01/23/98

The 1997 Tax Act

Thinking of how to spend the tax dollars you'll save from passage of the Taxpayer Relief Act of 1997? You might have to think again. Tax rate relief (mainly in capital gains) is part of the legislation. However, maybe the biggest financial opportunity is found in other parts of the law that make IRAs more available to many for the first time...and that significantly expand IRA benefits for just about everyone.

Perhaps more than any legislation in history, this is mainly a tax law of opportunity, not tax cuts. What this means is that taxpayers can gain from the new legislation by proactively saving, investing and managing their resources to maximize new rules, especially those governing IRAs. Taxpayers will have some control over how, and how much, the act affects them.

What it means to you

The tax act encourages long-term investing, and may positively affect the financial -- especially the retirement -- planning of many Americans. People have to act to take advantage of the legislation. Creating a financial plan, if you don't already have one, can organize your thinking and financial strategies -- your actions -- in a way that helps maximize the legislation's benefits to you.

And, if you already have a financial plan, new changes in the capital gains provisions alone make reviewing your current plan necessary, noting that the basis for many historical assumptions about retirement planning have now changed. Even more dramatic, though, is the shift in the "IRA picture." Here, the overhaul has been fairly significant. Briefly...

• "Traditional" IRAs have been enhanced -- New rules will, over the next few years, permit more IRA holders to retain full tax deductibility for their IRA. Also, more people are now eligible to contribute to a deductible IRA -- namely, spouses of those already covered by an employer pension plan (with some income limitations).

• Some IRA penalty provisions have been eased -- New rules make withdrawals more flexible and without penalty in selected situations, notably for those purchasing a first home or paying qualified college expenses (special guidelines apply).

• The new "Roth IRA" offers tax-free benefits -- Contributions to these new accounts aren't deductible. But all withdrawals -- including investment earnings -- are tax free if certain conditions are met. Special rules will help ease the penalties and/or tax consequences that otherwise would apply if transferring money from a traditional IRA to a new Roth IRA.

• The "Education IRA" offers a new way to save for college -- Non-deductible annual contributions of up to $500 per child -- considered gifts to the beneficiary -- can be made to an Education IRA. Earnings and withdrawals from these accounts are tax free for qualified higher education expenses of the account holder.

Something for everyone

This tax act provides considerable incentive to save for retirement and education, and is clearly designed to reward long-term investing with special provisions. This acknowledges the needs of most Americans, who long have pointed to these particular 'life issues' as their most significant financial goals.

In addressing the ways in which such widely held personal financial goals can be achieved, the tax act contains opportunity 'across the board. The legislation is conceivably important to virtually all taxpayers without regard to income, marital status, age, personal or family financial situation. These and other specific, personal factors must be considered to determine how each individual or family can benefit from the new act.

Almost universally, the act creates the need either to establish a personal financial plan or review the one you already have, with individual issues and situations addressed. For almost all taxpayers, this is a crucial first step in understanding how the new legislation can positively influence their financial future.

Please send questions or comments to dcoffin46333@wradvisors.com.