New and old rules to keep IRAs aloft

ONE of the most basic rules of the IRA game - fully deductible deposits for all taxpayers - has been changed, but many of the other rules are the same. Here is a rundown of some of the old and new IRA regulations: The $2,000 annual limit on contributions has not changed. A married couple with only one partner working can open a ``spousal'' IRA with a $2,250 annual limit. You can, of course, put in as little as you like up to these limits; it just depends on the minimum-deposit requirements of your IRA sponsor. At some banks and thrifts, for instance, it's $50, while a mutual fund may want no less than $250.

The entire IRA contribution is still fully deductible for single people covered by a qualified pension plan and earning less than $25,000 and married couples with pensions who are earning less than $40,000. If the single person earns more than $35,000 or a couple earns more than $50,000, they cannot take any deduction. Between those figures, the deduction is reduced as income goes up.

In general, the deduction is reduced by $1 for every $5 of income in excess of $25,000 for single people and by the same about for married couples in excess of $40,000.

Whether or not you get the deduction in the future, you can still make your maximum IRA contribution every year and the account will compound tax-free until withdrawal. This will make your money grow much faster than it would in a taxable non-IRA vehicle, assuming the same rate of return (see chart).

If neither you nor your spouse is covered by an employer-sponsored pension plan, you can take the full deduction, no matter how much money you make. (Conversely, if either of you is covered by any kind of pension, and you are over the income limits, you are both ineligible for the deduction.)

An employer-sponsored plan includes any qualified plan, profit-sharing, stock bonus plan, 401(k), 403(b) tax-sheltered annuity, Simplified Employee Plan (SEP), or 501(c)(18) union pension trust.

With lower tax rates, the IRA deduction isn't worth as much anymore, even for those who still have it. When the top rate was 50 percent, a $2,000 IRA contibution saved a person $1,000 in taxes. In the 40 percent bracket, the saving was about $800. When the top rate is 28 percent as of next year, the saving won't go over $560.

For this IRA season - where you have until April 15 to make an IRA contribution for 1986 - the rules don't change. No matter what your income or pension situation, you can make the maximum possible IRA contribution and take the full deduction on your 1986 Form 1040.

If you are making a 1986 IRA contribution now, make sure you designate on the deposit slip or the check (both if possible) that this is a 1986 deposit. Otherwise, the Internal Revenue Service might force you to count it as a 1987 contribution and not allow the deduction.

A new IRA option has been added. You can now include gold and silver coins minted by the US Treasury, as long as an IRA trustee or custodian holds the investment.

Any withdrawals made before age 59 will be subject to a 10 percent penalty on the amount withdrawn, except in the case of death or disability. After that age, there is no penalty, so the IRA could be used as a short-term, tax-sheltered savings acocunt.

Regular withdrawals for retirement must begin by age 70. If you turned 70 last December, the first withdrawal must be made by April 1, 1987, and the second before Dec. 31, 1987.

You can still borrow to make an IRA deposit. In the past, many people borrowed to fund the IRA and still came out ahead, because they could deduct the interest payments on the loan. Higher tax brackets made this deduction and the normal IRA deduction worth more. But lower rates have taken most of the benefit out of this strategy, because the final borrowing costs probably won't be offset by returns on the IRA. If you can still claim the full IRA deduction, borrowing may pay off if your tax rate has not changed much, so examine the numbers carefully before taking this step.

If you open or add to an IRA now, you had better plan to leave the money there for some time. In other words, it really is a retirement account now. The loss of the deduction and lower tax rates will make it difficult to offset the 10 percent early-withdrawal penalty for nearly 20 years.

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