THE ROTH IRA: INVESTING FOR THE FUTURE
(1998)

Taxpayers, particularly those with a long-term investment horizon, should investigate the possible benefits of either opening a new Roth IRA or rolling over existing IRA assets into a Roth IRA.

A Roth IRA is a new type of IRA created by Congress in 1997. Contributions are nondeductible, and the tax advantages are "backloaded." Not only does the build-up (e.g., interest, dividends and appreciation) in the account accumulate on a tax-free basis, as in a traditional IRA, but the build-up is not taxed upon withdrawal if the taxpayer withdraws money from the account after five years from the initial contribution and after attaining age 59-1/2. Moreover, the principal amount of contribution may be withdrawn at any time (even before reaching age 59-1/2) without any penalty or recognition of income. In addition, individuals are allowed to make contributions to a Roth IRA even after age 70-1/2 and no mandatory withdrawals are required during the lifetime of the taxpayer. Thus, there would not appear to be a reason why a taxpayer who is eligible to open a Roth IRA would not open a non-deductible IRA.

There are limits on a taxpayer's ability to contribute to a Roth IRA. The maximum total annual contribution that may be made by an individual to all IRAs (deductible, pre-Roth-IRA non-deductible, and Roth IRA) remains $2,000. In addition, the maximum annual contribution that may be made to a Roth IRA is phased out for single taxpayers with adjusted gross income ("AGI") between $95,000 and $110,000 and for joint filers with AGI between $150,000 and $160,000.

Amounts in a non-Roth IRA can be rolled over to a Roth IRA only if the taxpayer's AGI for the tax year (determined before inclusion of any income resulting from the roll-over) does not exceed $100,000 (individual or joint filers). Further, taxpayers who are married, and filing separately are not eligible to roll over existing IRAs. A qualified rollover will incur no penalty, but will cause the taxation of the monies rolled over to a Roth IRA upon which no taxes had previously been paid.

Rolling over an existing IRA to a Roth IRA calls for careful planning. Assuming that an investor is able to make a qualified rollover, the time to have acted was 1998, and the earlier the better, assuming a rising market. When a rollover from an ordinary IRA to a Roth IRA is made any time in 1998, the amount includible in gross income is included "ratably" over a four year period beginning with the tax year in which the rollover is made. In other words, one pays taxes on the rollover to the Roth IRA over a four year period with no charge for interest on the deferred taxes. Moreover, a rollover early in the year will enable the investor to avoid paying unnecessary taxes on the earnings accumulation prior to the rollover. On the other hand, if a rollover is made any time after December 31, 1998, the entire amount is include in gross income for the tax year in which the rollover is made.

The financial risks and rewards of rolling over traditional IRA into a Roth IRA must be decided on a case by case basis, and one's financial advisor should assist in that calculation. For a more complete explanation of the estate planning benefits and requirements of Roth IRAs, please call DGW&W and ask to speak to one of our estate planners.

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