Traditional IRAs - 1998 Changes

Note: Current as of 1/1/98. Some items below have been changed in the 1998 Technical Corrections Act.

Beginning in 1998, four rules for traditional IRAs (IRAs other than Roth IRAs, SIMPLE IRAs, or education IRAs) have changed. Generally, you can now do the following.

1. Ignore, in most situations, your spouse's participation in an employer plan in determining your IRA deduction.
2. Have a higher modified adjusted gross income and still claim a deduction for contributions to your IRA.
3. Make penalty-free early withdrawals from your IRA for qualified:
   1. Higher education expenses, or
   2. Acquisition costs of a first home.
4. Invest IRA funds in certain platinum coins and gold, silver, palladium, and platinum bullion.

Spouse Covered by Employer Plan

Beginning in 1998, even if your spouse is covered by an employer-sponsored retirement plan, you may be able to deduct all your contributions to an IRA if you are not covered by an employer plan. The deduction is still limited to $2,000 (which must be reduced if your modified adjusted gross income (AGI) on a joint return is more than $150,000 but less than $160,000). Your deduction is eliminated if your modified AGI on a joint return is $160,000 or more. Modified AGI is the AGI on your return figured without taking any IRA deduction, foreign earned income exclusion, foreign housing exclusion or deduction, or exclusion of series EE bond interest shown on Form 8815.

Figure your reduction by subtracting $150,000 from your modified AGI and dividing the result by $10,000. For more information on deductible contributions, see IRS Publication 590.

Modified AGI Limit Increased

For 1998, if you are covered by a retirement plan at work, your IRA deduction will not be reduced (phased out) unless your modified adjusted gross income (AGI) is within the range listed below for your filing status.

1. $50,000 to $60,000 (previously $40,000 to $50,000) for a married couple filing a joint return or a qualifying widow(er).
2. $30,000 to $40,000 (previously $25,000 to $35,000) for a single individual (or head of household).
3. $-0- to $10,000 (no change) for a married individual filing a separate return.

You cannot claim an IRA deduction if your modified AGI is equal to or more than the high end of your phaseout range. For more information on figuring your IRA deduction when you are subject to the AGI limit, see IRS Publication 590.

Increases after 1998. For years beginning after 1998, the low and high of each phaseout range (except for separate returns) will increase by $1,000 each year through 2002. After 2002, there will be larger increases.

Penalty-Free Early Withdrawals

Beginning in 1998, you can take distributions from your IRA to pay qualified higher education expenses or to buy, build, or rebuild a main home. You will owe income tax on at least part of the distribution, the same as with other IRA distributions, but you will not have to pay the 10% additional tax on early withdrawals. Generally, if you take distributions from your IRA before you reach age 59 1/2, you must pay the 10% additional tax.

Withdrawals for higher education expenses. To qualify as a penalty-free withdrawal for higher education expenses, a distribution must meet the following requirements.

1. It must be used to pay qualified higher education expenses (defined later) for education furnished at an eligible education institution (defined later) to any of the following family members:
   1. You,
   2. Your spouse,
   3. Your or your spouse's children, or
   4. Your or your spouse's grandchildren.
2. It must be used to pay qualified higher education expenses remaining after the following reductions.
   1. Tax-free distributions from an education IRA.
   2. Any qualified scholarships, such as a Pell Grant, that are excludable from income.
   3. Certain educational assistance allowances, such as employer-provided educational assistance, provided under federal laws.
   4. Any payment (other than a gift, bequest, or devise) due to enrollment at an eligible education institution that is excludable under federal law.
3. It must not be more than the qualified higher education expenses for the year that are remaining after the adjustments described in item (2).

1. An individual's earnings,
2. A loan,
3. A gift,
4. An inheritance given to the student or the individual making the withdrawal, and
5. Personal savings (including savings from a qualified state tuition program).

Qualified higher education expenses. Qualified higher education expenses are tuition, fees, books, supplies and equipment required for the enrollment or attendance of a student at an eligible education institution. In addition, if the individual is at least a half-time student, room and board are considered qualified higher education expenses.

Eligible education institution. This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in the student aid programs administered by the Department of Education. It includes virtually all accredited, public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. The education institution should be able to tell you if it qualifies under that law.

You can also take these penalty-free distributions from a Roth IRA.

Qualified first-time homebuyer distribution. To qualify for penalty-free withdrawal treatment as a first-time homebuyer distribution, a distribution must meet the following requirements.

1. It must be used to pay qualified acquisition costs (defined later) before the close of the 120th day after the day you received it.
2. It must be used to pay qualified acquisition costs for the main home of a first-time homebuyer (defined later) who is any of the following:
   1. Yourself,
   2. Your spouse,
   3. Your or your spouse's child,
   4. Your or your spouse's grandchild, or
   5. Your or your spouse's parent or other ancestor.
3. When added to all your prior qualified first-time homebuyer distributions, if any, the total distributions cannot be more than $10,000.

Qualified acquisition costs. Qualified acquisition costs include the following items.

1. Costs of acquiring, constructing, or reconstructing a home.
2. Any usual or reasonable settlement, financing, or other closing costs.

First-time homebuyer. A first-time homebuyer is, generally, any individual (and his or her spouse, if married) who had no present ownership interest in a main home during the 2-year period ending on the date the individual acquires the main home to which these rules apply.

Date of acquisition. The date of acquisition is the date that:

1. The first-time homebuyer enters into a binding contract to acquire the main home to which these rules apply, or
2. Construction or reconstruction of the main home to which these rules apply begins.

Investment in Certain Coins and Bullion

Beginning in 1998, your IRA can invest in certain platinum coins and gold, silver, and platinum bullion. These investments will not be considered an investment in collectibles and will not be treated as a distribution from your IRA, if:

1. The platinum coins are minted and issued by the Treasury Department, and
2. The bullion is issued by the Treasury Department and it meets or exceeds the minimum fineness standards for contracts traded on authorized boards of trade in the United States.

© Copyright 1998 Raymond S. Kulzick. All rights reserved. 980919.

This publication provides business, financial planning, and/or tax information to our clients. All material is for general information only and should not be acted upon without seeking appropriate professional assistance.  Disclaimer.

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Copyright © 1998 Kulzick Associates, PA - Last modified: September 13, 2008