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82
Friday, February 13, 1987
THE DETROIT JEWISH NEWS
■•■
••BARRY J. WEISBERG
The investment implications
of The Tax Reform Act of 1986
have given investors good rea-
son to re-evaluate the direction
of their retirement planning.
' Perhaps the foremost question
on the minds of most IRA (In-
dividual Retirement Account)
investors these days is: Will
the role of an IRA under the
new tax law change the way I
plan for retirement?
Taxpayers should take ad-
vantage of an IRA for 1986. For
many taxpayers 1986 may be
the last year to enjoy the full
tax deductions for an IRA con-
tribution. The most significant
tax changes involving IRAs
don't take effect until the 1987
tax year. So, if confusion about
tax reform's impact on the IRA
was the only question in decid-
ing whether you should make
your 1986 contribution, don't
delay any longer. You can de-
duct your entire 1986 contribu-
tion (up to the lesser of $2,000
or 100 percent of your earned
income) and you have until
April 15, 1987 to do so. The
sooner you make contribution,
however, the sooner your in-
vestment earnings will grow,
deferred from taxes.
You will be able to deduct
IRA contributions in 1987 and
beyond.Beginning with the
1987 tax year, you will still be
able to deduct your IRA contri-
- bution, regardless of your in-
come, if neither you nor your
spouse is an "active partici-
pant" in an employee-
sponsored qualified retirement
plan. But what exactly is an
active participant?
The general rule is that an
employe is an active partici-
pant if the individual is
covered by a pension or profit-
sharing plan. Among the
categories of tax-qualified
plans mentioned by the IRS as
falling under this provision are
profit-sharing plans, tax-
sheltered annuity ar-
rangements, 401(k) plans and
simplified employee pension
plans.
This "active participant"
area of restrictions on IRA de-
ductibility is more difficult to
comprehend because an em-
ployee does not necessarily
have to be fully or (even) partly
vested in retirement benefits,
make any contribution to the
plan or work for the employer
for a whole year to be consid-
■.■
548-6633
Weisberg is a financial
consultant with the Souhfield
office of Shearson Lehman
Brothers.
ered an active participant. Due
to the complex nature of these
issues, you should consult your
tax adviser on how the law
applies to your individual situ-
ation.
However, even if you are an
active participant in a retire-
ment plan, you may still be
able to deduct all or part of
your annual IRA contribution.
You can deduct your entire
contribution (up to the lesser of
$2,000 or 100 percent of your
earned income) in future tax
years if you: are single and
have an adjusted gross income
of less than $25,000; or, are
married, file jointly, and have
a combined income of less than
$40,000.
Deductibility however, is not
permitted if you (or your
spouse) is an active participant
in a retirement plan and your
adjusted gross income exceeds
$35,000, when filing a single
return, or exceed $50,000,
when filing a joint return.
Partial deductibility is per-
mitted for active participants
(and their spouses) in a retire-
ment plan if their adjusted
gross income falls between
$25,000 and $35,000 on a
single return or $40,000 and
$50,000 on a joint return..In
these instances, your IRA's de-
ductibility is reduced by 10
percent for every $1,000 above
the base amounts of $25,000
and $40,000, respectively.
Make IRA contributions in
future years even if they are
not tax-deductible. Stop worry-
ing about the loss of tax-
deductibility for your future
IRA contributions. These con-
tributions will still accumulate
earnings on a tax-deferred
basis, which has always been
the most important feature of
IRAs from a retirement plan-
ning perspective. Tax-deferred
earnings is the cake—
deductibility was just the ic-
ing.
The tax deferral feature that
IRAs offer has never caught
the investing public's fancy in
the same way deductibility
has, but the following example
wil show the added earning
power tax deferral can get you.
Suppose that an investor in
the 28 percent tax bracket puts
aside $2,000 each year for re-
tirement and earns 9 percent
annually on the investments.
In an IRA, where income and
capital gains compound tax-
deferred, the account will grow
to about $112,000 after 20
years. That amount represents
a gain that's nearly 40 percent
higher than if the money were
(
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