Proposed changes to IRA plans offer a better deal for even the smallest businesses.
Now that companies with up to 100 employees are taking advantage of the new Savings Incentive Match Plan for Employees (SIMPLE) pension plans authorized last August, Congress and President Clinton are proposing very similar Individual Retirement Account (IRA) expansion proposals to help smaller businesses, such as sole proprietorships.
Congress and the president want income caps restricting tax deductibility to be lifted and a new kind of IRA that allows individuals to withdraw funds tax-free. Senate Republicans included those proposals in their American Family Tax Relief Act. Sens. William V. Roth (R-DE) and John Breaux (D-LA) have introduced another bill, the bipartisan Savings and Investment Act of 1997, which has Democratic support. Clinton's plan is included in his fiscal 1998 budget proposal.
Right now, people who earn more than $25,000 (if single) or more than $40,000 (if married) are allowed only limited (if any) tax deductions on annual IRA contributions. Both Congressional bills lift those $25,000/$40,000 limits in five annual stages until there is no dollar cap on full tax deductibility. Clinton's plan keeps the cap, but at double current levels. All three proposals index the maximum $2,000 contribution for inflation, allowing it to rise in $500 increments.
All three plans also offer a big new benefit. With current IRAs, the annual contribution may be tax deductible and no tax is paid on the annual earned interest. When funds are withdrawn at retirement, then taxes are paid. The new benefit is what Roth and Breaux term an "IRA Plus Account." Annual contributions would not be tax deductible, and there would still be no tax on interest earned--plus no tax would be paid when money was withdrawn at age 591/2, as long as the account had existed at least five years. Clinton goes a step further by establishing no age limit.
Benson Goldstein, tax counsel to the National Association for the Self-Employed, says the IRA Plus is a far better deal than current IRAs. There's one problem, though: Business owners who have built up "old style" IRAs and want to convert them to IRA Plus accounts would have to pay back to the U.S. Treasury some, if not all, of past tax benefits they accrued.
While Democrats and Republicans seem to agree on IRA expansion, there is some difference of opinion on changes Democrats seek for small-business pensions, including the SIMPLE pensions authorized in 1996. The Senate Democratic leadership backs the Retirement Security Act (S.14), which includes a requirement that employers who set up SIMPLE pension plans contribute at least 1 percent of each employee's income to their SIMPLE account, whether or not the employee makes a contribution.
The bill would also prohibit 401(k) plans from investing more than 10 percent of employee contributions in employer securities or property unless the plan participants themselves direct it.
On the plus side, S.14 would provide certain employers with fewer than 50 workers a tax credit of up to $500 for start-up costs associated with qualified pension plans.
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National Association for the Self-Employed, 1023 15th St. N.W., #1200, Washington, DC 20005, (202) 466-2100;
Small Business Administration, (800) 8-ASK-SBA, (202) 205-7749, (http://www.sba.gov/ADVO/).
Stephen Barlas is a freelance business reporter who writes monthly Washington columns for 15 magazines.