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Accountant's Corner
A New IRA for 1998
By Ronald L. Noll, MS, CPA

Ron Noll As you consider ways to lighten your tax load, keep in mind that some significant changes have taken place with the passage of the Taxpayer Relief Act of 1997. One of the highlights of the new tax law is a new type of IRA, called the Roth Ira, which provides an alternative to the traditional IRA. Both types of IRAs provide tax savings but in very different ways; whereas the traditional IRA offers a break on taxes up-front, the Roth IRA allows for tax-free growth and a bigger potential payoff. Which type best fits your needs? The chart below can help you sort out the pros and cons.

TRADITIONAL IRA

ROTH IRA

*If you qualify for a tax deduction for your IRA contribution, the federal government helps to foot the bill. For restaurateurs in the 36% tax bracket, for example, a $2,000 IRA contribution nets a $720 tax savings. This deduction means that many business owners can afford larger IRA contributions. Although you’ll pay taxes when you ultimately withdraw money from your IRA, in the meantime your money grows and compounds on a tax-deferred basis.

*If you expect to be in a lower tax bracket after you retire, the traditional deductible IRA may make a lot of sense. If your deduction for an IRA contribution in 1998 shelters income from a 36% tax rate and if your IRA withdrawals would be taxed at a 28% rate, the deductible IRA probably will net you more than a Roth IRA. (Note: Actual results depend on several variables, including the amount of your IRA contributions, the return on your IRA investments, and future tax rates.)

*Many more people will be eligible to take a tax deduction for IRA contributions made in 1998. The new tax law raises the income limits that govern whether IRA contributions are deductible for those covered by retirement plans at work. It also ends the practice of treating one spouse as an active participant in a retirement plan merely because the other is covered. This change will enable many individuals to claim deductions for IRA contributions even when their spouses cannot. (Note: Nondeductible contributions may be made to a traditional IRA regardless of income, while contributions to a Roth IRA are prohibited for couples with adjusted gross income exceeding $160,000 or single tax filers with adjusted gross income exceeding $110,000.)

*Earnings on a Roth IRA can be withdrawn totally free of federal income tax if the account has been held for at least five years and the account owner has reached age 591/2. (Note: Tax-free distributions can be taken before age 591/2 if the account has been held five years and the withdrawals are due to death or disability, or are for expenses of a first-time home purchase.) Tax-free growth of your IRA is especially attractive if you think tax rates will be higher when you withdraw the money than they are now.

*In effect, the Roth IRA allows you to shelter more money in an IRA. The $2,000 annual contribution limit is the same for traditional and Roth IRAs. But because your contribution to a Roth IRA is made with after-tax income while your contribution to a deductible IRA is made with pretax income, a $2,000 contribution to a Roth IRA turns out to be equivalent to more than a $2,000 deductible contribution. Because the Roth IRA effectively allows you to defer taxes on a larger sum than the deductible IRA, the Roth IRA is a better choice if you make a full $2,000 contribution. (Note: This is the case provided that tax rates when withdrawals are taken are not markedly lower than those in effect when the contributions are made.

*In contrast to a traditional IRA, the account owner does not have to take required minimum distributions after age 701/2. Also, those with earned income may contribute to a Roth IRA after reaching age 701/2, which is not permissible with a traditional IRA.

Of course, the best way to make a decision that is beneficial to you and your business is to consult first with a knowledgeable accountant.


Ronald L. Noll, MS, CPA, is President of Noll & Company, Inc., a Certified Public Accounting firm in Malvern specializing in restaurant accounting. If you have suggestions, questions or comments, please send them to Noll & Company, Inc., Certified Public Accountants, 18 E. Lancaster Avenue, Malvern, PA 19355, or call us at (610) 644-3750.




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