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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.
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.