Individual Retirement Accounts provide retiring employees with a savings plan that they could use during retirement. There are two kinds of IRAs namely traditional and Roth accounts. The main difference is that with the traditional IRA, the plan holder can deduct taxes on the money they deposit while Roth IRA involves non-deductible and tax-free accounts. This paper will delve on the new provisions of the amended tax laws concerning the Individual Retirement Account (IRA).
Individual Retirement Account (IRA) is one of the ways that employees who are nearing retirement age can draw up a savings plan as soon as they are no longer working. There are two kinds of IRAs accessible to retiring employees namely traditional and Roth (Tarquinio, 2008).
In traditional IRA, the account holder can avail of tax deductions on the money deposited by the individual. However, upon retirement and once the money has been withdrawn, all the tax credits deducted will be settled. Roth IRAs, on the other hand, are non-deductible, but once they are withdrawn upon retirement, they are tax free (Tarquinio, 2008).
In 1980, the government subjected IRAs to income limits to prevent high income taxpayers from diverting their savings into tax-free accounts (Tarquinio, 2008).
Recent Modifications in Tax Laws
Revisions in the federal Pension Protection Act of 2006 took effect on August 17, 2006. The following is a summary of the new provisions of the revised tax law (Roher, 2006):
- Under the new act, taxpayers who are more than 70 ½ years old can donate both traditional and Roth IRAs to charitable institutions without acknowledging any income. In the previous law, individuals who distribute their IRA to charity accept taxable income. Under the revised law, eligible individuals can directly donate their IRA without income recognition on the premise that the individual will not get any benefit or there are no substantiation concerns (Roher, 2006).
- Before the changes in the tax law were adopted, organizations that are excluded from payment of taxes with gross receipts less than $25,000 need not accomplish the federal annual information return (Form 990). With the new law, these organizations are still not required to file Form 990. However, they need to submit a yearly notice with the IRS, who will then issue a form for the purpose of notification. Under the new law, individuals who will not comply with the new ruling for three successive years will have their tax-free status cancelled (Roher, 2006).
- Another new provision in the law grants qualified taxpayers who have businesses to work out a more favorable tax deduction. Previously, only businesses classified as C corporations were qualified for the favorable deduction (Roher, 2006).
- For taxpayers who contributed personal property who gained a charitable deduction worth over $5,000 and the property is sold within three years after the charitable organization acknowledged the donation, then the individual can avail of adjustments in their tax benefits. Charitable deductions are only valid for contributions that consist of clothing or household items that are “in good use or higher.” Taxpayers can look forward to getting more restrictions on these kinds of donations. However, the provision is not applicable to goods worth more than $500 if the donor can prove a qualified appraisal (Roher, 2006).
- The new law on IRA demands more stringent recordkeeping criteria for contributions to charitable organizations rendered after August 17, 2006. To be eligible for charitable deductions, the individual or entity should provide bank records or written correspondences from the charitable institution for all cash contributions, regardless of the amount of the contribution. The following information should be indicated: 1) donation date; 2) donor’s name; 3) amount of donation. It is recommended that the charitable institution should provide a written communication for all contributions (Roher, 2006).
- The revised IRA tax law contains several provisions that make donor-advised funds less attractive and subject to more regulations. The new law may include rules connected with substantiating illegal distribution, automatic additional benefit transactions, investment advisors, and additional business holding policies. Hence, those that are financed through donor-advised funds, such as “501 (c)(3) organizations and donors,” should carefully assess their situations (Roher, 2006).
- The new law increased several excise taxes related to exempted organizations. In the case of public charities and social welfare, the penalty for the manager who partakes in transactions with additional profit was elevated from $10,000 to $20,000 for every transaction. Excise taxes for private organizations were likewise increased (Roher, 2006).
Roher, J.A. (2006, October 23). Recent tax law changes. Godfrey & Kahn S.C. Retrieved
June 5, 2008 from http://www.gklaw.com/publication.cfm?publication_id=545
Tarquinio, A. (2008, April 27). A Stalwart of Retirement Planning: The I.R.A. The New York
Times. Retrieved June 5, 2008 from