What About Roth IRAs? Are They Better For Me?

The Taxpayer Relief Act of 1997 has established a new type of IRA, called the Roth IRA, which will be available for tax years 1998 and later.

A Roth IRA is, by definition, a non-deductible IRA, regardless of your income and regardless of whether or not you are covered by a pension plan. Therefore, unlike a deductible IRA contributing to a Roth IRA provides no immediate tax savings. Like with any IRA, the earnings in the account are tax deferred while remaining in the IRA.

Like a regular IRA, you (or your spouse, if filing jointly) must have earned income in an amount that is not less than the IRA contribution, in order to make a contribution to a Roth IRA. You can have both a Roth IRA and a regular IRA for the same year, but the amount contributed to your Roth IRA reduces the amount you may contribute to a regular IRA, dollar for dollar. Unlike regular IRAs, you are free to continue to contribute to a Roth IRA after age 70 1/2, if you otherwise meet the rules.

Where a Roth IRA differs primarily is in several rules concerning withdrawals.

Withdrawals from a Roth IRA are assumed to come from your non-deductible contributions FIRST, and are only taxable once you deplete those and are taking out the deferred earnings. (By comparison, each dollar you withdraw from a regular IRA is taxed based on the ratio of pretax to total funds in *all* IRA accounts you have at the time.)
There are no minimum distributions from Roth IRAs, even after age 70 1/2.
Once your Roth IRA account has been open for FIVE YEARS, you can take "qualifying distributions" from the Roth IRA, which would be COMPLETELY tax free (including the deferred earnings!), under one of three circumstances:

After you turn age 59 1/2 OR
Upon death or permanent disability OR
A special withdrawal by a "first time home buyer" (maximum $10,000 lifetime), defined as someone who has not owned an equity interest in a home for the past TWO years, and uses the money within 120 days of withdrawal for such purposes.

IMPORTANT: Unlike a regular IRA, there are AGI limitations that affect your ability to contribute to a Roth IRA (even though it is non-deductible, and regardless of whether or not you have pension plan coverage). If you are unmarried, your allowable contribution to a Roth IRA phases out over $95,000-110,000 of AGI. For those married filing jointly, your allowable Roth IRA contribution phases out over $150,00-160,000 of AGI. Allowable contribution limits are rounded to the next higher $10 multiple.

In order to give taxpayers the ability to "jumpstart" a Roth IRA, the new tax act allows you to "convert" an existing IRA to a Roth IRA. Unlike a regular IRA rollover, this is NOT tax-free, but is considered a taxable *distribution* of the IRA funds to you (although the 10% early distribution surtax is waived.) You are not permitted to convert a regular IRA to a Roth IRA in a year in which your AGI (before the taxable portion of the IRA being converted) exceeds $100,000 (any filing status).

Should I convert my IRA to a Roth IRA?

This is primarily a financial planning decision, rather than a tax planning choice. Obviously, you are electing to pay *now* a tax liability which you otherwise would have been able to defer to a future year, perhaps when your rates might be lower.

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