September 2, 1974 - 131 Pub. Law 93-406 88 STAT. 959 by an agency or instrumentality of any of the foregoing, or "(B) amounts were contributed by his employer for an annuity contract described in section 403(b) (whether or not 26 USC 403. his rights in such contract are nonforfeitable). (3) CONTRIBUTIONS AFTER AGE 701.—No deduction is allowed under subsection (a) with respect to any payment described in subsection (a) which is made during the taxable year of an individual who has attained age 70% before the close of such taxable year. "(4) RECONTRIBUTED AMOUNTS.-No deduction is allowed under this section with respect to a rollover contribution described in section 402(a) (5), 403 (a) (4), 408 (d) (3), or 409 (b) (3) (C). Post, pp. 991, "(5) AMOUNTS CONTRIBUTED UNDER ENDOWMENT CONTRACT.-969, 964. In the case of an endowment contract described in section 408 (b), Supra. no deduction is allowed under subsection (a) for that portion of the amounts paid under the contract for the taxable year properly allocable, under regulations prescribed by the Secretary or his delegate, to the cost of life insurance. "(c) DEFINITIONS AND SPECial Rules.— "(1) COMPENSATION.-For purposes of this section, the term 'compensation' includes earned income as defined in section 401 (c) (2). "(2) MARRIED INDIVIDUALS.-The maximum deduction under subsection (b) (1) shall be computed separately for each individual, and this section shall be applied without regard to any community property laws.". (2) DEDUCTION ALLOWED IN ARRIVING AT ADJUSTED GROSS INCOME.-Section 62 (defining adjusted gross income) is amended by inserting after paragraph (9) the following new paragraph: "(10) RETIREMENT SAVINGS.-The deduction allowed by section 219 (relating to deduction of certain retirement savings).". (b) INDIVIDUAL RETIREMENT ACCOUNTS.-Subpart A of part I of subchapter D of chapter 1 (relating to retirement plans) is amended 26 USC 401. by adding at the end thereof the following new section: "SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS. "(a) INDIVIDUAL RETIREMENT ACCOUNT.-For purposes of this section, the term 'individual retirement account' means a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries, but only if the written governing instrument creating the trust meets the following requirements: "(1) Except in the case of a rollover contribution described in subsection (d) (3) in section 402(a)(5), 403(a)(4), or 409 (b) (3) (C), no contribution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year in excess of $1,500 on behalf of any individual. "(2) The trustee is a bank (as defined in section 401 (d) (1)) or such other person who demonstrates to the satisfaction of the Secretary or his delegate that the manner in which such other person will administer the trust will be consistent with the requirements of this section. (3) No part of the trust funds will be invested in life insurance contracts. "(4) The interest of an individual in the balance in his account is non forfeitable. "(5) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund. Pub. Law 93-406 88 STAT. 960 - 132 September 2, 1974 "(6) The entire interest of an individual for whose benefit the trust is maintained will be distributed to him not later than the close of his taxable year in which he attains age 702, or will be distributed, commencing before the close of such taxable year, in accordance with regulations prescribed by the Secretary or his delegate, over "(A) the life of such individual or the lives of such individual and his spouse, or "(B) a period not extending beyond the life expectancy of such individual or the life expectancy of such individual and his spouse. "(7) If an individual for whose benefit the trust is maintained dies before his entire interest has been distributed to him, or if distribution has been commenced as provided in paragraph (6) to his surviving spouse and such surviving spouse dies before the entire interest has been distributed to such spouse, the entire interest (or the remaining part of such interest if distribution thereof has commenced) will, within 5 years after his death (or the death of the surviving spouse), be distributed, or applied to the purchase of an immediate annuity for his beneficiary or beneficiaries (or the beneficiary or beneficiaries of his surviving spouse) which will be payable for the life of such beneficiary or beneficiaries (or for a term certain not extending beyond the life expectancy of such beneficiary or beneficiaries) and which annuity will be immediately distributed to such beneficiary or beneficiaries. The preceding sentence does not apply if distributions over a term certain commenced before the death of the individual for whose benefit the trust was maintained and the term certain is for a period permitted under paragraph (6). "(b) INDIVIDUAL RETIREMENT ANNUITY.