<PAGE> 1
SUPPLEMENT TO PROSPECTUSES FOR
WESTERN-SOUTHERN LIFE ASSURANCE COMPANY
SEPARATE ACCOUNT 1 AND SEPARATE ACCOUNT 2
THE DATE OF THIS SUPPLEMENT IS JANUARY 1, 1998.
Certain provisions of the Taxpayer Relief Act of 1997 (the "TRA")
affect, generally for tax years that commence on or after January 1, 1998, the
information provided in the following prospectuses (each a "Prospectus" and
collectively the "Prospectuses"):
- May 1, 1997 Prospectus for the TOUCHSTONE VARIABLE ANNUITY;
- May 1, 1997 Prospectus for the TOUCHSTONE II VARIABLE ANNUITY; and
- October 20, 1997 Prospectus for the TOUCHSTONE SELECT VARIABLE
ANNUITY.
Each Prospectus describes variable annuity contracts (each a "Contract" and
collectively the "Contracts") that are invested in one or more sub-accounts of
Western-Southern Life Assurance Company Separate Account 1 or Separate Account
2. In addition, Western-Southern Life Assurance Company (the "Company") has
taken action so that the Contracts can be used for a new type of individual
retirement account or annuity (an "IRA") that is permitted by the TRA. This
Supplement modifies each Prospectus and explains the affect of the TRA on the
provisions of each Prospectus and the new type of IRA for which the Contracts
can be used.
In general, information about the following topics is located in the
part of this Supplement indicated below.
<TABLE>
<CAPTION>
TOPIC LOCATION
---------------------------------------------------- -------------------------
<S> <C>
Federal tax rules applicable to Roth IRAs Part A (pages 1 - 5)
Changes in contribution and distribution limits Part B (pages 5 - 7)
applicable to traditional IRAs
New rules applicable to early distribution penalty Part C (pages 7 - 8)
tax
</TABLE>
PART A. NEW TYPE OF IRA FOR WHICH CONTRACTS CAN BE USED - ROTH IRAS.
Each Prospectus indicates that the Contracts can be either Qualified
Contracts (which are defined in each Prospectus as Contracts purchased in
connection with plans that qualify under Section 401, 403(b), 408 or 457 of the
Internal Revenue Code of 1986, as amended (the "Code")) or Non-Qualified
Contracts (which are defined in each Prospectus as any other Contracts).
<PAGE> 2
One type of Qualified Contract is used in connection with an IRA that
is governed under Section 408 of the Code (called herein a "traditional IRA").
The TRA has created, for tax years beginning on or after January 1, 1998, a new
type of IRA under Section 408A of the Code. This new IRA is called in the Code
and in this Supplement a "Roth IRA" (after the Senator who promoted such IRAs).
The Company has taken action so that, for tax years beginning on or after
January 1, 1998, Qualified Contracts can be used in connection with Roth IRAs as
well as traditional IRAs.
Except to the extent modified in Part B and Part C of this Supplement,
the federal tax rules applicable to traditional IRAs are summarized in each
Prospectus. Part A of this Supplement describes the federal tax rules applicable
to Roth IRAs.
Annual Contributions for Roth IRAs
Unlike a traditional IRA, NO contributions to a Roth IRA can, under any
circumstances, be deducted by an individual. Instead, all contributions made to
a Roth IRA are nondeductible.
Subject to the following discussion, the maximum amount that may be
contributed to all Roth IRAs for the benefit of an individual with respect to
any tax year will generally be equal to the amount (if any) by which (1) the
lesser of $2,000 or the compensation includible in the individual's income (for
federal income tax purposes) with respect to such tax year exceeds (2) the
aggregate amount of contributions made for the benefit of such individual with
respect to such tax year to all traditional IRAs.
A special rule applies if the individual for whom the contributions are
being made files a joint federal income tax return with his or her spouse for
the applicable tax year but has an amount of compensation includible in income
(for federal income tax purposes) with respect to such tax year that is less
than the taxable compensation of his or her spouse for such tax year (such as
will occur when the individual is a "nonworking spouse"). In such case, subject
to the following discussion, the maximum amount that may be contributed to all
Roth IRAs for such individual with respect to such tax year can generally be up
to the amount (if any) by which (1) the lesser of $2,000 or the sum of the
taxable compensation of such individual for such tax year plus the taxable
compensation of his or her spouse for such tax year (minus any deduction allowed
his or her spouse with respect to such tax year for contributions to traditional
IRAs and any contributions made for his or her spouse to Roth IRAs with respect
to such tax year) exceeds (2) the aggregate amount of contributions made for the
benefit of such individual with respect to such tax year to all traditional
IRAs.
