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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.
Output:
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.