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Balance Budget Act 1997


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December 1998

Editor: Scott Gottlieb, CPA
Assistant editor: Susan A. Maffetone, CPA

Some Background on the Roth IRA

Beginning in 1998 married taxpayers having AGI not exceeding $150,000 ($95,000 for singles) can annually contribute $2,000 to a Roth IRA. Married taxpayers filing separate tax returns are not eligible. Eligible Roth IRA contributions are phased out for taxpayers with AGI from $150,000 to $160,000 ($95,000 to $110,000 for singles). To allow IRA contributions, a special rule treats a husband and wife filing separate returns and living apart at all times during the tax year as not married.

Roth IRAs are more flexible in allowing contributions than regular deductible IRAs. Working taxpayers, age 70 wQ or older, can still contribute to a Roth IRA. Similarly, taxpayers with AGI not exceeding $150,000 ($95,000 for singles) can still contribute $2,000 each to a Roth IRA, even if they are active participants in an employer's pension plan.

Upon the death of the Roth IRA owner, distributions must be made by the end of the tax year containing the fifth anniversary of the date of death or over the life expectancy of the designated beneficiary starting by December 31 of the year following the Roth IRA owner's death. If distributions do not commence by Dec. 31 of the year following the Roth IRA owner's death, the first distribution method is considered chosen.

During the taxpayer's life, mandatory distribution rules do not apply to Roth IRAs. The taxpayer's spouse may be the sole beneficiary of the Roth IRA. In that case, upon the taxpayer's death, the surviving spouse is treated as the Roth IRA account owner. The surviving spouses can name a new beneficiary and accumulate tax-free income over the surviving spouse's life. Upon the surviving spouse's death, the Roth IRA passes tax-free accumulations to the newly named beneficiary. The beneficiary of the surviving spouse then distributes the Roth IRA tax free over his or her lifetime.

In computing the maximum contribution to Roth IRAs, taxpayers must subtract from $2,000 all contributions made to deductible and nondeductible regular IRAs. Though employers' "qualified plans" don't reduce the amount an individual can contribute to a Roth IRA, contributions made by or on behalf of an individual under a SEP or SIMPLE IRA are treated as contributions to an IRA. Thus an individual who makes elective contributions and receives matching contributions to a SIMPLE IRA equal to $2,000 for the year is not eligible to contribute to a Roth IRA for that tax year.

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