Planning retirement

The kids need money for college and property taxes have gone up again -- but you still try to save a little each month toward retirement. Sure, you've got social security. But there's a little farmhouse north of Santa Fe you've got your heart set on, where you can sit on the porch and paint the Sangre de Cristo Mountains. Maybe next month, after tuition's due, you can save more. . . .

President Reagan's tax bill brings those hills a little closer to your grasp. Amid the windfall profits cuts and research-and-development credits are provisions designed to help overage taxpayers store away more of their salaries toward retirement.

"This really is helpful to the small fellow," says Bernard Barnett, senior partner at the accounting firm of Seidman & Seidman.

Everyone, under the new legislation, can take advantage of a tax break available before to only a few. And the self-employed will be able to double their tax-deductible retirement savings. How will the bill help me save?

Beginning Jan. 1, 1982, taxpayers can deduct up to $2,000 a year for contributions to Individual Retirement Accounts (IRAs) -- $2,250 for a married couple with one working spouse. Or they can put the money in their company pension plans, if the company agrees. In either case, the money won't be taxed until it's paid out.

Before Mr. Reagan's power sweep put his tax bill through Congress, only those not covered by private plans could set up IRAs. And no one could write off cash donated to corporate retirement plans.

"I consider this significant. It's a good deal," says Leon Nad, national tax policy partner at the accounting firm of Price, Waterhouse.

Most people will choose IRAs over donations to the company plan for retirement savings, say accountants, because corporations aren't required to let you donate to their pension plans.

IRAs are offered by banks, brokerage houses, insurance companies, mutual funds, and other financial institutions. Once the money goes in, it's locked up -- withdrawal before age 59 1/2 merits a 10 percent penalty tax.

"Assuming you can afford the money, I can't see why you shouldn't do it," says George Ince, a tax partner in the accounting firm of Ernst & Whinney.

The Reagan tax bill makes a few other changes in IRA law. Taxpayers who leave their account alone no longer will be forced to start withdrawing when they reach age 70 1/2. The proceeds from a matured US retirement bond may be added into an IRA, tax free. Disaffected couples may divorce, but their IRA will never part. Divorcees who paid in to a spousal IRA for three years can still contribute, and receive benefits.

And, to the horror or gold bugs, auction houses, and survivalist investors, collectables can't be contributed to retirement savings plans after Dec. 31, 1981.

"I think it's a bad idea anyway" to put collectables like gold and paintings in an IRA, says Jack Porter, tax partner at Seidman & Seidman.

Lobbyists say a move to repeal this provision is already afoot. In the meantime, if you want to put grandmother's highboy in your retirement savings, move fast. I'm self-employed, or have substantial freelance income. How does the bill affect me?

For those who make a living without punching the corporate time clock, the new law will let you deduct 15 percent of your income (up to $15,000) for donations to certain retirement plans. The old ceiling was $7,500.

If you have a Keogh plan (available to those who work for themselves, or make money outside their regular jobs) this affects you. Small business employees covered by Subchapter "S" retirement provisions or Simplified Employee Pensions are also eligible.

Until now, many small business and professional partnerships have incorporated so they could set up more generous pension plans. Newly attractive Keoghs may change that.

"People who have been considering incorporating may want to take another look at it," says Don Wiese, tax partner at accounting firm of Touche Ross.

One other change bears on how partnerships use Keoghs. Previously, partners who owned less than 10 percent of the business could use their Keogh as collateral for loans. The new law ends this practice.

A further point for the self-employed: Even if you've got a Keogh, say accountants, you can set up an IRA -- further increasing your tax-deductible retirement savings.

Any other savings incentives I should be aware of?

Yes. Under previous law, taxpayers could deduct up to $200 ($400 per joint return) of interest and dividend income. The new bill takes a somewhat roundabout course toward amending this rule.

The bad news is that, after 1982, taxpayers can exclude only $100 of dividends ($200 on joint returns).

The good news is that, starting in 1985, you can deduct 15 percent of net interest, up to a maximum exclusion of $450, or $940 for joint filers.

(The All-Savers certificate will be covered later in this series.)

(The All-Savers certificate will be covered later in this series.)

Next: How the bill affects planning your estate.