Roth and Education IRAs

The Taxpayer Relief Act of 1997 signed into law earlier this year creates two new categories of Individual Retirement Accounts (IRAs), the Roth IRA and the Education IRA.

Contributions to Roth IRAs are nondeductible, however distributions from a Roth IRA after age 591/2 (and distributions for other qualified purposes) will not be includable in gross income. Thus, a Roth IRA allows an individual to create a tax-exempt retirement account that is not subject to income tax when funds are withdrawn. An individual can contribute up to $2,000 per year to the account, less any amounts contributed to other IRAs. The Roth IRA is not available to all taxpayers. Contributions are phased out for joint filers with gross income in excess of $150,000 and single filers with gross income in excess of $95,000. Rollovers from regular IRAs to Roth IRAs are available to taxpayers with gross income of less than $100,000. Income tax must be paid on the rollover amount, but there is no penalty tax for early withdrawal, and subsequent distributions from the Roth IRA will not be taxed.

An Education IRA allows an individual to contribute up to $500 per year to a tax free account if distributions from the account are used exclusively for qualified higher education expenses of the designated beneficiary of the account. The amount that can be contributed to an Education IRA is phased out for taxpayers with gross incomes in excess of $95,000 or $150,000 for joint filers.

This information was obtained from a document entitled, The Taxpayer Relief Act of 1997, A Brief Overview Prepared for the American Bankers Association Advanced Program for Trust Professionals, by Schiff Hardin & Waite, Chicago, IL