Much of the press given to the changes in Individual Retirement Accounts (“IRAs”) in the Taxpayer Relief Act of 1997 has been directed at the new Roth IRA. However, there are other changes that benefit those who have existing “traditional” IRAs. The biggest change is an expansion of the types of IRA withdrawals which can be made without incurring the 10% additional tax penalty. Previously, penalty free withdrawals were allowed primarily for retirement, certain cases of disability, and a few other more obscure purposes. Congress has decided to expand the basic purpose of IRAs so that most taxpayers will be able to take advantage of their IRAs for more than just retirement. The new exceptions apply only to withdrawals made after December 31, 1997.
The first new purpose is for acquisition of a first home. The withdrawal must be made within 120 days prior to the acquisition of the first home, and the buyer may be not only the owner of the IRA but also the child, grandchild, spouse, or ancestor of the owner. A person is a first-time home buyer if he or she has had no ownership interest in a principal residence for the two years before the acquisition. However, there is a $10,000 lifetime limitation on withdrawals for this purpose.
The second new purpose is for what the Taxpayer Relief Act calls “qualified higher education expenses.” Such expenses include the cost of necessary tuition, fees, books, supplies, and equipment. The expenses that are covered include those incurred by the IRA owner or the owner’s spouse, child, or grandchild for most types of post-high school education.
With the new purposes for which IRAs can now be used, Congress might consider changing the name to IRFTHBQHEEA for “Individual Retirement, First Time Home Buyer, and Qualified Higher Education Expense Account.” On second thought, perhaps “IRA” is still a little easier to pronounce.
The first new purpose is for acquisition of a first home. The withdrawal must be made within 120 days prior to the acquisition of the first home, and the buyer may be not only the owner of the IRA but also the child, grandchild, spouse, or ancestor of the owner. A person is a first-time home buyer if he or she has had no ownership interest in a principal residence for the two years before the acquisition. However, there is a $10,000 lifetime limitation on withdrawals for this purpose.
The second new purpose is for what the Taxpayer Relief Act calls “qualified higher education expenses.” Such expenses include the cost of necessary tuition, fees, books, supplies, and equipment. The expenses that are covered include those incurred by the IRA owner or the owner’s spouse, child, or grandchild for most types of post-high school education.
With the new purposes for which IRAs can now be used, Congress might consider changing the name to IRFTHBQHEEA for “Individual Retirement, First Time Home Buyer, and Qualified Higher Education Expense Account.” On second thought, perhaps “IRA” is still a little easier to pronounce.
– Mike Malin