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Events Transcript | ![]() |
Vern Martens and Jim McCarthy discuss the Tax Relief Act of 1997 in a special seminar co-hosted by MSNBC.
Welcome to the first interactive seminar hosted jointly by Merrill Lynch OnLineSM and MSNBC Business Video. The opinions expressed during this seminar are those of the speakers as of September 24, 1997. The contents of the seminar are intended as general information about new developments and do not constitute legal or tax advice concerning any specific facts or circumstances.
For the next hour, we'll examine the Taxpayer Relief Act of 1997 and how the new tax bill may affect you. Our two guests will also be interviewed by MSNBC. You can click on one of the links above at any time during the seminar to access the LIVE audio or video feeds (with the proper software installed). But first, Merrill Lynch Director and Product Manager Frank Zammataro will give a brief overview of the Merrill Lynch OnLineSM service and how this seminar will work.
Zammataro: Good Evening and welcome. This is a joint venture between MLOL and MSNBC. Ichat, audio and video will be used in this process. This is very exciting, as it is the first seminar of its kind, as well as being the first interactive venture between Merrill Lynch and MSNBC. I would like to thank everybody for coming. I hope you enjoy the seminar.
MSNBC Opening statements (Listen)
OnLine Host:: Bruce Thompson, a vice president at Merrill Lynch and Director of Government Relations, was instrumental in getting this legislation passed. He could not join us, but has some prepared comments.
Thompson ( Listen): The tax bill passed by Congress and signed by the President really is an historic piece of legislation that will have a tremendous impact on everyone's financial future. We need to take steps now to address our long-term savings crisis. Americans are now saving less than at almost any time since World War II, and we have become a nation of spenders, not savers.
Everyone needs to save and invest for the future, and that's why this bill is so historic. It will help people save for their retirement, for college education, for a first home and for other personal needs. The new tax bill includes a number of new and expanded provisions. It includes an expansion of the traditional IRA, creation of a new IRA (called the Roth IRA), creation of the Education IRA, a reduction in long-term capital gains tax rate and an increase in the estate and gift tax unified credit. It includes a child tax credit, and other education tax incentives, and it includes a repeal of the 15% excise tax on very large IRAs and retirement plan assets. All of these provisions should mean a more secure future for all Americans, and that is why we are so excited about this new tax bill.
OnLine Host:: In this next segment, Vern Martens, Vice President and Manager of Merrill Lynch's Tax Advisory group, will answer your questions here while Jim McCarthy, Vice President and Product Manager for IRAs at Merrill Lynch, will be interviewed live on MSNBC. In approximately 25 minutes they will switch roles. Now, we'd like to welcome Vern Martens.
McCarthy, presentation on MSNBC: overview of the Taxpayer Relief Act of 1997.(Listen).
Martens: It is a pleasure to be here this evening. By way of an introduction, the new tax law change will affect a larger number of individuals than any tax law change since 1986. It will provide a greater number of benefits to individuals in the areas of investment planning, retirement planning, planning for your child's future education and estate planning. Unfortunately, although this new tax law will provide a lot more planning opportunities for individuals, it will also introduce more complexity and require more planning in order to implement these planning strategies. The last time we had such a large tax law was in 1986. That law basically simplified the income tax planning and preparation. This latest change greatly complicates planning and tax law preparation going into the future. Most of the new tax provisions will not take effect until next year. This includes changes in the individual retirement accounts, as well as the child tax credit, education credits and changes in the estate and gift tax area. At this time I would like to entertain questions that you may have.
Question: Can both types of IRAs be used to pay for college expenses?
Martens: The answer to this question is yes. However, the Roth IRA is not available until next year so I am assuming that you are speaking about some time in the future. Withdrawals from regular IRAs for qualified higher education expenses will be subject to income tax but will avoid the 10% premature distribution penalty. Qualifying distributions from the Roth IRA in the future may not be subject to income tax and would also not be subject to the 10% premature distribution penalty.
Question: What are the new capital gains rates?
Martens: Starting with sales of capital assets after May 6, 1997, new capital gains rates will take affect. For sales of assets between May 7, 1997, and July 28, 1997, any gain realized would be taxed at a maximum rate of 20%, provided the asset was owned or held more than 12 months prior to sale. For sales of assets after July 28, 1997, assets have to be held more than 18 months to be taxed on any gains at the 20% rate. Thus, under the new changes, assets held one year or less will still be taxed at ordinary income rates, which can be as high at 39.6%. Assets held more than 12 months, and sold after July 28, 1997, will be taxed at a maximum 28% rate, provided they have not been held more than 18 months. And assets held more than 18 months will be taxed at the 20% rate. Individuals who are in a 15% tax bracket will be taxed at the maximum capital gains rate of 10% on gains from assets held more than 18 months.
Question: A question about capital gains tax on a home ... is it retroactive? For example, would a home sold with a $200,000 capital gain in May of 1996 be covered by the increased "shield," or is the old $125,000 exclusion the only remedy available?
Martens: Yes. This change is retroactive. However, for sales made between May 7, 1997, and August 5, 1997, individuals may have a choice between the old rules that apply. This means that, if taxpayers qualify, they may elect to defer under the old rules capital gains on the sale of their home or they may elect treatment under the new tax law. Under the new tax law, for any sale of a home maintained as the principal residence for at least two years that results in a gain, up to $500,000 of such gain would be excluded from income tax from a married couple filing jointly or up to $250,000 of such gain would be excluded from income tax for a single taxpayer.
Question: Should I still contribute to my regular IRA and the new Roth IRA?