However, notwithstanding the foregoing paragraphs, the maximum
contribution amount that can be made to Roth IRAs for any individual with
respect to any tax year under the rules described above generally begins to be
phased out for such individual if his or her adjusted gross income (for federal
income tax purposes) with respect to such tax year exceeds a certain amount (the
"initial Roth IRA limit") and is reduced to zero (so that no contributions can
be
-2-
<PAGE> 3
made to Roth IRAs for his or her benefit for such tax year) if his or her
adjusted gross income for such tax year is equal to or in excess of a higher
amount (the "totally phased out Roth IRA limit").
For this purpose, the initial Roth IRA limit and the totally phased out
Roth IRA limit are generally:
(1) $150,000 and $160,000, respectively, if the applicable
individual files a joint federal income tax return for such
tax year;
(2) $95,000 and $110,000, respectively, if such individual files a
separate federal income tax return for such tax year and is
not married; and
(3) $0 and $15,000, respectively, if such individual files a
separate return for such tax year and is married.
Unlike traditional IRAs, if otherwise permitted, annual contributions
can be made to Roth IRAs for an individual even after he or she has attained age
70-1/2.
Similar to traditional IRAs, contributions made to Roth IRAs in excess
of the contribution limits summarized above may be subject to certain tax
penalties or other restrictions.
Rollover Contributions to a Roth IRA
Under certain conditions described in Sections 408(d)(3) and 408A(e) of
the Code, a distribution from a Roth IRA or a traditional IRA may be able to be
rolled over to a Roth IRA on a tax-deferred basis during any tax year; except
that such a rollover from a traditional IRA to a Roth IRA can be made in a tax
year only if (1) the applicable individual's adjusted gross income (for federal
income tax purposes) with respect to such tax year is $100,000 or less and (2)
such individual is not a married individual filing a separate federal income tax
return for such tax year. Any proper rollover is not taken into account in
determining the maximum limits described above as to annual contributions made
to Roth IRAs.
However, if any distribution from an individual's traditional IRA is
rolled over to a Roth IRA held for the benefit of such individual, the
individual must generally include in income (for federal income tax purposes)
the amount of such distribution (except that any such distribution made before
January 1, 1999 is included in income only ratably over the 4-tax year period
beginning with the tax year in which the distribution is made). No early
distribution penalty tax under Section 72(t) of the Code, which generally
provides a 10% penalty in cases of distributions from IRAs unless the applicable
individual is age 59-1/2 or in certain other situations, will apply to such
distribution.
-3-
<PAGE> 4
Any individual considering a rollover to a Roth IRA should review the
conditions applicable to making such rollover that are set forth in Sections
408(d)(3) and 408A(e) of the Code.
If an individual's traditional IRA is to be converted into a Roth IRA,
it is generally subject to the same tax rules and limits as would apply to a
distribution from a traditional IRA that is to be rolled over to a Roth IRA.
Distributions from Roth IRAs
Any distribution from a Roth IRA that is considered a qualified
distribution is not includible in income (for federal income tax purposes) and
hence also is not subject to the early distribution penalty tax under Section
72(t) of the Code.
A distribution from a Roth IRA is treated as a "qualified distribution"
for this purpose if (1) it is made after the end of the 5-tax year period
beginning with the first tax year for which a contribution was made to a Roth
IRA for the benefit of the applicable individual (or, to the extent any portion
of such distribution is allocable to a rollover contribution, if it is made
after the end of the 5-tax year period beginning with the tax year in which the
rollover contribution was made) and (2) it meets one of the following
conditions:
(a) It is made on or after the date the individual attains age
59-1/2;
(b) It is made to a beneficiary or the individual's estate on or
after the death of the individual;
(c) It is attributable to the individual's being disabled (when
the meaning of Section 72(m)(7) of the Code); or
(d) It meets the conditions of a "qualified first-time homeowner
distribution," which are summarized in Part C of this
Supplement (that deals with the early distribution penalty
tax).
Any distribution from a Roth IRA that is not considered a qualified
distribution under the above rules is generally excluded from income (for
federal income tax purposes) to the extent it does not, when added to all
previous distributions from such Roth IRA, exceed the aggregate amount of
contributions made to such Roth IRA and is included in income (and may be
subject to the early distribution penalty tax under Section 72(t) of the Code)
to the extent it does exceed such amount.
Further, while distributions from a traditional IRA generally must
commence by the April 1 of the calendar year that immediately follows the
calendar year in which the individual for whose benefit the IRA was established
attains age 70-1/2 and in at least minimum annual installments as determined
under rules issued by the Internal Revenue Service (the "IRS"), a
-4-
<PAGE> 5
Roth IRA is not subject to such requirements, and they will not apply unless the
applicable Roth IRA document itself imposes them.
