Traditional and Roth IRAs:
Retirement planning benefits of the Taxpayer Relief Act of 1997
What the Taxpayer Relief Act of 1997 does...
The Taxpayer Relief Act of 1997 (TRA '97) is the largest tax cut since 1981, most of which
goes into effect in 1998. This Act provides many tax benefits for people who want to put
away money for their retirement, their child's education, or for the purpose of their home.
According to leading tax authorities, TRA '97 will give taxpayers nearly $95 billion tax relief.
Some principal provisions of the new law include:
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Enhancements to Individual Retirement Account (IRA) programs, including new tax-favored
savings programs and broader eligibility for IRAs.
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A $500 per child tax credit.
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Educational tax incentives, including tax credits and tax deductions.
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Lower capital gains rates.
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Lower estate and gift taxes.
For retirement planning
TRA '97 greatly expands the usefulness of the IRA as a tax-favored financial vehicle for retirement,
first-time home ownership, and qualified education expenses.
TRA '97 will allow more flexibility in IRAs and give more people access to IRA tax advantages.
The key changes include:
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Increase of income limit for tax-deductible IRAs.
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Withdrawal from IRAs without penalty taxes for qualified higher education expenses and for
first-time homeowners.
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Creation of the Roth IRA to provide earnings potentially free of Federal income tax.
The Traditional tax-deductible IRA
The Traditional IRA has become even more valuable under the provisions of the TRA '97. It allows
more people to qualify for tax-deductible IRAs. It also allows contributors to withdraw money
penalty-free for college expenses or for first-time home purchases.
If neither spouse participates in a company-sponsored retirement plan, each can deduct the
full $2,000 IRA contribution. But if one spouse participates in an employer plan, income limits
restricting the deductibility of IRAs will apply. These adjusted gross income (AGI) limitations,
which will gradually phase out tax deductible contributions will increase from $40,000 to $80,000
for joint filers by the year 2007 and $25,000 to $50,000 by the year 2005 for a single taxpayer.
A non-working spouse can take the full $2,000 tax deduction if the other spouse participates in a
company-sponsored retirement plan, but that is phased out beginning at $150,000 joint AGI.
Withdrawals from IRAs are taxable in the year withdrawn. Withdrawals are subject to a 10 percent
penalty unless:
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The contributors are 59 and a half or older.
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To pay the costs of buying a principle residence by a first-time home buyer (withdrawal
limited to $10,000).
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To pay qualified higher education expenses.
The non-deductible, tax-free Roth IRA:
The Roth IRA can accumulate tax-deferred and can be distributed tax-free! It is, in a sense, the
opposite of a traditional IRA. Yearly contributions are not deductible from income, but earnings
on the Roth IRA can be tax-free.
These features distinguish the Roth IRA from the Traditional IRA:
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No tax deduction for contributions to the account
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Distribution only required at the death of the contributor
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Qualified distributions are not included in income
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Contributions can be made beyond age 70 and a half
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Distribution is not required at age 70 and a half
Qualified Distribution
Tax-free and penalty-free qualified distribution is possible five years after the first tax-year
in which contributions are made if the distribution is due to:
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Attainment of age 59 and a half
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Disability
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First home purchase (limited to 10,000)
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Death
Non-qualified distribution of earnings is taxable income and can be subject to a 10
percent IRS penalty tax.
Broader eligibility
There is no age limit for making contributions. You must have earned income
equal to the amount of your contribution, up to $2,000 annually for an individual or a
combined $4,000 for spouses.
Limits on contributions
If your adjusted gross income exceeds $150,000 and you file jointly, (95,000 for
single filers) the amount you may contribute is gradually reduced. The combined
total of IRA and Roth IRA accounts cannot exceed the maximum annual contribution
of $2,000 per individual.
How your Farmers agent can help
Your Farmers agent offers a variety of retirement planning options, including IRAs and
nonqualified annuities, to meet your retirement planning needs. Farmers individual
Retirement Annuities can offer significant advantages for maximizing retirement cash
accumulation without compromising safety.
There is a heavy cost associated with waiting too long to establish a well-considered
retirement program. Now is the time to discuss your retirement goals and establish a
retirement plan - contact your Farmers agent and set up a Farmers Friendly Review.
You need to know...
The Taxpayer Relief Act of 1997 (Public Law 104-34) is an extensive piece of Federal
legislation consisting of 17 different titles and approximately 1,000 pages. This information
is not intended to be a comprehensive overview of of the legislation. Rather, it provides brief
information about a few key provisions that may be of interest to our customers.
This information does not discuss the effect of this new Federal legislation on state income tax
statutes and regulations. Customers should understand that the taking of any action in reliance
on the Federal law could have state tax law consequences. Customers should also understand
that parts of this law are not effective immediately and action should not be taken without
knowledge of the appropriate effective date. Federal Regulations and other implementation
legislation may be forthcoming which will further clarify certain aspects of the law.
Farmers does not provide nor is this information intended to be legal or tax advice for policyholders
or prospects. This information reflects our current understanding of this new law and is intended
solely for the customers of Farmers agents for informational purposes only. Each taxpayer should
consult his or her own tax advisor as to the effect of any particular transaction.
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