THE ROTH IRA

Individual taxpayers are being besieged by Banks, Brokers and other financial institutions intent on selling a new product, known as the Roth IRA. Like most of the "Benefits" of the Taxpayer Relief Act of 1997, election of such a plan demands careful study and advice before adoption or conversion.
Essentially, the Roth IRA was created for middle-income taxpayers who are active participants in employee-sponsored retirement plans and younger taxpayers in lower brackets preferring future tax-free withdrawals over current tax savings.

In a nutshell, contributions to a Roth IRA are not tax-deductible, but earnings grow tax deferred and can be withdrawn tax-free in retirement after age 59 1/2 if the account has been in place for at least five years. In addition, the Roth IRA permits certain early withdrawals without penalty, sets no maximum age limit for contributions and imposes no schedule for withdrawals.The one key limit the Roth IRA adds is a maximum income level; joint filers may contribute the lesser of $2,000 or 100% of their compensation (earned income) into a Roth IRA, as long as their combined annual income is below $150,000.

  Above that figure, the allowable contribution decreases and is phased-out completely at $160,000. For individual filers, the $2,000 maximum allowable contribution begins to phase-out at $95,000 and reaches zero at $110,000. Roth IRAs can be opened starting January, 1998. Taxpayers may contribute to a traditional IRA, a Roth IRA, or a combination of both. An individual's maximum allowable total annual IRA contribution remains at $2,000

A Roth IRA also incorporates a few other options. Both traditional and Roth IRAs allow withdrawals after age 59 1/2, but unlike the traditional IRA, a Roth will permit contributions after age 70 1/2 and does not require withdrawals on any particular schedule.

   After five years, a Roth IRA allows tax-free withdrawals for a first-time purchase (up to $10,000), disability or certain emergencies without penalty, up to the amount deposited. Larger withdrawals i.e., including some or all of the interest earned in the account, will be subject to tax.

The law permits people with annual AGI of less than $100,000 to convert their traditional IRA into a Roth IRA anytime during 1998. Those who choose to switch before January 1, 1999 will owe tax on the amount transferred, but can pay the tax over four years. Keep in mind that unless ruled otherwise by the IRS, one quarter of the rollover amount will be added to a taxpayer's AGI and may cause the total to then exceed the $100,000 limit.

For more information on a Roth IRA and whether its benefits are right for you, contact the tax professionals at Maxwell Shmerler & Co.

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Comparing Roth and Traditional IRAs

FEATURE TRADITIONAL IRA ROTH IRA
Tax-deductible contributions? Yes, income limits exist if individual or spouse is active participant in employee-sponsored plan. No
Tax on earnings when withdrawn after age 59 1/2? Yes No, if taken more than five years after the initial contribution
Maximum annual adjusted gross income limit for contributions? No Yes. $100,000 for individuals, $160,000 for couples who file jointly
Contributions after age 70 1/2? No Yes
Penalty-free early withdrawals? No Yes, for a first-time home purchase, disability, or other pressing needs if made at least five years after first contribution
Mandatory withdrawals starting at age 70 1/2? Yes No

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