However, minimum distributions may be required from a Roth IRA after
the death of the individual for whose benefit the Roth IRA was established in
accordance with the rules of the Code and the IRS. In general, such rules appear
to require that the funds held under the individual's Roth IRA be completely
distributed by the end of the calendar year in which the fifth annual
anniversary of the date of the death of the individual occurs. As an
alternative, if distributions to the individual's beneficiary as designated
under the Roth IRA begin by the end of the calendar year immediately following
the calendar year in which the individual's death occurs (or, if the designated
beneficiary is the individual's surviving spouse, by the later of the end of the
calendar year immediately following the calendar year in which the individual
dies or the end of the calendar year in which the individual would have attained
age 70-1/2), distributions from the individual's Roth IRA may be able to be made
over a period not extending beyond the life (or life expectancy) of the
designated beneficiary.
Other Rules Applicable to Roth IRAs
In general, a Roth IRA is subject to the same tax rules that apply to a
traditional IRA except to the extent modified by the rules summarized above.
PART B. NEW CONTRIBUTION AND DEDUCTION LIMITS APPLICABLE TO TRADITIONAL
---------------------------------------------------------------
IRAS.
-----
Certain contribution and distribution limits that apply to traditional
IRAs have been changed, effective for tax years beginning on or after January 1,
1998, in certain respects by the TRA. Part B of this Supplement describes such
changes. In this regard, such changes do not affect rollovers to or transfers
among traditional IRAs, and such rollovers and transfers are not considered
contributions for purposes of the limits described in Part B of this Supplement.
In general, the rules for determining the maximum amount that can be
contributed to a traditional IRA for any individual with respect to a tax year
that begins on or after January 1, 1998 (without regard to whether or not such
amount is deductible) are very similar to the rules that applied to tax years
beginning prior to January 1, 1998.
Under such rules, the maximum amount that may be contributed to all
traditional IRAs for the benefit of an individual for any tax year beginning on
or after January 1, 1998 will generally be equal to the lesser of $2,000 or the
compensation includible in the individual's income (for federal income tax
purposes) with respect to such tax year.
A special rule applies if the individual for whom the contributions are
being made files a joint federal income tax return with his or her spouse for
the applicable tax year but has compensation includible in income (for federal
income tax purposes) with respect to such tax year that is less than the taxable
compensation of his or her spouse for such tax year (such as
-5-
<PAGE> 6
will occur when the individual is a "nonworking spouse"). In such case, the
maximum amount that may be contributed to all traditional IRAs for such
individual with respect to such tax year can generally be up to the lesser of
$2,000 or the sum of the taxable compensation of such individual for such tax
year plus the taxable compensation of his or her spouse for such tax year (minus
any deduction allowed his or her spouse with respect to such tax year for
contributions to traditional IRAs and any contributions made by his or her
spouse to Roth IRAs with respect to such tax year).
Under the prior rules of the Code, the maximum amount that could be
contributed to an individual's traditional IRAs for any tax year AND deducted
was generally equal to the same maximum limits on contributions explained above,
except that, for purposes of determining such deduction limit, the $2,000 limit
referred to above was reduced if (1) either the individual's adjusted gross
income (for federal income tax purposes) with respect to such tax year exceeded
a certain limit or (2) either the individual or his or her spouse was an active
participant in an employer-provided tax-qualified retirement plan for a plan
year ending with or within such tax year. These deduction limit rules have been
significantly changed by the TRA for tax years beginning on or after January 1,
1998.
Under the new rules, in determining the deduction limit on
contributions made to all traditional IRAs held for the benefit of an individual
with respect to any tax year beginning or after January 1, 1998, the $2,000
limit noted above begins to be phased out if such individual (or, if applicable,
his or her spouse) is an active participant in an employer-provided
tax-qualified retirement plan for a plan year ending with or within such tax
year and if his or her adjusted gross income (for federal income tax purposes)
with respect to such tax year exceeds a certain amount (the "initial traditional
IRA limit"). In addition, if the individual is an active participant in an
employer-provided tax-qualified retirement plan for a plan year ending with or
within such tax year, such $2,000 limit is reduced to zero if such adjusted
gross income is equal to or in excess of a higher amount (the "totally phased
out traditional IRA limit"). For this purpose, the initial traditional IRA limit
for any tax year is generally:
(1) $150,000 if the applicable individual is not an active
participant in an employer-provided tax-qualified retirement
plan at any time in a plan year ending with or within such tax
year but whose spouse has been such an active participant;
(2) $50,000 (increasing in stages in tax years beginning after
1998 until it is $80,000 for tax years beginning in 2007 and
thereafter) if the applicable individual files a joint federal
income tax return for such tax year and has been an active
participant in an employer-provided tax-qualified retirement
plan at any time in a plan year ending with or within such tax
year;
(3) $30,000 (increasing in stages in tax years beginning after
1998 until it is $50,000 for tax years beginning in 2005 and
thereafter) if the applicable
-6-
<PAGE> 7
individual files a separate federal income tax return for such
tax year, is not married and has been an active participant in
an employer-provided tax-qualified retirement plan at any time
in a plan year ending with or within such tax year; or
(4) $0 if the applicable individual files a separate federal
income tax return for such tax year, is married and has been
an active participant in an employer-provided tax-qualified
retirement plan at any time in a plan year ending with or
within such tax year.
