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February 7, 1990
TO: BOARD OF GOVERNORS NO. 10-90
ACCOUNTING/TREASURERS COMMITTEE NO. 3-90
CLOSED-END FUND COMMITTEE NO. 6-90
OPERATIONS COMMITTEE NO. 2-90
PENSION COMMITTEE NO. 3-90
SEC RULES COMMITTEE NO. 10-90
TAX COMMITTEE NO. 3-90
UNIT INVESTMENT TRUST COMMITTEE NO. 6-90
RE: ADMINISTRATION'S PROPOSED SAVINGS AND ECONOMIC GROWTH ACT
__________________________________________________________
Attached is a copy of the Administration's proposed Savings
and Economic Growth Act, which was transmitted to Congress on
February 1. The following memorandum describes the three
components of this proposal.
Family Savings Accounts
The Administration's proposal would add to the Internal
Revenue Code a new provision for the establishment of family
savings accounts (FSAs). Married couples with adjusted gross
income of $120,000 or less could contribute up to $5,000 to an
FSA each year. Single taxpayers with adjusted gross income of
$60,000 or less could contribute up to $2,500. FSAs could be
invested in any investment except insurance contracts or
collectibles.
Contributions would not be deductible, but both the
contributions and earnings thereon could be withdrawn tax-free if
the contribution remained in the FSA for at least seven years.
If amounts were withdrawn prior to the expiration of seven years
from the date of the contribution to which they were applicable,
the earnings would be taxable as ordinary income in the year of
the withdrawal. Furthermore, if the amounts were attributable to
contributions held less than three years, the earnings would be
subject to an additional ten percent tax.
The source of a distribution from an FSA would be
determined under a first-in, first-out ordering rule. In the
case of an FSA originally established with one trustee and
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subsequently transferred to a second trustee, the holding periods
under both would be aggregated for purposes of the seven-year
rule. The first trustee would be required to provide to the
second trustee and to the individual information concerning the
"age" of the contributions in the account.
Capital Gains Tax Rate Reduction
The Administration's capital gains tax proposal would
permit individuals (but not corporations) to claim a deduction
for a percentage of capital gain realized upon the disposition of
certain assets based upon the length of time the assets were
held.
Shareholders in regulated investment companies (RICs) would
be permitted to deduct a percentage of the gains realized both at
the fund level, when distributed to shareholders, and at the
shareholder level, upon redemption or sale of the RIC shares.
The proposal includes a "sliding-scale" capital gains
deduction feature whereby the amount of the deduction increases
with the length of time the asset is held. For assets held at
least 3 years, the deduction would be 30 percent of the realized
gain. The deduction would decrease to 20 percent for assets held
at least two but less than three years, and to 10 percent for
assets held at least one but less than two years. Special
transition rules would phase in these new holding period
requirements during 1990 and 1991. For example, in 1990 the 30
percent deduction would apply to all assets sold after the
proposal's effective date that were held at least one year prior
to sale.
Withdrawals from IRAs for First-Time Home Purchases
The Administration proposal also would permit IRA owners to
withdraw up to $10,000 from an IRA for a first-time home purchase
on a penalty-free basis. In order to qualify, the cost of the
home could not exceed 110 percent of the median home price in the
geographic area.
We will keep you informed of developments.
Kathy D. Ireland
Associate General Counsel
Keith D. Lawson
Assistant General Counsel
Attachments