With the changes, however, came more paper work and additional complications in determining the appropriate use of these investment vehicles. Some financial planners have even taken to referring to the "Taxpayer Complication Act." What this means is the conscientious planner will now advocate the use of a CPA or accountant to a greater extent than before to make sure the planning is done correctly.

Traditional IRAs
The Taxpayer Relief Act contains two significant changes to traditional IRAs. The new law will double the income limitations for people to make fully deductible contributions, phasing in over the next 10 years. As the income increases above the maximum in any given year, the deductibility will be phased out.

The second major change in the Act applies to nonworking spouses or spouses not covered by a retirement plan at work to deduct IRA contributions, subject to income limitations. Even more significant could be that if neither spouse is covered by a retirement plan at work, there is no income limitation preventing them from making deductible contributions.

Under the new law, it is also easier to access, with no penalty, money saved in a tax qualified IRA for purchasing a principal residence, to pay for college costs and to pay some specified medical costs.

Roth IRAs
The new tax-free Roth IRA allows yearly non-deductible contributions of up to $2000 for individuals and $4000 for couples. These contributions cannot be deducted from taxable income. Withdrawals, however, can be made tax-free if the account is at least five years old and the account holder is at least 59 1/2 years old. Taxpayers can also continue to invest in the Roth IRA after age 70 1/2. Individuals can invest in both types of IRAs in any given tax year, but the combined contributions cannot exceed $2000 for singles and $4000 for couples per year.

The addition of the Roth IRA will create a need to look again at the issue of deductibility before making client recommendations. It will force financial planners and accountants to look more closely at the potential for tax deferral of investments and long range tax planning.

Education IRAs
The Taxpayer Relief Act now allows Education IRAs, also known as Education Savings Accounts. Parents, relatives and friends can now contribute up to $500 per year toward a child's college education costs. The contributions are not deductible, but profits in the account are not taxable if used to pay for qualified education costs.

Capital Gains
Possibly one of the most significant provisions of the Taxpayer Relief Act is the elimination of capital gains tax on the sale of one's principal residence up to $250,000 per person, or $500,000 per couple, as long as the seller has lived in the home for two of the past five years. This should provide many new dollars for unrestricted investment.

As is the case in all situations involving federal tax laws, it is important that the specific rules that apply to clients are consulted. This will give the information necessary to provide sound financial advice.