(4/18/98 Baltimore AFRO-American Newspaper)
by Congressman Elijah E. Cummings
Recently, national and local news shows have been focusing on the future of this nation’s baby boomers, people who were born during the 15 years following the end of World War II. There is widespread concern that baby boomers, who are now in their 40s and 50s, have not prepared themselves properly for retirement due to the assumption that our economy will remain as strong as it is today.
Health care, college tuition, and new homes are among the many things that have risen in cost during the past 15 years, and I see no end in sight. Currently, undergraduate college tuition nationwide ranges from $3,000 a year for in-state students to more than $40,000 for out-of-state students. Particularly, for a four-year education at the University of Maryland, an in-state student would pay $4,700 a year, while an out-of-state student would pay $11,000 a year. University of Baltimore’s tuition is $3,300 in-state, and $6,700 out-of-state. Harvard University averages $33,000, Howard University is $7,300, and Morgan State University is $3,700 in-state and $8,800 for out-of-state. Based on these figures, a family who is planning to send a child to college must prepare well in advance in order to keep up with higher education’s ever-rising costs.
Unfortunately, the Tax Reform Act of 1986 stripped hard-working American people of the ability to invest in their retirement and their children’s futures without being bombarded with taxes. The IRA (Individual Retirement Account) was a popular investment tool for middle to upper-middle class citizens until the 1986 Act removed the account’s most attractive feature -- a tax deduction taken on the investor’s adjusted gross income, which is income less any deductions such as IRA contributions, alimony or business expenses. Even though traditional IRAs initially were created to help members of the middle class save for retirement, very few investors were able to qualify for the deduction under measures set forth in the 1986 Act.
To correct this hardship, Congress passed the Taxpayer Relief Act of 1997, which has awakened the interest in IRAs as a means of saving for retirement, first-time home ownership, and college tuition. In 1986, Americans contributed $38.3 billion in IRAs. After tax reform, that figure fell to 14.9 billion. However, because of the new tax relief measures granted by the 1997 Act, about $1 trillion now reside in 41 million IRAs. In addition, new IRA account openings have increased 73 percent because the Act has expanded the number of investors eligible for a tax deduction on contributions to the account.
Renewed interest in the IRA as an investment tool is due in large part to the newly-created Roth IRA. Named after Delaware Senator William V. Roth, Jr., chairman of the Senate Finance Committee, the Roth IRA has brought new energy to the investment world.
In fact, just recently, I received a letter from an investment broker who has been a financial advisor for 44 years. He called the Roth IRA "the opportunity of a lifetime" for small investors because taxes are not levied against withdrawals from the account, unlike traditional IRAs. Money invested in a Roth IRA can be withdrawn both tax-free and penalty-free after five years if the investor is at least 59 ½ years old, is disabled, or has died. The five-year limitation also applies to a withdrawal of up to $10,000 for the purchase of a first home, payment of certain medical expenses, insurance premiums while unemployed, or college education expenses.
In addition, traditional IRAs require withdrawals to begin at age 70 ½, while the Roth IRA allows contributions beyond that age and does not require withdrawals at all.
When opening a Roth IRA, wage earners can contribute up to $2,000 a year, or $4,000 for married couples who file their taxes jointly. Those who qualify for Roth IRAs are single individuals who earn up to $95,000 in adjusted gross income. Married couples can earn up to $150,000 and still be eligible to open a Roth IRA.
Moreover, there are no rules to prohibit investors already contributing to 401(k) plans from opening a Roth IRA or from converting a traditional IRA into a Roth IRA. Although conversion would require the payment of taxes on accumulated gains associated with the traditional IRA, this tax payment can be spread over four years.
The Roth IRA can be a great investment tool for young individuals and couples in search of a means to begin investing for retirement. Many families can take advantage of this opportunity to begin investing in their children’s futures. I am concerned that many of you will forego this opportunity without fully understanding its advantages. Talk to an investment professional for more information on how the Roth IRA can benefit you.
-The Honorable Elijah E. Cummings represents the 7th Congressional District of Maryland in the United States House of Representatives.