- 19 -
deductible contributions are not allowable because of the "active
participant" rule.13 Although such contributions are not
deductible from gross income, they are not subject to the excise
tax on excess contributions under section 4973. Sec. 4973(b),
flush language; see sec. 408(o)(2). Moreover, the earnings on
such contributions are permitted to accumulate on a tax-deferred
basis and without incurring any excise tax under section 4973.
Sec. 408(o); see S. Rept. 99-313, at 543 (1986), 1986-3 C.B.
(Vol. 3) 543. Second, Congress amended section 408(d)(1) to
provide an individual with a basis in his or her IRA to the
extent of the individual's "investment in the contract".
The conference report to the TRA of 1986 discussed the new
approach to taxing IRA distributions as follows:
if an individual withdraws an amount from an IRA during a
taxable year and the individual has previously made both
deductible and nondeductible IRA contributions, then the
amount [excludable from] income for the taxable year is the
portion of the amount withdrawn which bears the same ratio
to the amount withdrawn for the taxable year as the
individual's aggregate nondeductible IRA contributions bear
to the aggregate balance of all IRAs of the individual
13 In the Economic Recovery Tax Act of 1981, Pub. L. 97-
34, 95 Stat. 274, Congress eliminated the active participant
restriction and extended IRA availability to all taxpayers.
However, 5 years later, in the Tax Reform Act of 1986, Pub. L.
99-514, sec. 1101(a)(1) 100 Stat. 2085, 2411, Congress enacted
sec. 219(g), which reinstated rules imposing restrictions on the
availability of IRA deductions to active participants; i.e.,
individuals covered by an employer-provided retirement plan.
Thus, Congress enacted section 408(o) in an effort to provide a
tax incentive for discretionary retirement savings for
individuals considered active participants in qualified
retirement plans.
Page: Previous 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 NextLast modified: May 25, 2011