-For purposes of this section, the term 'individual retirement annuity' means an annuity contract, or an endowment contract (as determined under regulations prescribed by the Secretary or his delegate), issued by an insurance company which meets the following requirements: "(1) The contract is not transferable by the owner. "(2) The annual premium under the contract will not exceed $1,500 and any refund of premiums will be applied before the close of the calendar year following the year of the refund toward the payment of future premiums or the purchase of additional benefits. "(3) The entire interest of the owner will be distributed to him not later than the close of his taxable year in which he attains age 7012, or will be distributed, in accordance with regulations prescribed by the Secretary or his delegate, over— "(A) the life of such owner or the lives of such owner and his spouse, or "(B) a period not extending beyond the life expectancy of such owner or the life expectancy of such owner and his spouse. "(4) If the owner dies before his entire interest has been distributed to him, or if distribution has been commenced as provided in paragraph (3) to his surviving spouse and such surviving spouse dies before the entire interest has been distributed to such spouse, the entire interest (or the remaining part of such interest if distribution thereof has commenced) will, within 5 years after his death (or the death of the surviving spouse), be distributed, or applied to the purchase of an immediate annuity for his beneficiary or beneficiaries (or the beneficiary or beneficiaries of his surviving spouse) which will be payable for the life of such bene ficiary or beneficiaries (or for a term certain not extending beyond the life expectancy of such beneficiary or beneficiaries) and which annuity will be immediately distributed to such beneficiary or beneficiaries. The preceding sentence shall have no application if distributions over a term certain commenced before the death of the owner and the term certain is for a period permitted under paragraph (3). "(5) The entire interest of the owner is non forfeitable. Such term does not include such an annuity contract for any taxable year of the owner in which it is disqualified on the application of subsection (e) or for any subsequent taxable year. For purposes of this subsection, no contract shall be treated as an endowment contract if it matures later than the taxable year in which the individual in whose name such contract is purchased attains age 7012; if it is not for the exclusive benefit of the individual in whose name it is purchased or his beneficiaries; or if the aggregate annual premiums under all such contracts purchased in the name of such individual for any taxable year exceed $1,500. 88 STAT. 961 "(c) ACCOUNTS ESTABLISHED BY EMPLOYERS AND CERTAIN AssoCIATIONS OF EMPLOYEES.-A trust created or organized in the United States by an employer for the exclusive benefit of his employees or their beneficiaries, or by an association of employees (which may include employees within the meaning of section 401 (c) (1)) for the 26 USC 401. exclusive benefit of its members or their beneficiaries, shall be treated as an individual retirement account (described in subsection (a)), but only if the written governing instrument creating the trust meets the following requirements: "(1) The trust satisfies the requirements of paragraphs (1) through (7) of subsection (a). "(2) There is a separate accounting for the interest of each employee or member. The assets of the trust may be held in a common fund for the account of all individuals who have an interest in the trust. "(d) TAX TREATMENT OF DISTRIBUTIONS.— "(1) IN GENERAL.-Except as otherwise provided in this subsection, any amount paid or distributed out of an individual retirement account or under an individual retirement annuity shall be included in gross income by the payee or distributee, as the case may be, for the taxable year in which the payment or distribution is received. The basis of any person in such an account or annuity is zero. "(2) DISTRIBUTIONS OF ANNUITY CONTRACTS.-Paragraph (1) does not apply to any annuity contract which meets the requirements of paragraphs (1), (3), (4), and (5) of subsection (b) and which is distributed from an individual retirement account. Section 72 applies to any such annuity contract, and for pur- 26 USC 72. poses of section 72 the investment in such contract is zero. "(3) ROLLOVER CONTRIBUTION.--An amount is described in this paragraph as a rollover contribution if it meets the requirements of subparagraphs (A) and (B). "(A) IN GENERAL.