IRA Updates

Increased Contribution Limits and "Catch-up Contributions"

The maximum annual contribution amount to a traditional IRA (an IRA which is not a Roth IRA) is $5,000 for 2009. The limit for 2010 has not yet been established. An individual may make an additional "catch-up" contribution for any year in which he or she will be at least age 50,is $1,000. For years after 2009, the maximums will be increased from time to time to reflect changes in the cost of living. (The maximum contribution, including the catch-up contribution, for any year generally may not exceed the individual's compensation for that year.)

Increased AGI Phase-Out Ranges for Deductible Contributions

The maximum amount of a traditional IRA contribution which is deductible to an individual who is an "active participant" in an employer-sponsored retirement plan decreases proportionately over a "phase-out" range. An active participant with adjusted gross income ("AGI") at or below the bottom of the range is entitled to the full deduction. However, once the deduction limit is reduced to $200, it will not be reduced further until it is reduced to zero. An active participant with AGI at or above the top of the range is not entitled to any deduction. The current AGI phase-out range is as follows:

Married individuals who file separately, but who live apart at all times during the taxable year, are treated as single. If the spouses file separately but live together at any time during the taxable year, the phase-out range is between any amount over zero and $10,000.

Treatment of Spouses of Active Participants

Under prior law, an individual was treated as an active participant in an employer-sponsored retirement plan if his or her spouse was an active participant in such a plan. As a result of changes made by the 1997 tax law, this is no longer the case. For an individual who is not an active participant in an employer-sponsored retirement plan, but whose spouse is, the AGI phase-out range is between $150,000 and $160,000 (joint income). (The active participant spouse is subject to the phase-out ranges described above.)

Limited Relief for Failure to Complete Rollover Within 60 days

An individual who receives a distribution from an IRA or tax-favored plan and fails to complete a tax-free rollover of that distribution within 60 days can request the IRS to waive the 60-day requirement if the failure is caused by a disaster, casualty, or other event beyond the reasonable control of the individual, and the IRS's failure to waive the requirement would be against equity and good conscience. Among the types of events that may qualify for the waiver are errors committed by a financial institution, death, disability, hospitalization, incarceration, restrictions imposed by a foreign country and postal error. Waivers are not automatic, and must be expressly granted by the IRS. However, approval is automatic (without the necessity of an express IRS waiver) if the funds were received by a financial institution within the 60-day rollover period; the institution failed to timely deposit the funds in an IRA or other eligible tax-favored plan or account; the individual took all appropriate steps to complete the rollover timely and correctly, and the funds are deposited in an IRA or other eligible tax-favored plan account no later than one year after the funds were distributed to the individual.

Qualified Higher Education Expenses

The 10% penalty tax for IRA distributions before age 59½ will not apply to IRA distributions used to pay "qualified higher education expenses" of the taxpayer, the taxpayer's spouse or a child or grandchild of the taxpayer or the taxpayer's spouse. In general, these expenses include tuition, fees, books, supplies, room and board (if student is at least half time), and equipment required for enrollment or attendance at an "eligible educational institution." An eligible educational institution is generally an accredited, post-secondary institution that is eligible to participant in the Department of Education student aid program and that offers credit toward a bachelor's, associate's, graduate or professional degree or other recognized post-secondary credential. Certain proprietary and post-secondary vocational institutions are also eligible educational institutions. The amount of qualified higher education expenses may be reduced by the amounts of certain scholarships or other educational assistance that is excludable from gross income.

Qualified First-Time Homebuyer Distributions

The 10% penalty tax for IRA distributions before age 59½ also will not apply to IRA distributions that are "qualified first-time homebuyer distributions." In general, "qualified first-time homebuyer distributions" are withdrawals from an IRA (not to exceed $10,000 during the recipient's lifetime) that are used within 120 days of withdrawal to pay "qualified acquisition costs" for the principal residence of a "first-time homebuyer" who is the recipient of the withdrawal, the recipient's spouse, or any child, grandchild, or ancestor of the recipient or the recipient's spouse.

"Qualified acquisition costs" are the costs of acquiring, constructing, or reconstructing the home being acquired, including any usual or reasonable settlement, financing, or other closing costs.

An individual need not be acquiring a home for the first time in order to be a "first-time homebuyer" under this new rule. An individual is a "first-time homebuyer" if the individual (and his or her spouse, if married) did not have an ownership interest in a principal residence during the two-year period ending on the "date of acquisition" of the new home. The "date of acquisition" is the date on which a binding contract is entered into or the date on which construction or reconstruction begins.

If a delay or cancellation of the purchase or construction of the residence means that the IRA distribution cannot be used within 120 days of withdrawal as required, then the amount withdrawn may be returned without penalty to the same or another IRA before the 120-day period expires.

Investments in Bullion

The acquisition by an IRA of a "collectible" (e.g., works of art, rugs, antiques) is treated as a distribution from the IRA in the amount of the collectible. Under prior law, certain coins were excepted from the definition of "collectible." Under the 1997 tax law, the exceptions have been expanded to include certain platinum coins as well as any gold, silver, platinum, or palladium bullion, provided that the bullion is in the physical custody of the IRA trustee and that it is of a fineness equal to or exceeding the minimum fineness that a contract market (regulated by the Commodity Futures Trading Commission) requires for metals which may be delivered in satisfaction of a regulated futures contract.