New IRAs, capital gains, and investment planning.

• Author: Schnepper, Jeff A.

The Taxpayer Relief Act of 1997 offers workers new investment opportunities for wealth accumulation and to save for a comfortable retirement. These vehicles are structured either as tax-deferred with an up-front deduction for your retirement investment contribution or as one where all gains flow to you tax-free, but without the up-front deduction.

Tax deferral allows earning a return on money that normally would have gone into taxes. For example, if I am in the 28% bracket and earn an additional $100, I normally lose $28 of that to taxes and get to keep -- and reinvest -- the remaining $72. However, if the $100 was earned in a tax-deferred account, I get to "keep" and reinvest the entire $100. When I take the money out of the account, I am taxed on the earnings, but, by that time, the value of the account is greater because I have been earning returns on money that immediately would have been lost to taxes. Moreover, if I take the money after retirement. I should be in a lower tax bracket than during my working years.

Note that, if the money had gone into the account as a tax-deductible contribution, when I take it out, both the principal and any earnings are taxed then. This is reasonable because the original contribution was deducted and therefore never taxed to begin with. With tax deferral, one pays the tax later, rather than now. With tax exemption, one never has to pay the tax.

Traditional individual retirement accounts (IRAs) are tax-deferred retirement investment vehicles available for those under age 70.5 who have earned income, regardless of its level. Earnings eligible for IRA contributions include wages, salaries, or professional fees and other amounts received for personal services rendered, including commissions, tips, and bonuses.

Maximum contributions to an IRA are $2,000 for yourself and another $2,000 for your spouse, even if he or she doesn't work. In that case, though, you must have had at least $4,000 in earned income. The earnings on these contributions accrue on a tax-deferred basis, but your original contribution is not currently deductible. Contributions may be limited if you are an active participant in certain specified retirement plans, including 401(k) programs.

The Taxpayers Relief Act of 1997 makes two major changes. First, the income level for deductible contributions has increased to between $30,000 and $40,000 (between $50,000 and $60,000 on a joint return). Second, money can be withdrawn penalty-free to...