-Paragraph (1) does not apply to any amount paid or distributed out of an individual retirement account or individual retirement annuity to the individual for whose benefit the account or annuity is maintained if "(i) the entire amount received (including money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) or retirement bond 88 STAT. 962 26 USC 401. Ante, p. 958. Pub. Law 93-406 · 134 September 2, 1974 for the benefit of such individual not later than the 60th day after the day on which he receives the payment or distribution; or "(ii) the entire amount received (including money and any other property) represents the entire amount in the account or the entire value of the annuity and no amount in the account and no part of the value of the annuity is attributable to any source other than a rollover contribution from an employees' trust described in section 401(a) which is exempt from tax under section 501(a) (other than a trust forming part of a plan under which the individual was an employee within the meaning of section 401 (c) (1) at the time contributions were made on his behalf under the plan), or an annuity plan described in section 403 (a) (other than a plan under which the individual was an employee within the meaning of section 401 (c) (1) at the time contributions were made on his behalf under the plan) and any earnings on such sums and the entire amount thereof is paid into another such trust (for the benefit of such individual) or annuity plan not later than the 60th day on which he receives the payment or distribution. "(B) LIMITATION.-This paragraph does not apply to any amount described in subparagraph (A) (i) received by an individual from an individual retirement account or individual retirement annuity if at any time during the 3-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an individual retirement account, individual retirement annuity. or a retirement bond which was not includible in his gross income because of the application of this paragraph. "(4) EXCESS CONTRIBUTIONS RETURNED BEFORE DUE DATE OF RETURN.-Paragraph (1) does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity to the extent that such contribution exceeds the amount allowable as a deduction under section 219 if "(A) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individual's return for such taxable year, "(B) no deduction is allowed under section 219 with respect to such excess contribution, and (C) such distribution is accompanied by the amount of net income attributable to such excess contribution. Any net income described in subparagraph (C) shall be included in the gross income of the individual for the taxable year in which received. "(5) TRANSFER OF ACCOUNT INCIDENT TO DIVORCE.-The transfer of an individual's interest in an individual retirement account, individual retirement annuity, or retirement bond to his former spouse under a divorce decree or under a written instrument incident to such divorce is not to be considered a taxable transfer made by such individual notwithstanding any other provision of this subtitle, and such interest at the time of the transfer is to be treated as an individual retirement account of such spouse, and not of such individual. Thereafter such account, annuity, or bond for purposes of this subtitle is to be treated as maintained for the benefit of such spouse. "(1) EXEMPTION FROM TAX.-Any individual retirement account is exempt from taxation under this subtitle unless such account has ceased to be an individual retirement account by reason of paragraph (2) or (3). Notwithstanding the preceding sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business 26 USC 511. income of charitable, etc. organizations). "(2) Loss OF EXEMPTION OF ACCOUNT WHERE EMPLOYEE ENGAGES IN PROHIBITED TRANSACTION. "(A) IN GENERAL.-If, during any taxable year of the in- any transaction prohibited by section 4975 with respect to Post, p. 971. "(i) the individual for whose benefit any account was "(B) ACCOUNT TREATED AS DISTRIBUTING ALL ITS ASSETS.— In any case in which any account ceases to be an individual retirement account by reason of subparagraph (A) as of the first day of any taxable year, paragraph (1) of subsection (d) applies as if there were a distribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day). "(3) EFFECT OF BORROWING ON ANNUITY CONTRACT.—If during any taxable year the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the first day of such taxable year. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day. "(4) EFFECT OF PLEDGING ACCOUNT AS SECURITY.-If, during any taxable year of the individual for whose benefit an individual retirement account is established, that individual uses the account or any portion thereof as security for a loan, the portion so used is treated as distributed to that individual. “(5) PURCHASE OF ENDOWMENT CONTRACT BY INDIVIDUAL RETIREMENT ACCOUNT.-If the assets of an individual retirement account or any part of such assets are used to purchase an endowment contract for the benefit of the individual for whose benefit the account is established IN "(A) to the extent that the amount of the assets involved in the purchase are not attributable to the purchase of life insurance, the purchase is treated as a rollover contribution described in subsection (d) (3), and "(B) to the extent that the amount of the assets involved in the purchase are attributable to the purchase of life, health, accident, or other insurance, such amounts are treated as distributed to that individual (but the provisions of subsection (f) do not apply). "(6) COMMINGLING INDIVIDUAL RETIREMENT ACCOUNT AMOUNTS CERTAIN COMMON TRUST FUNDS AND COMMON INVESTMENT FUNDS. Any common trust fund or common investment fund of |