A bill to amend the Internal Revenue code of 1986 to modify the definition of compensation for purposes of determining the limits on contributions to individual retirement accounts and annuities, and for other purposes.

Summary: IRA Equity Act of 2005 - Amends the Internal Revenue Code to allow taxpayers to: (1) include wage replacement income in computing the allowable tax deduction for contributions to retirement savings accounts; and (2) elect to include certain unused income from prior taxable years in computing such tax deduction. Defines "wage replacement income" as amounts received by disabled individuals, unemployment compensation, workers' compensation, or other income deemed wage replacement income under Treasury regulations.

SECTION 1. SHORT TITLE.

    This Act may be cited as the ``IRA Equity Act of 2005''.

SEC. 2. COMPUTATION OF LIMITS ON IRA AND ROTH IRA CONTRIBUTIONS.

    (a) Certain Wage Replacement Income Treated as Compensation.--
            (1) Wage replacement income.--Section 219(f) of the 
        Internal Revenue Code of 1986 (relating to other definitions 
        and special rules) is amended by adding at the end the 
        following new paragraph:
            ``(8) Treatment of certain wage replacement income as 
        compensation.--
                    ``(A) In general.--Notwithstanding paragraph (1), 
                applicable wage replacement income not otherwise 
                treated as compensation shall be treated as 
                compensation for purposes of this section.
                    ``(B) Applicable wage replacement income.--For 
                purposes of this paragraph, the term `applicable wage 
                replacement income' means any amount received by an 
                individual--
                            ``(i) as the result of the individual 
                        having become disabled,
                            ``(ii) as unemployment compensation (as 
                        defined in section 85(b)),
                            ``(iii) under workmen's compensation acts, 
                        or
                            ``(iv) which constitutes wage replacement 
                        income under regulations prescribed by the 
                        Secretary.''
            (2) Certain excludable amounts may be taken into account 
        for purposes of roth iras.--Section 408A(c)(2) of such Code 
        (relating to contribution limit) is amended by adding at the 
        end the following new flush sentence:
        ``In determining the maximum amount under subparagraph (A), 
        subsections (b)(1)(B) and (c) of section 219 shall be applied 
        by taking into account compensation described in section 
        219(f)(8) without regard to whether it is includible in gross 
        income.''
            (3) Effective date.--The amendments made by this subsection 
        shall apply to taxable years beginning after December 31, 2004.
    (b) Computation of Maximum IRA Deduction for Roth IRAs Using 
Compensation From 2 Preceding Taxable Years.--
            (1) In general.--Section 408A(c) of the Internal Revenue 
        Code of 1986 (relating to treatment of contributions) is 
        amended by adding at the end the following new paragraph:
            ``(8) Compensation from preceding 2 years may be taken into 
        account.--
                    ``(A) In general.--A taxpayer may elect for 
                purposes of paragraph (2) to take into account any 
                unused compensation from the 2 taxable years 
                immediately preceding the taxable year.
                    ``(B) Unused compensation.--For purposes of this 
                paragraph, the term `unused compensation' means with 
                respect to an individual for any taxable year the 
                compensation includible in the individual's gross 
                income for the taxable year reduced by the sum of--
                            ``(i) the amount allowed as a deduction 
                        under 219(a) to such individual for such 
                        taxable year,
                            ``(ii) the amount of any designated 
                        nondeductible contribution (as defined in 
                        section 408(o)) on behalf of such individual 
                        for such taxable year,
                            ``(iii) the amount of any contribution on 
                        behalf of such individual to a Roth IRA under 
                        this section for such taxable year, and
                            ``(iv) the amount of compensation 
                        includible in such individual's gross income 
                        for such taxable year taken into account under 
                        section 219(c) in determining the limitation 
                        under section 219 or paragraph (2) for the 
                        individual's spouse.
                    ``(C) Application to special rule for married 
                individuals.--Under rules prescribed by the Secretary, 
                in applying section 219(c) for any taxable year for 
                purposes of applying paragraph (2)(A), unused 
                compensation of an individual or an individual's spouse 
                for the 2 taxable years immediately preceding the 
                taxable year may be taken into account.''
            (2) Effective date.--The amendment made by this subsection 
        shall apply to taxable years beginning after December 31, 2004, 
        but unused compensation for taxable years beginning before 
        January 1, 2005, may be taken into account for taxable years 
        beginning after December 31, 2004.