ROANOKE TIMES
Copyright (c) 1997, Roanoke Times
DATE: Monday, March 31, 1997 TAG: 9704010011
SECTION: MONEY PAGE: 6 EDITION: METRO
SOURCE: MAG POFF THE ROANOKE TIMES
THIS YEAR BROUGHT an important change in Individual Retirement Accounts that should greatly benefit couples with only one working spouse. The new regulation also makes withdrawals easier.
But the law is not retroactive. You have until the time you file your federal income tax return, up to the April 15, to pay into your 1996 IRA. You can also make your 1997 contribution to the account, making this one of the busiest times of year for deposits into the retirement plans.
As of Jan. 1 this year, all couples can put a combined $4,000 into their IRAs starting with 1997 contributions. That's a maximum contribution of $2,000 a year for each person, although you can sock away any lesser amount up to that ceiling.
Until this year, couples with a nonemployed spouse were limited to a combined total contribution of $2,250. Now there is no distinction between couples who are employed and couples with a nonworking spouse.
How valuable is this increase?
Robert Kulp, manager of the Roanoke office of A.G. Edwards & Sons, said that change of $1,750 could give a 35-year-old couple an additional $176,878 at retirement. That assumes a 7 percent annual investment return on a tax-deferred basis over 30 years.
"Even if you and your spouse both work," Kulp said, "the new legislation serves as a reminder of just how valuable early, systematic contributions to your IRA can be for your retirement."
Depending on the type of financial institution where you open your IRA, he said, you generally have flexibility and control over how you invest your funds.
You can set up an account using a certificate of deposit at a bank, or you can invest in any mutual fund. Or you can set up a self-directed IRA at a brokerage house or some banks and put your money in virtually any investment.
Kulp said even a difference of one percentage point in your IRA investment return can mean a major variation in your IRA's long-term performance.
He gave an example of a couple who contribute the combined maximum of $4,000 every year for the next 40 years.
If you choose investments that yield an annual return of 7 percent, he said, your two IRAs would grow to about $854,000.
But if you find investments for the same savings that yield an 8 percent annual return, you could be millionaires. You would build your IRA value to about $1.11 million over that 40-year period.
If either spouse is covered by an employer's pension plan, you can take the full deduction for your contribution as long as your adjusted gross income is no more than $40,000 for a couple or $25,000 for a single tax filer.
The deduction is phased out until it disappears entirely for married couples with adjusted gross income of $50,000 or single people earning $35,000.
Employees with no retirement plan at work automatically qualify for the full deduction. But both are limited if just one spouse is covered by a company pension.
You can't contribute more money to an IRA than you earn, so retired people can no longer make annual contributions.
Contributions that were taxed won't be taxed again on withdrawal. But if you qualify for a deduction now, you will have to pay tax on that share of the money when you make your withdrawals.
Earnings on both deductible and nondeductible contributions will be taxed at the time of withdrawal. But the tax deferment on the earnings makes IRAs attractive to people who cannot deduct the contribution itself.
Be warned, however, that in most cases you will pay a 10 percent penalty, in addition to usual taxes due on the money, if you withdraw it earlier than age 591/2.
However, the law on withdrawals has been relaxed starting this year.
The 10 percent penalty no longer applies to withdrawals used to pay unreimbursed medical expenses in excess of 7 percent of your gross income. These are the medical expenses you can deduct on your federal income tax return.
Nor does the 10 percent penalty apply if you lose your job, receive unemployment compensation for at least 12 consecutive weeks or use the IRA withdrawal to buy health insurance for yourself, your spouse or your dependents.
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