Roth IRAs

        The Roth Individual Retirement Account represents a major new form of retirement savings that should not be overlooked. Created by the Taxpayer Relief Act of 1997, enhanced by 1998 tax legislation, and interpreted by recent IRS and Treasury Department rules, the Roth IRA--which first became available to taxpayers starting January 1, 1998--offers a unique opportunity for tax-free buildup and withdrawal. Although contributions to these new IRAs are not deductible, the Roth IRA provides two key benefits: qualified distributions are subject to neither income tax nor a penalty for early withdrawal.

        To be qualified, a distribution from a Roth IRA must be made after the five-year period beginning with the first tax year you make a contribution to it. It must also be made on or after the date you reach 59-1/2; made to a beneficiary or your estate on or after your death; attributable to your being disabled; or a qualifying special purpose distribution, including those made for up to $10,000 of first-time homebuyer expenses. (The provision excepting first-time homebuyer expenses from the early withdrawal tax applies to other IRAs, as well.)

        The maximum yearly contribution an individual can make to all IRAs is $2,000, but this limitation doesn't apply to rollovers or conversions of existing IRAs into a Roth IRA. The maximum contribution to a Roth IRA phases out for joint filers with adjusted gross income (AGI) between $150,000 and $160,000, and individuals with AGI between $95,000 and $110,000.

        If you already have an IRA you may be able to roll it over or convert it into a Roth IRA. You cannot do this, however, if your adjusted gross income for the tax year exceeds $100,000 (determined before any amount is included in income as a result of the rollover) or you are married filing separately. If your income is higher than the $100,000 AGI limitation, we would be happy to explore whether tax planning could help you come within the limit in 2000 and 2001.

        Unlike rollovers from a conventional IRA to another conventional IRA, which when done properly are not taxable, you must pay income tax on the amount that would have been included in gross income as if taken as a distribution. There are also complicating rules if you take some of the conversion amount to pay the income tax due; or if you then withdraw for other purposes before a 5-year period expires.

        If you are interested in considering whether the new Roth IRA could benefit you, we would be happy to examine your individual financial circumstances and compare the possible benefits of a Roth IRA and your existing IRA or IRAs. It is also sometimes advantageous to maintain a mix of IRAs. Determining whether to open a Roth IRA can sometimes be quite complex, involving among many other factors, a look at your present tax bracket and your likely tax bracket in retirement, whether immediate deductions for your contributions are more beneficial than the potentially tax-free distributions from a Roth IRA, and how close you are to retirement.

        In addition, if you expect to be financially comfortable in retirement, you don't have to start distributions from a Roth IRA by April 1 of the calendar year you reach age 70-1/2. In fact, you can continue to make contributions to a Roth IRA after age 70-1/2. This means a Roth IRA could possibly be an important estate-planning tool, an aspect we would be happy to discuss with you.

        If you have questions about whether a new Roth IRA is right for you, we would be happy to assist you in coming to a decision. Opportunities for setting up a Roth IRA for 2000 do not end until you file your 2000 income tax return. Rollovers from traditional IRAs to Roth IRAs in 2000 also require special planning to maximize tax and financial benefits.

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