| Sargent & Lundy Savings Investment Plan |
| IRA GIFT TO INVESTORS |
| The following excerpts are from an article in the Friday,
August 1, 1997 "Wall Street Journal". The opinions of the author,
Karen Damato, may or may not reflect those of the SIP Committee. The tax-free
retirement account discussed is part of the tax-cut bill approved last
week by Congress. It has not yet been signed into law by President Clinton.
The new tax-free retirement account offers a wealth of savings opportunities for many mutual-fund investors. Now comes the tricky part: deciding just how to make the most of it. The Roth IRA - previously known as IRA Plus - is "like having Christmas" for a large group of eligible taxpayers who currently don't qualify for tax-deductible contributions to traditional individual retirement accounts, says Stephen Corrick, a Washington tax partner with Arthur Andersen. These folks will now get the chance to put $2,000 a year into stock funds or other investments and avoid all federal tax as long as the money is used for retirement or other qualifying purposes. But the introduction of the Roth IRA - named for Senate Finance Committee Chairman William V. Roth Jr. - also raises tricky questions for lots of investors in the wake of the federal tax overhaul that emerged from Washington this week. The Roth IRA will be a boon to many middle-income and upper-income taxpayers who haven't been able to make deductible IRA contributions because they are covered by company retirement plans and have income above certain levels. In 1998, participants in corporate retirement plans can make a fully deductible IRA contribution only if their income is below $50,000 on a joint return or $30,000 on an individual one. In contrast, the full $2,000 contribution to a Roth IRA can be made by taxpayers with adjusted gross income of as much as $150,000 on joint returns and $95,000 on individual returns. The Roth IRA earnings will be tax-free if the money remains in the account for at least five years, and is then withdrawn past age 59-1/2 or for educational expenses or for the purchase of a first home. (The new option to pull money out early for education and home-buying applies to all retirement IRAs.) The Roth IRA's tax benefit remains intact in later years even if the holder's income soars above the contribution limits. For individuals who can choose between a deductible IRA and a Roth IRA, preliminary analyses suggest that tax-free growth in the future can be more valuable than getting a tax deduction today and pulling money out later at ordinary income tax rates. But not always. "The big determining factor is the tax bracket someone is in now compared to retirement," says Michael McCarthy, a financial planner with consultants Hewitt Associates in Chicago. If a person expects to pay tax at a lower rate in retirement, he says, "it probably makes sense to take the deduction now, when you get more of a tax break. " People strapped for cash also are likely to favor the deductible IRA, because the tax write-off reduces the out-of-pocket cost of funding the account. Another consideration" It's not yet clear whether all the states will waive their taxes on money in the new Roth IRAs. A couple of other favorable features in the Roth IRA: Investors can pull out an amount up to their original contribution, at any time, without getting hit with a tax penalty. And there is no requirement, as there is with a deductible IRA, for distributions to begin at age 70-1/2. The conversion question requires weighing even more pluses and minuses. William Brennan, a Washington tax and financial adviser, figures lots of people will simply pass on the chance. "You are asking them to pay a current tax now, for a theoretical future benefit," which he believes isn't such a compelling deal. Only taxpayers with adjusted gross income below $100,000 (apparently, on either a joint or individual return) can move money from an existing IRA to a Roth IRA without incurring tax penalties. Tax is due on some or all of the money coming out of the existing IRA (depending on whether it was funded with deductible or nondeductible contributions). But if the transfer is made before Jan 1, 1999, that distribution income and the resulting tax bite can be spread equally over four tax years. Initial analyses by T. Rowe Price and Arthur Andersen suggest that making the switch pays off over time - assuming the IRA holder has money outside the existing IRA that can be used to pay the taxes. If you convert, says Mr. Corrick of Arthur Andersen, "you pay today for the opportunity never to have to pay tax in the future on the appreciation. " One complication, though: taking a large sum out of an IRA can bump the taxpayer into a higher tax bracket over the next few years. Frank McArdle, manager of Hewitt Associates' Washington research office, sees another "risk factor, long-term" in converting. At some point, he frets, Congress might make the rich tax-free treatment of Roth IRAs a little less sweet. "There are lots of ways for Congress to revisit decisions like this," he says. |
This page updated on 8/4/97