IRA planning opportunities.

• Author: Camperell, Kevin J.
• Position: Individual retirement account

Individual retirement accounts (IRAs) are personal retirement savings plans that allow eligible individuals to contribute up to $2,000 per year, both deductibly and nondeductibly with the benefit of tax deferral on the growth and on pretax contributions until withdrawal.

Just prior to the August 1996 congressional recess, four bills were passed containing many significant tax law changes. One of these, the Small Business Job Protection Act of 1996 (SBJPA), made numerous changes to the IRA and pension laws.

Penalty Provisions

Prior law: Prior law contained provisions that assessed onerous penalties under four different sets of circumstances. Penalties are assessed for excess contributions to an IRA. This is a 6% nondeductible penalty, assessed each year that the excess is not withdrawn. A second penalty is assessed for excess distributions from an IRA and other qualified plans. This is a 15% nondeductible tax on total retirement distributions to an individual, during any one calendar year, in excess of a predetermined amount adjusted for inflation ($155,000 for 1996). Individuals with accrued benefits of more than $562,500 on Aug. 1, 1986 are allowed to make a grandfather election that could exempt certain distributions from the excess distributions penalty. The third penalty provision is a 15% Federal estate tax (over the regular Federal estate tax) for excess retirement accumulations. The excess accumulation is the value at the date of death in the decedent's retirement plans over the present value of a single life annuity with annual payments over predetermined amounts. The fourth penalty provision is a 10% excise tax on premature distributions from IRAs and other qualified plans. This penalty generally applies to distributions made before age 59 1/2 (with some exceptions). New law: Sec. 4980A(g), as amended by SBJPA Section 1452(b) (effective for years beginning after 1996 and before 2000), suspends the 15% excess distribution excise tax from IRAs and other qualified plans. This is an extremely valuable planning tool for any client with significant IRA and other retirement accumulations as a result of either corporate rollovers or successful retirement plan growth. The suspension of the 15% penalty on excess distributions not only avoids the excess distribution penalty for the three-year suspension period, but also can allow the taxpayer to reduce the plan total (in order to avoid the 15% penalty on excess retirement accumulations)...