Eager to Open a Roth IRA Account? You’ll Have to Wait Till Next Year

Q: The new Roth individual retirement account sounds like just the thing for me, because I am ineligible for a tax-deductible IRA contribution and already contribute as much as I am allowed to my employer’s 401(k) plan. How can I open one of these accounts?--P.S.

A: You can’t open one of these new retirement savings accounts, created by the tax law signed earlier this month, until Jan. 1. This delay will allow banks, mutual funds and others enough time to develop the procedures to administer these accounts.

To review: The maximum $2,000 annual contributions to the so-called Roth IRAs, named after principal sponsor Sen. William V. Roth Jr. (R-Del.), are not tax-deductible. However, withdrawals from the account by taxpayers 59 1/2 or older, or for certain other limited purposes, are tax-free, assuming the account has been open at least five years.

Whether these accounts are better than the traditional tax-deferred (and for some, tax-deductible) IRAs depends on each reader’s individual circumstances, notably whether you believe you’ll be in a higher or lower tax bracket when you withdraw the money than you currently are.

If you believe you’ll be in a lower bracket during retirement than you are now, the immediate tax benefit of a deduction, if you’re eligible for one, may be preferable. But until the new tax law--which raises the income eligibility for tax-deductible IRA contributions to traditional IRAs over the next decade to $80,000 in modified adjusted gross income for couples filing jointly, and $50,000 for single filers--most taxpayers eligible for the old-style IRAs could have ended up in a higher bracket in retirement than they’re currently in. (Modified adjusted gross income is generally total income minus income adjustments other than IRA deductions.)

Roth IRAs are a boon to taxpayers like you whose incomes prevent them from making tax-deductible IRA contributions and who are already contributing the allowable maximum to their 401(k) plans. The income limits for the Roth IRA are particularly attractive to upper-income taxpayers--$150,000 in modified adjusted gross income for married couples filing jointly and $80,000 for single filers.

Tax Consequences of Donating Land

Q: My wife and I own a piece of commercial property that we would like to donate to a charity. We paid $390,000 in 1986 for the property, which is currently appraised at $500,000. The loan balance is $85,000, and we have claimed a total depreciation on the property so far of $137,500. What are the tax consequences of donating this land?--J.M.H.

According to Howard Gordon, a certified public accountant in Palm Springs, you must claim a long-term capital gain of $42,075 due to relief of debt, assuming that the mortgage goes with the land. At the same time, you will be able to claim a tax-deductible charitable contribution of $415,000.

Here’s how Gordon arrived at this conclusion: Your basis in the property is $252,500, which is your 1986 purchase price minus the depreciation you already have claimed. That amount is divided by the property’s current appraised value to arrive at what is called the “basis allocation” ratio. This ratio of 50.5% is then applied to the $85,000 of debt relief you will have when you turn over the mortgaged property to the charity. The result of this calculation? That $42,925 of the mortgage is allocated to your basis, the balance of $42,075 is allocated to the untaxed property appreciation and considered a debt relief gain to you.

Your charitable contribution of $415,000 was calculated by deducting the mortgage from the property’s appraised value.

IRA Funds Can Be Used for Down Payment

Q: A few weeks ago, you said that taxpayers couldn’t tap their IRAs penalty-free to make a down payment on a home. But my friend says we can. Who’s right?--H.J.

As of Jan. 1, your friend is right. The new tax law allows a penalty-free early withdrawal of up to $10,000 from an IRA for use as a down payment for the first-time purchase of a home. The withdrawal can be made from the home buyer’s account or that of a parent or grandparent. Although the standard 10% early-withdrawal penalty is waived, the withdrawal is subject to ordinary income tax.

Rent Discount May Invite IRS Scrutiny

Q: We want to rent a house to our son for an amount less than what we are currently receiving for this unit. However, our tax consultant says we will be taxed as though we are receiving the amount we had previously gotten. Is this true, or can we charge our son a reasonable rental price based on the fact that the house is next door to ours and that our son will be required to care for us as we become older?--J.W.

You may rent the house to your son at a discount as long as the rent you charge is “reasonable.”

What does that mean? Our advisors say the Internal Revenue Service scrutinizes such deals carefully. A 20% discount below prevailing rental rates is generally considered reasonable. More than that, they say, and you invite scrutiny, although you can’t be sure that the IRS would challenge an arrangement with a discount greater than 20%.

Why does the IRS accept a discount for rentals to family members? It’s a good question. Our advisors say it is generally accepted that renting to a family member poses less risk than renting to a stranger, a factor that takes some of the uncertainty out of being a landlord.

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Send financial questions of general interest to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053 Or send e-mail to carla.lazzareschi@latimes.com