Deadline To Establish An IRA

An IRA can be established and funded at any time between January 1 of the current year, up to and including the date an individual's income tax return is due (generally, April 15 of the following year); not including extensions.

Can Deduction Be Taken Prior To Investment Of The Funds?

Yes. This, in effect, permits an individual (0 file his return early in the year; e.g., January, and use his or her tax refund to make the actual contribution prior to April 15. Revenue Ruling 84-18, l984~1 C.B. 88

Types Of Arrangements Permitted

There are currently two types of IRAs:

A. Individual Retirement Accounts: A trust with a corporate trustee.

B. Individual Retirement Annuities: This is a special annuity issued by an insurance company.

Contribution And Deduction Limits

A wage earner may contribute and deduct the lesser of $2,000 or 100% of earned
income for the year. If the wage earner is married, an additional $2,000 may be
contributed and deducted on behalf of a lesser earning (or non-working) spouse, using
a "spousal" IRA account. This means the family unit may contribute up to a total of
$4,000 as long as family earned income is at least that amount.

Other Retirement Plans May Reduce Or Eliminate Deductions

Taxpayers who participate in an employer's plan may make fully deductible IRA contributions only if their adjusted gross income (AGI) is below $51,000 if married filing jointly, $31,000 if single, and $0 if married filing separately. If AGI exceeds these amounts, the $4,000 family, or $2,000 individual limit is reduced by a formula which eventually permits no deduction. No IRA deduction is allowed for married couples filing jointly with AGI over $61,000, single individuals with an AGI over $41,000, and married couples filing separately with an individual AGI over $10,000.

For a taxpayer who is not an active participant in an employer plan, but whose spouse is, the maximum deductible IRA contribution is phased out if their combined AGI is between $150,000 and $160,000.

Employer plans include: regular qualified plans; Keogh Plans; Sec. 403(b) tax-sheltered annuity plans; Simplified Employee Pension (SEP) plans; SIMPLE plans; and state, federal, and local government plans (except Sec. 457 nonqualified deterred compensation plans).

Individuals with income in excess of the above limits may wish to make contributions to a Roth IRA on a nondeductible basis.

Distributions, Withdrawals, And Taxation

A. Typical Payment Plans:

1. Single Sum Distribution: Becomes part of taxable income for that year (less any nondeductible contributions).
2. Life Expectancy of the Participant (and a designated beneficiary, if desired): To avoid penalties, minimum distributions  must be made each year after age 70 1/2,
however, life expectancy can be recalculated each year to minimize actual distributions.
3. A Fixed Period of Years: The period cannot exceed the participant's life expectancy (or joint life expectancies of participant and designated beneficiary).

B. Premature Distributions: Withdrawals and distributions prior to age 59-1/2 arc subject to a 10% penalty tax, in addition to current income tax, unless:

1. A distribution is made because of the death or disability of the participant; or
2. A distribution is paid as an annuity over the life of the participant; or the joint lives of the participant and a designated beneficiary. The 10% penalty is triggered if the distribution schedule is modified within five years, or before attainment of age 59-1/2, if later; or
3. The distribution is rolled over into another IRA.

Other exceptions to the 10% premature withdrawal penalty rule include:

1. Distributions used to pay for medical expenses in excess of 7.5% of AGI.
2.     In certain situations, IRA withdrawals by unemployed individuals to pay health insurance premiums.
3. If the IRA distribution is used to pay education expenses for the individual₇ a spouse, child, or grandchild. This applies to expenses paid after 1997 for education (including graduate level) furnished in academic periods beginning after 12/31/97.
4.     For a first-time homebuyer, there is a lifetime exception of $10,000 from the 10% penalty tax. The purchaser of the home may be the individual, spouse, child, or grandchild. A first-time homebuyer is someone; or his or her Spouse; who had no ownership in a principal residence during the preceding two years prior to the purchase of the "new" home.

C. Required Distributions: Minimum distributions must begin by April 1 of the calendar year following the year in which the participant reaches age 70-1/2. Thereafter; the minimum distribution must be made by the end of each calendar year. The minimum distributions may be paid:

1. Over the life or the lives of the participant and a designated beneficiary_, or
2. Over a fixed number of years, not to exceed the life expectancy of the participant or the joint life expectancies of the participant and a designated beneficiary.
3. A 50% excise tax is levied on amounts, which should have been distributed; but were not.

D. Taxation of Distribution:

1. During Life: Distributions are taxable as ordinary income.
2. At Death: At the participant's demise, the distributions received by a beneficiary are taxed as ordinary income.² If the participant dies before distributions have begun; distributions must be paid out over a 5-year period or less; or over the life expectancy of a designated beneficiary, if such a schedule is elected within one year of the participant's death. If the distributions are paid to the surviving spouse, they may be paid out over the life expectancy of the spouse and must begin by the end of the year in which the participant would have attained age

Caution is required in making a QTIP trust the beneficiary of an IRA.

For federal estate tax purposes, the value of the IRA is included in the gross taxable estate of the participant.

A. Banks and Savings and Loans: Certificates of deposit are generally protected by EDIC. Fixed and variable rates are available. There may be stiff penalties for early withdrawal.

B. Annuities: Traditional individual retirement annuities issued by insurance. Companies can guarantee fixed monthly income at retirement and may include a "waiver of premium" provision. Variable annuities do not guarantee a fixed monthly income at retirement.

C. Money Market: Yield fluctuates with the economy. Investor cannot lock in the higher interest rates. It is easy to switch to other investments.

D. Mutual Funds: Capital gains, interest and dividends are tax-deferred in an IRA but are taxed as ordinary income at withdrawal.

E. Zero Coupon: Bonds are bought at deep discount originally. There are no interest payments to worry about reinvesting. Zero coupon bonds are subject to inflation risk and interest rate risk

F. Stocks: A wide variety of investments and risk is possible. Capital gains are taxed as ordinary income at withdrawal. Losses are not deductible.

G. Limited Partnerships: Some limited partnerships are especially designed for qualified plans, specifically in the areas of real estate and mortgage pools.

Prohibited Investments Or Transactions For IRAs

A. Life Insurance: IRAs cannot include life insurance contracts.

B. Loans to IRA Taxpayer: Self-borrowing triggers constructive distribution of the entire amount in an IRA. It becomes currently taxable plus a 10% penalty if under age 59½.

C. Collectibles: Purchases of art works, antiques, metals, gems, stamps, etc. will be treated as a taxable distribution. Coins issued under state law and certain U.S. gold, silver, and platinum coins are exceptions. Some kinds of bullion may be purchased.

Other Factors To Consider

A Is the interest rate fixed or variable? If interest rates drop, a fixed rate is better, especially if you can make future contributions at the same fixed rate. If interest rates go up, you may be able to roll the account over to another IRA.

B. What is the yield? More frequent compounding will produce a higher return.

C. How often can you change Investments? What is the charge?