if their contributions aren't tax-deductible. If you don't qualify for deductible contributions, your earnings can still benefit from the power of tax-deferred compounding. You won't pay taxes on the growth of your investment until you begin to withdraw the money, at which time it will be taxed as ordinary income.

What is a qualified withdrawal?

One of the biggest advantages of the Roth IRA is that investors can establish tax-free growth of their investments and make qualified withdrawals without penalties or taxes. The following constitutes a qualified withdrawal for a Roth IRA:

• Withdrawals may only be made after the five-year period beginning with the first tax year the individual made a contribution to the Roth IRA.
• It must also include one of the following: Made on or after the date the individual reaches 59-1/2; or made to a beneficiary of the individual's estate or or after the individual's death; or attributable to the individual's being disabled; or made for up to $10,000 of first-time homebuyer expenses.

I participate in my company's 401(k) plan, but I've heard that my spouse may now be able to make deductible IRA contributions. Is this true?

Yes, with certain rules regarding income, your spouse can contribute. The new law allows for working or non-working spouses of employer-plan participants to open and contribute up to $3,000 into their own IRA.

The income limits for these tax-deductible contributions are higher, with the phase-outs beginning at $150,000 (partial tax deductions are available for those between the $150,000 - $160,000 adjusted gross income range). Not only can more couples benefit from a tax-deduction, there's also the opportunity to significantly expand retirement savings!

Can I convert my existing Traditional IRA to a new Roth IRA?

Yes, if your adjusted gross income is less than $100,000, you can convert in 1998 (or later). Of course, you will still have to pay tax on your transferred amount. Married individuals filing separately cannot make such a transfer. Please have a qualified tax professional calculate your tax amount. Another bit of good news - if you convert funds before January 1, 1999, you can pay the taxes over a four-year period.

What about the Coverdell Education Savings Account IRA?

These specialized IRAs allow you to invest $2000 per year per child to pay for future higher-education expenses. As with a Roth IRA, the money you invest in a Coverdell Education Savings Account IRA is not deductible, but future withdrawals to pay for higher education are tax-free. Money from these specialized IRAs can be used to pay for more than tuition. Books, supplies, and room & board for full-time students are also covered.

Of course, there are parameters. Money in Coverdell Education Savings Account IRAs has to be used by the time your child reaches the age of 30, or it will be taxed and subject to an additional 10% penalty. If a child does not use the money in the account, it can be transferred to another child to pay for higher education. These specialized IRAs cannot be used to pay for daycare, pre-school, elementary or secondary schooling.

The money you invest in Coverdell Education Savings Account IRAs does not count against the maximum you may invest in your other IRAs. However, eligibility to contribute to Coverdell Education Savings Account IRA follows the income guidelines for a Roth IRA.

The contribution for Coverdell Education Savings Accounts has been increased to $2000 per year.

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