Martens: Depending on your income and tax filing status, you may be eligible to contribute to both IRAs. However, the maximum total contribution is still limited to the lesser of your earned income or $2,000, which would have to be split between the two accounts. Whether you choose either the traditional or Roth IRA to contribute to depends on a number of factors. Contributions to a traditional IRA may be more beneficial for individuals who are in a higher tax bracket during their contribution years and will be in a lower tax bracket during their retirement years.
Question: Being a retiree receiving benefits, am I considered to be participating in a pension plan?
Martens: As a retiree receiving benefits, you are not considered an active participant in a retirement plan.
OnLine Host:: Now Vern and Jim will switch roles. Jim will join us online, and Vern will join MSNBC for a live interview. Welcome, Jim McCarthy.
Marten, presentation on MSNBC: impacts of the Taxpayer Relief Act of 1997 (Listen).
McCarthy: I would be interested in anyone's questions regarding the new IRA legislation. We at Merrill Lynch feel it's imperative that people make educated decisions and engage in effective financial planning to take maximum advantage of the new tax law.
Question: I am a 31-year-old man currently contributing 14% pretax to my 401(k). My employer matches the first 6%. Would it make more sense for me to reduce the portion going to the 401(k) ( still enough to earn the matching funds) and put the remainder into a Roth IRA. I hope to retire at 60 years of age.
McCarthy: At age 31 I am going to assume that your career is still on an upward track. As a result, it is likely that your tax rate at retirement will be higher than it is currently. In that case, a Roth IRA merits serious consideration. It will give you greater access than a 401(k) plan, and at distribution the tax free accumulation will be hard to beat.
Question: All the Information you've covered so far talks about 1998. What can I do today?
McCarthy: If you have not yet funded your IRA for 1997, you should consider doing so as soon as possible. This has two immediate benefits: It maximizes the amount of tax-deferred growth and, if eligible, it will give you a greater amount to potentially convert to a Roth IRA in 1998. Finally, if you are close to any of the income limits, now is the time to assess any capital gains or other income you might be recognizing in the next few months with the aim of managing your eligibility for contributions in 1998.
Question: Is there any deadline for converting an existing IRA into a Roth IRA?
McCarthy: While there is no deadline for converting, the special tax spread in 1998 may be particularly attractive. As a result, you may only want to wait if you don't have another option.
Question: If I convert my IRA to a Roth IRA, do I have to sell and rebuy my current holdings?
McCarthy: You do not have to liquidate your holdings to do a conversion, but any new contributions must be in cash.
Question: What are the rules for converting an IRA to the Roth IRA?
McCarthy: You must have modified adjusted gross income $100,000 or less in the year in which you convert. Additionally, for no apparent reason the tax law does not allow married individuals filing separately to do a conversion.
Question: Does the new IRA have minimum distribution requirements?
McCarthy: The Roth IRA has no minimum distribution requirements while the account holder is living There are, however, minimum distribution requirements that will apply to an account holder's beneficiaries. The exact rules that will be applicable to the beneficiaries should be published by the IRS in very late 1997.
Question: Can you open one Roth IRA for a married couple filing jointly?
McCarthy: Roth IRA contributions must be deposited into separate accounts. As a result, it's advisable that married taxpayers each maintain a separate account.
Question: Does the five-year holding period for qualified distributions from a Roth IRA refer to the length of time contributions have been in the account or the number of calendar years the account has been open?
McCarthy: Both. New Roth contributions work off of a five-year timetable. For example: A contribution in 1998 starts the five-year holding period for annual contributions made in 1999 and later years. However, each conversion is measured on a separate five-year timetable. In the case of a conversion that occurs in 1999, this will be measured on a separate timetable from any conversions that occurred in a prior tax year.
Question: How are the capital gains treated within a Roth IRA?
McCarthy: Roth IRAs, like other IRAs, enjoy tax-deferred growth. Thus, there is no capital gains treatment applicable to purchases and sales within the account. If you meet the five-year holding requirement and your distribution is for one of the purposes listed - age 59½, death, disability or first home purchase - withdrawals are tax free. If you do not meet the requirements, gains in the account are taxable as ordinary income, regardless of whether or not they would have qualified for capital gains treatment in a taxable account.
Question: If a grandparent funds an education IRA for the grandchildren, is it the grandparent's income or the children's parent's income that determines eligibility?
McCarthy: It is always the contributor's income that limits eligibility to make a contribution. Because there is no family relationship required, we anticipate that most people interested in an education IRA will be able to find a family member or friend whose income is under the applicable limit.
Question: If I leave my job, can I roll my 401(k) over into a Roth IRA? Do I have to pay tax on the profits?
McCarthy: Assuming you meet the $100,000 income limit, you can convert but not directly: You must first deposit your 401(k) distribution into a traditional IRA and then convert to a Roth IRA. Essentially, your 401(k) distribution will be taxable at the point when you convert from the traditional IRA to the Roth IRA. If you have employer stock, ask your tax advisor whether the special rules that apply to employer stock make it advantageous for you to roll this part of your distribution over.
Question: For 1997, is there a maximum adjusted gross income level where IRA deductions are not allowed?
McCarthy: For 1997, if neither you nor your spouse is covered by an employer plan, you can make a deductible contribution no matter how high your income. If one or both of you is an active participant in an employer plan, then the limit for a couple filing jointly is $40,000 to $50,000 and $25,000 to $30,000 for single people.
OnLine Host:: This wraps up the first interactive seminar hosted by Merrill Lynch and MSNBC Business Video. Thank you so much for joining us. We would like to thank Vern Martens and Jim McCarthy for their participation in this event. We would also like to thank MSNBC Business Video for their help in the production of the seminar, and the New York Society of Security Analysts (NYSSA) for providing us with the auditorium in which we conducted the seminar. Check http://www.mlol.ml.com/ in the Events section for transcripts and listings of upcoming events.
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Thank you, and have a good evening
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