Saving for retirement?: California's conformity scramble may not arrive in time.

• Author: Allen, Bruce C.
• Position: Government Relations - Brief Article

California legislators are scrambling to enact tax conformity legislation, but there are no guarantees that relief will arrive in time.

Currently, California tax law does not conform to provisions of the federal Economic Growth and Tax Relief Reconciliation Act of 2001 that apply to retirement plans and certain trusts, including provisions relating to annuities and proceeds of life insurance contracts, IRAs, employee annuities, qualified state tuition programs, retirement savings, deferred compensation plans, employee funded pension trusts, VEBAs and group legal service plans.

Those differences may create problems for individual Californians who are unaware of the discrepancy, as well as for pension plans that accept contributions which exceed California's maximum.

Several bills have been introduced to deal with the lack of conformity and Gov. Gray Davis has included revenue projections in his budget that consider the estimated $44 million annual cost of conformity. In the interim, taxpayers should be aware that the issue exists, and CPAs should carefully advise their California clients since lack of conformity could create significant tax problems for the unwary.

Education IRAs

Education IRAs have several key nonconformity areas. Current California law limits education IRA contributions to $500 annually, while federal law, beginning in 2002, allows $2,000 and permits corporations to contribute. Federal law would allow expenditures for qualified elementary and secondary education to be made from the education IRA while state law applies only to college.

Additionally, California allows one qualified tuition plan, ScholarShare, and taxes the income from the plan at the beneficiary level. However, federal law would exclude from gross income the education-related distributions from a qualified tuition plan and permit expenses for special needs services of a special needs beneficiary.

IRA Contributions

California law limits annual IRA and Roth IRA contributions to $2000, but federal law would allow annual contributions of up to $3,000 for 2002-04; $4,000 for 2005-07; and beginning in 2008, $5,000, with indexing increments of $500 thereafter.

Federal law also provides for catch-up contributions for both traditional and Roth IRAs. Under this law, individuals age 50 and older are allowed to contribute an extra $500 to qualified retirement savings for 2002-05. That amount is scheduled to increase to $1,000 per year in 2006.

Defined Contribution...