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About What's happening. (Eugene, OR) 1982-1993 | View Entire Issue (Dec. 3, 1987)
■FINANCE The IRA—still a good strategy by Bere Lindley and Julia Lucich W ■hen the Tax Reform Act of 1986 (TRA-86) was enacted one year ago, one feature that received much attention was the ' reduced benefit of Individual Retire ment Arrangements (IRAs). When the news of this aspect of the TRA-86 got out, many of the people affected by the changes were discouraged from continuing their IRA contributions. What many people do not realize is that if an IRA made sense before the law was changed, it will probably continue to be a wise program. Another fact that can get overlooked is that many people are entirely un affected by the new restrictions. In any case, we must keep in mind the fact that IRAs were designed for long term accumulation or retirement funds, not to save up for shorter term needs such as emergency cash. You probably should not be involved with an IRA until you have considered your shorter term savings needs. A brief review of the prior law reveals that any taxpayer could claim a deduction on his or her tax return for the amount contributed to an IRA, up to $2,000, so long as the taxpayer had earned income that year of at least the amount deducted on the tax re turn. In addition, a non-working spouse could contribute (and deduct on the tax return) up to $250 to a “spousal” IRA. So then, precisely who is affected by the change and who is not? There are three groups of taxpayers which are each affected differently by the change of law, so you first need to determine which group you belong to. What the TRA-86 changed was the amount over $40,000 ($25,000 for single taxpayers), and then only if the taxpayer (or the taxpayer’s spouse) is an active participant in an employer sponsored retirement or tax sheltered annuity plan. In other words, you are unaffected by the rule changes if you and your spouse are not participating in an employer sponsored plan, OR you are participating but your adjusted gross income is under $40,000 ($25,000 for single taxpayers). This is Group One. If you are in Group One, you are probably well advised to use your IRA to the maximum extent. Supper at Southtowne Light dinners from 5-8 pm, Monday through Saturday. Music from 6-8 on Friday nights. JOIN US! Southtowne Shoppes 28th & Oak Eugene The COFFEE CORNER Ltd.. If you fall outside the unaffected group, an IRA may still be worth while. Under the new rules, if the tax ' payer (or spouse) participates active ly in an employer sponsored plan and adjusted gross income exceeds $40,000 ($25,000 for single tax payers), the available tax deduction for an IRA slopes down from $2,000 at $40,000 ($25,000 for single tax payers) of adjusted gross income to zero at $50,000 ($35,000 for single taxpayers) of adjusted gross income. This income range constitutes Group Two. For members of Group Two, some amount of tax deduction is still available. For example, a Group Two married taxpayer with adjusted gross income of $45,000 would qualify for half the maximum deduction, or $1,000. So, taxpayers who fit into this income range still can benefit from contributing to their IRAs. it your adjusted gross income is $50,000 ($35,000 for single taxpayers) or greater, and you (or your spouse) participate actively in an employer sponsored plan, then you belong to Group Three, and you cannot deduct any amount for an IRA on your tax return. Yet there is still one very im portant tax benefit available to Group Three taxpayers who contribute to an IRA. Even though as a Group Three taxpayer you cannot deduct any of your IRA contribution, the earnings of your IRA investments are tax free until they are withdrawn from the IRA. This single tax break increases in importance as your income in creases and your IRA balance increases. Let’s conclude with three sugges tions to guide your IRA strategy. If you are in Group One you might want to make the maximum contribution to your IRA. This may be especially ad vantageous if you have no alternative such as an employer sponsored retire ment or profit sharing plan. If you are in Group Two, you can make the max imum possible contribution to your employer sponsored plan to maximize the deductions on your tax return, then contribute to your IRA up to the maximum deduction amount for your income level. If you are in Group Three, first make the maximum possi ble contribution to your employer sponsored plan in order to get the maximum tax deduction available. Then, you may want to make a nonde ductible IRA contribution up to the maximum amount for a sheltered in vestment. This maximum amount is $2,000 per working taxpayer, and $250 for a non-working spouse. However, taxpayers in Uroups two and Three may have some expensive accounting difficulties upon with drawal if they have made nondeduc tible contributions. For this reason, you and your advisor may wish to con sider tax exempt alternatives to non deductible IRA contributions. Finally, the caveat: These explana tions and recommendations are high ly generalized and will not yield the best results in every case. See your own financial or tax advisor for help with an individual strategy. Questions or suggestions for future articles may be sent to: W.H. Finance, 335 W. 20th, Eugene, OR 97405. [Be re W. Lindley, CPA is a partner in the accounting firm of Blackburn & Lindley, which offers Tax, Planning, Estate, Accounting, and Management Advisory Services. Julia Lucich is an agent/Registered Representative of the New York Life Ins. Co. /New York Life Securities Corp., specializing in Business Insurance and Estate Plan ning.! 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