The Roth IRA legislation became effective on 01/01/98 and offers a number of new financial and estate planning options.

Creating a new Roth IRA

Individuals with adjusted gross income ("AGI") of less than $95,000 (single taxpayers) or $150,000 (married filing jointly) can contribute up to $2,000 per year (not tax deductible). The contribution limit phases to zero at AGI $110,000 (single) and $160,000 (married filing jointly). No age limits, but you must have "compensation income" as with a regular IRA.

Converting an existing IRA

Individuals with adjusted gross income of up to $100,000 (single or married) can elect to convert their existing IRA into a Roth IRA. This is a taxable transaction, as opposed to the nontaxable transfer (or "rollover") of one regular IRA into another. This option is available even to people who have no compensation income (including the completely retired) and who would not be eligible to make a Roth IRA contribution.   It may be possible to convert other types of retirement assets (such as qualified plans) into a Roth IRA by first rolling over to a conventional IRA.

Treatment of Roth IRA Balances

Once in a Roth IRA account (whether by contribution or conversion) the funds accumulate tax free, as with a regular IRA. Unlike a regular IRA, there are no required distributions during life. After death, the distribution rules are the same and include the option to pay in installments over the lifetime of a designated beneficiary. Qualified distributions are tax free to the recipient. Thus contributions to a Roth IRA established by a young adult and never withdrawn could theoretically avoid income tax for a generation or more.

Observations

Those who are eligible and who can afford a long term savings commitment will probably benefit by establishing a new Roth IRA and making contributions of up to $2,000 annually. Converting an existing IRA to a Roth IRA is a gamble that involves assumptions about life expectancy, future tax rates and the ongoing strength of the stock market.

Links

The Roth IRA Website

       Perhaps the most comprehensive coverage, with a variety of articles,
calculators and other resources.

Understanding the Roth IRA 

       A good introductory treatment.

InvestorGuide: Roth IRAs
www.investorguide.com/RothIRA.htm

        A collection of articles and other resources at the introductory and
intermediate levels. 

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