There are two provisions of the new Act which stand to make a significant difference for those investors who have purchased long-term assets or are trying to prepare for their own retirement: new incentives for IRAs, including restored deductibility of IRA contributions for many investors, and a cut in the capital gains tax rate.
Although the top capital gains tax rate will be reduced from 28 percent to 20 percent on assets held longer than 18 months, it is important to be aware of investment income and how it originates. This will be a great relief for real estate owners who have held property for years and are ready to liquidate their holdings. It will provide incentive to purchase stock or stock mutual
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The new capital gains provision may create a complexity in early 1998 for mutual fund investors receiving 1099s for 1997 distributions; mostly due to the phase-in provisions necessary to accommodate the new “over 18 months” holding period for long-term capital gain treatment. In prior years, mutual funds reported only two categories of capital gains—short-term (securities held one year or less) and long-term (over one year). For 1997, there will be four capital gain categories:
1. Investments held one year or less and sold anytime in 1998.
2. Investments held more than one year and sold before May 7, and investments held over one year, but not more than 18 months and sold May 7 through July 28, inclusive.
3. Investments held over one year and not more than 18 months and sold May 7 through July 28 inclusive.
4. Investment held over 18 months and sold on or after May 7.
To clarify your position you might want to consult the 1997 tax preparation instructions which will be available soon from the IRS.
Many financial institutions, mutual fund companies, insurance companies and investment brokerage houses are expecting a new influx of retirement money from the millions of taxpayers who discontinued making IRA contributions when deductibility was first scaled back in 1986. The 1998 IRA expansion has many facets that will eliminate the existing inequity of depriving both spouses of making an IRA contribution deductible merely because one is an active participant in an employer-sponsored pension plan, and their joint income exceeds a particular level. The income levels below which IRA contributions are fully deductible, and those above which contributions are not deductible, are being approximately doubled over the next decade. For a chart of these income levels you may contact the author or any tax professional.
Starting in 1998, a new type of IRA known as the “Roth IRA” will become available for your long-term planning. This will offer no tax deduction for contributions, but will permit a tax-free payout of both contributions and accumulated earnings if the IRA is held at least five years and the owner is 59 and a half years of age. There is also no penalty or tax in the event of death or disability. Another plus is the non-mandatory minimum distribution after age 70 and a half. Contributions will be permitted to the Roth IRA after age 70 and a half. This is not an option with a traditional IRA. A $2,000 contribution can also be divided between a regular IRA and the Roth IRA as long as the total contribution does not exceed $2,000. Unfortunately, the eligibility for the Roth IRA will be phased out for couples with an adjusted gross income of $150,000 to $160,000. The major difference between a Roth IRA and an existing non-deductible IRA: the entire distribution from a Roth IRA can be tax-free, whereas the IRA earnings on a non-deductible existing IRA are taxed upon distribution.
The existing premature withdrawal penalties are liberalized beginning in
1998. IRA investors will now be able to make penalty-free withdrawals if a first-time home buyer (up to $10,000) and to pay off higher-education expenses for themselves or for their spouse, child or grandchild. Coupled with recent liberalization permitting penalty-free early withdrawals for certain medical expenses, this places IRAs closer to being open-ended tax-deferred savings accounts as opposed to simply a retirement account. The author would caution investors to exercise extreme discipline or it will become easy to forfeit long-term goals in order to satisfy short-term desires. Last, but certainly not least, the onerous 15 percent tax on excess IRA accumulations and distributions is repealed effective in 1998. To see how these new changes will affect you and your financial well-being, you may call us at (760) 243-2551.
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