To amend the Internal Revenue Code of 1986 to permit nondeductible tax-free individual retirement accounts.

Summary: Amends the Internal Revenue Code to establish special individual retirement accounts that are nondeductible.  Makes such accounts nontaxable if earnings on contributions are held for at least five years.  Applies the early withdrawal penalty to distributions made before the end of the five year-period.

SECTION 1. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE INDIVIDUAL 
              RETIREMENT ACCOUNTS.

    (a) In General.--Subpart A of part I of subchapter D of chapter 1 
of the Internal Revenue Code of 1986 (relating to pension, profit-
sharing, stock bonus plans, etc.) is amended by inserting after section 
408 the following new section:

``SEC. 408A. SPECIAL INDIVIDUAL RETIREMENT ACCOUNTS.

    ``(a) General Rule.--Except as provided in this section, a special 
individual retirement account shall be treated for purposes of this 
title in the same manner as an individual retirement plan.
    ``(b) Special Individual Retirement Account.--For purposes of this 
title, the term `special individual retirement account' means an 
individual retirement plan which is designated at the time of 
establishment of the plan as a special individual retirement account.
    ``(c) Treatment of Contributions.--
            ``(1) No deduction allowed.--No deduction shall be allowed 
        under section 219 for a contribution to a special individual 
        retirement account.
            ``(2) Contribution limit.--The aggregate amount of 
        contributions for any taxable year to all special individual 
        retirement accounts maintained for the benefit of an individual 
        shall not exceed the excess (if any) of--
                    ``(A) the maximum amount allowable as a deduction 
                under section 219 with respect to such individual for 
                such taxable year (determined without regard to section 
                219(g)), over
                    ``(B) the amount so allowed.
            ``(3) Special rules for qualified transfers.--
                    ``(A) In general.--No rollover contribution may be 
                made to a special individual retirement account unless 
                it is a qualified transfer.
                    ``(B) Limit not to apply.--The limitation under 
                paragraph (2) shall not apply to a qualified transfer 
                to a special individual retirement account.
    ``(d) Tax Treatment of Distributions.--
            ``(1) In general.--Except as provided in this subsection, 
        any amount paid or distributed out of a special individual 
        retirement account shall not be included in the gross income of 
        the distributee.
            ``(2) Exception for earnings on contributions held less 
        than 5 years.--
                    ``(A) In general.--Any amount distributed out of a 
                special individual retirement account which consists of 
                earnings allocable to contributions made to the account 
                during the 5-year period ending on the day before such 
                distribution shall be included in the gross income of 
                the distributee for the taxable year in which the 
                distribution occurs.
                    ``(B) Ordering rule.--
                            ``(i) First-in, first-out rule.--
                        Distributions from a special individual 
                        retirement account shall be treated as having 
                        been made--
                                    ``(I) first from the earliest 
                                contribution (and earnings allocable 
                                thereto) remaining in the account at 
                                the time of the distribution, and
                                    ``(II) then from other 
                                contributions (and earnings allocable 
                                thereto) in the order in which made.
                            ``(ii) Allocations between contributions 
                        and earnings.--Any portion of a distribution 
                        allocated to a contribution (and earnings 
                        allocable thereto) shall be treated as 
                        allocated first to the earnings and then to the 
                        contribution.
                            ``(iii) Allocation of earnings.--Earnings 
                        shall be allocated to a contribution in such 
                        manner as the Secretary may by regulations 
                        prescribe.
                            ``(iv) Contributions in same year.--Except 
                        as provided in regulations, all contributions 
                        made during the same taxable year may be 
                        treated as 1 contribution for purposes of this 
                        subparagraph.
                    ``(C) Cross reference.--

                                ``For additional tax for early 
withdrawal, see section 72(t).

            ``(3) Qualified transfer.--
                    ``(A) In general.--Paragraph (2) shall not apply to 
                any distribution which is transferred in a qualified 
                transfer to another special individual retirement 
                account.
                    ``(B) Contribution period.--For purposes of 
                paragraph (2), the special individual retirement 
                account to which any contributions are transferred 
                shall be treated as having held such contributions 
                during any period such contributions were held (or are 
                treated as held under this subparagraph) by the special 
                individual retirement account from which transferred.
            ``(4) Special rules relating to certain transfers.--
                    ``(A) In general.--Notwithstanding any other 
                provision of law, in the case of a qualified transfer 
                to a special individual retirement account from an 
                individual retirement plan which is not a special 
                individual retirement account--
                            ``(i) there shall be included in gross 
                        income any amount which, but for the qualified 
                        transfer, would be includible in gross income, 
                        but
                            ``(ii) section 72(t) shall not apply to 
                        such amount.
                    ``(B) Time for inclusion.--In the case of any 
                qualified transfer which occurs before January 1, 1994, 
                any amount includible in gross income under 
                subparagraph (A) with respect to such contribution 
                shall be includible ratably over the 4-taxable year 
                period beginning in the taxable year in which the 
                amount was paid or distributed out of the individual 
                retirement plan.
    ``(e) Qualified Transfer.--For purposes of this section--
            ``(1) In general.--The term `qualified transfer' means a 
        transfer to a special individual retirement account from 
        another such account or from an individual retirement plan but 
        only if such transfer meets the requirements of section 
        408(d)(3).
            ``(2) Limitation.--A transfer otherwise described in 
        paragraph (1) shall not be treated as a qualified transfer if 
        the taxpayer's adjusted gross income for the taxable year of 
        the transfer exceeds the sum of the applicable dollar amount 
        plus $10,000. This paragraph shall not apply to a transfer from 
        a special individual retirement account to another special 
        individual retirement account.
            ``(3) Definitions.--For purposes of this subsection, the 
        terms `adjusted gross income' and `applicable dollar amount' 
        have the meanings given such terms by section 219(g)(3), except 
        subparagraph (A)(ii) thereof shall be applied without regard to 
        the phrase `or the deduction allowable under this section'.''
    (b) Early Withdrawal Penalty.--Section 72(t) of such Code is 
amended by adding at the end thereof the following new paragraph:
            ``(6) Rules relating to special individual retirement 
        accounts.--In the case of a special individual retirement 
        account under section 408A--
                    ``(A) this subsection shall only apply to 
                distributions out of such account which consist of 
                earnings allocable to contributions made to the account 
                during the 5-year period ending on the day before such 
                distribution, and
                    ``(B) paragraph (2)(A)(i) shall not apply to any 
                distribution described in subparagraph (A).''
    (c) Excess Contributions.--Section 4973(b) of such Code is amended 
by adding at the end thereof the following new sentence: ``For purposes 
of paragraphs (1)(B) and (2)(C), the amount allowable as a deduction 
under section 219 shall be computed without regard to section 408A.''
    (d) Conforming Amendment.--The table of sections for subpart A of 
part I of subchapter D of chapter 1 of such Code is amended by 
inserting after the item relating to section 408 the following new 
item:

                              ``Sec. 408A. Special individual 
                                        retirement accounts.''
    (e) Effective Dates.--
            (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        beginning after December 31, 1993.
            (2) Qualified transfers in 1993.--The amendments made by 
        this section shall apply to any qualified transfer during any 
        taxable year beginning in 1993.