[11171]
August 9, 1999
TO: BOARD OF GOVERNORS No. 51-99
FEDERAL LEGISLATION MEMBERS No. 21-99
PRIMARY CONTACTS - MEMBER COMPLEX No. 75-99
PUBLIC INFORMATION COMMITTEE No. 34-99
RE: CONGRESS PASSES TAX CUT BILL
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Both the Senate and the House of Representatives approved on August 5 a tax relief package
that contains a number of provisions of interest to the mutual fund industry.
H.R. 2488, the “Financial Freedom Act of 1999,” includes the following:
Increased IRA and Retirement Plan Contribution Limits. The annual IRA contribution limit is raised
in stages to $5,000 by 2006. The 401(k), 403(b) plan and 457 plan annual contribution limits are
increased in stages to $15,000 by 2005. The annual SIMPLE plan limit is raised in stages to $10,000 by
2004.
Expanded IRA and Roth IRA Eligibility. Income limits on eligibility to make Roth IRA contributions
are increased from $95,000 to $100,000 for individuals and from $150,000 to $200,000 for couples,
beginning in 2003. Also in 2003, the income limit on eligibility to convert a regular IRA to a Roth IRA
is increased from $100,000 to $200,000 for couples. (There is no change in eligibility limits for
deductible IRAs.)
New After-tax “Plus” Accounts. 401(k) and 403(b) plans are permitted to allow participants to make
after-tax contributions whose eventual distributions are taxed similar to Roth IRA distributions.
“Catch-up” Contributions. Persons 50 and older are eventually permitted to contribute an additional
50 percent more than the standard limit to IRAs and salary deferral pension plans. The “catch-up”
amount is phased in over five years in 10 percent increments.
Other Pension Provisions. Portability is enhanced among the various types of defined-contribution
plans and IRAs, top-heavy rules are modified and regulatory burdens are reduced under other
provisions.
“Flow-through” Provision. A provision is included that eliminates a tax barrier discouraging foreign
investors from investing in U.S. securities through U.S. mutual funds. Foreign investors are allowed to
receive the same tax treatment for interest and short-term received capital gains from U.S mutual funds
as they would receive if they invested either directly or through a foreign mutual fund.
Capital Gains Tax Reduction. The maximum rate of tax on net capital gains realized by individuals
after December 31, 1998 is reduced from 20 percent to 18 percent; gains currently taxed at a 10-percent
rate will be taxed at an 8 percent rate. In addition, the basis of assets acquired after December 31, 1999
is indexed for inflation.
Education IRAs. The annual limit on contributions to Education IRAs is increased from $500 to
$2,000, and withdrawals are permitted for elementary and secondary education expenses. Corporations
are also permitted to contribute to Education IRAs.
President Clinton has indicated that he will veto the tax cut bill.
We will keep you informed of further developments.
Matthew P. Fink