Treasury Touts New IRA Provisions

In response to a letter from Robert D. Stern, New York, on IRA contribution limits for 401(k) participants, Treasury has noted that the administration's fiscal year 1998 budget includes a proposal to increase the income limits for deductible IRAs for 401(k) participants or their spouses. Also, Treasury says, the Taxpayer Relief Act of 1997, increases the income limits for deductible IRAs, as well as the income limits that apply to the spouses of 401(k) participants. Finally, it points out, TRA '97 creates Roth IRAs, another form of IRA savings.

Treasury does note, however, that many of the IRA provisions it lists will be gradually phased out for higher income individuals.

====== FULL TEXT ======

November 6, 1997

Mr. Robert D. Stern

Dear Mr. Stern:

[1] Thank you for your letter to Secretary Rubin regarding the limits on contributions to Individual Retirement Arrangements (IRAs) by individuals who are active participants in employer-sponsored cash or deferred arrangements under section 401(k) (401(k) plans). Your letter was referred to this office because it concerns a matter of tax policy.

[2] The Administration is very much aware of the importance of retirement savings. As part of its Fiscal Year 1998 budget, the Administration proposed increasing the income limits for deductible IRAs in cases where the participant or spouse is an active participant in an employer-sponsored retirement plan. (No income limits apply if neither the individual or the spouse is an active participant.) Under the Administration's proposal, beginning in 1997, eligibility would be phased out for couples filing joint returns with AGI between $70,000 and $90,000 and for single individuals with AGI between $45,000 and $65,000. Beginning in 2000, eligibility would be phased out for couples filing joint returns with AGI between $80,000 and $100,000 and for single individuals with AGI between $50,000 and $70,000.

[3] The Taxpayer Relief Act of 1997 (the Act), signed into law by the President in August of this year, included several proposals that expand the ability of workers to increase retirement savings through elective deferrals of wages. Similar to the Administration's proposal, the Act increases the income limits for deductible IRAs. Also, the Act increased the income limits that apply to spouses of active participants who do not themselves participate in a plan. Under the Act, deductions for contributions by these nonparticipating spouses are phased out between $150,000 and $160,000. In addition, the Act created Roth IRAs, under which the ability to make contributions phases out between $150,000 and $160,000 for couples filing a joint return ($95,000 to $112,000 for single individuals) without regard to active participation. I have enclosed pages 378-381 of the Taxpayer Relief Act of 1997's Conference Report, which describes the new law.

[4] We appreciate hearing your views on this issue. Please be assured that we will keep them in mind as part of our ongoing review of issues relating to retirement savings.

Sincerely,

Donald C. Lubick

Enclosure