Further, for this purpose, the totally phased out traditional IRA limit
for any individual and with respect to any tax year is an amount that is $10,000
above the initial traditional IRA limit applicable to such individual and tax
year (except that such reference to $10,000 will be increased to $20,000 with
respect to a tax year beginning in 2007 or later if the applicable individual
files a joint federal income tax return for such tax year).
PART C. NEW RULES APPLICABLE TO EARLY DISTRIBUTION PENALTY TAX.
-------------------------------------------------------
As is described in each Prospectus, Section 72(t) of the Code generally
imposes a 10% early distribution penalty tax on the taxable portion of any
distribution from tax-qualified plans that qualify under Section 401(a), 403 or
408, including distributions under Qualified Contracts to the extent they are
issued in connection with such plans. Such penalty tax does not apply (1) to the
extent the distribution is properly rolled over to another tax-qualified plan or
(2) if the distribution is made after the applicable individual to whom the
distribution related is age 59-1/2 or older or (3) another exception set forth
in Code Section 72(t) applies. A summary of such exceptions is contained in each
Prospectus.
The early distribution penalty tax under Section 72(t) of the Code
generally applies to distributions made from Roth IRAs, except to the extent
provided in Part A of this Supplement.
In addition, two new exceptions to the early distribution penalty tax
of Code Section 72(t) have been added by the TRA with respect to distributions
made from traditional IRAs and Roth IRAs in tax years beginning on or after
January 1, 1998. Part C of this Supplement describes such new exceptions.
The first of such new exceptions applies to distributions to an
individual from a traditional IRA or a Roth IRA to the extent such distributions
do not exceed the expenses for tuition, fees, books, supplies, and equipment
required for the enrollment or attendance of the individual, his or her spouse
or any child or grandchild of the individual or his or her spouse at a qualified
post-secondary institution of education (less certain scholarships or other
assistance received for the same expenses).
-7-
<PAGE> 8
The second of such new exceptions applies to any qualified first-time
homebuyer distribution to an individual from a traditional IRA or a Roth IRA.
For this purpose, a "qualified first-time homebuyer distribution"
refers to any distribution received by an individual to the extent it is used by
him or her, before the close of the 120th day after the day on which it is
received, to pay the costs of acquiring, constructing or reconstructing a
principal residence of a first-time homebuyer who is such individual, his or her
spouse or any child, grandchild or ancestor of such individual or his or her
spouse. No more than $10,000 can be excluded in the aggregate from the early
distribution penalty tax by an individual under this exception over all tax
years.
* * * * *
THE ABOVE DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE APPLICABLE
PROSPECTUS.
FURTHER, PROSPECTIVE PURCHASERS OF CONTRACTS SHOULD CONSULT THEIR OWN
TAX ADVISORS PRIOR TO PURCHASING CONTRACTS.
IN ADDITION, THE ABOVE DISCUSSION IS NOT INTENDED AND SHOULD NOT BE
RELIED UPON AS TAX ADVICE BUT IS MERELY A SYNOPSIS OF CERTAIN FEDERAL INCOME TAX
RULES AND DOES NOT PROVIDE COMPLETE DETAILS AS TO SUCH RULES. ALSO, ALTHOUGH THE
ABOVE DISCUSSION IS BASED UPON THE COMPANY'S UNDERSTANDING OF FEDERAL INCOME TAX
LAWS AS CURRENTLY IN EFFECT, THERE IS NO GUARANTEE THAT THOSE LAWS WILL NOT
CHANGE OR THAT LATER INTERPRETATIONS OF THOSE LAWS WILL AFFECT THEIR
APPLICATION.
FINALLY, THE ABOVE DISCUSSION DOES NOT TAKE INTO ACCOUNT STATE OR LOCAL
TAX LAWS WHICH MAY AFFECT THE PURCHASE OF A CONTRACT OR THE BENEFITS PAID OUT
UNDER A CONTRACT AND DOES NOT CONSIDER FEDERAL ESTATE AND GIFT TAXES AND STATE
AND LOCAL ESTATE, INHERITANCE AND OTHER SIMILAR TAXES WHICH WILL DEPEND UPON THE
INDIVIDUAL SITUATION OF EACH CONTRACT OWNER OR BENEFICIARY.
-8-
