The Taxpayer Relief Act of 1997 created a new IRA that can provide tax free withdrawals and death benefits under certain conditions. The Roth IRA allows taxpayers to contribute up to $2,000 per year on an after tax basis, have the account grow tax deferred, and then take tax free withdrawals for qualified purposes. Qualified purposes are defined as withdrawals taken 5 years after the Roth IRA is established and after age 59½, death, for disability, or for a 1st home purchase. There is a maximum limit of $10,000 for qualified 1st home purchases.

If the distribution is not qualified, it is subject to tax only after all contributions have been withdrawn and could possibly be subject to the 10% premature distribution penalty tax. The Roth IRA also allows taxpayers to make contributions even after age 70½.

In order to take advantage of a Roth IRA, married taxpayers filing jointly must have an annual adjusted gross income of less than $160,000 ($110,000 for single taxpayers, and $10,000 for a married taxpayer filing a separate return.) Also, any contributions made to a regular IRA reduces, dollar for dollar, the amount that you can contribute to a Roth IRA.

The tax act also allows taxpayers, who qualify, the option to rollover their current IRA to a Roth IRA. The rollover is not a tax free transaction, but does avoid the 10% penalty on premature distributions. If the rollover occurs prior to 1999, the taxpayer may elect to have the taxes spread over 4 years. However, the tax due must be paid from funds outside of the IRA in order to avoid the 10% penalty tax. This rollover option is only available for taxpayers who have adjusted gross incomes of less than $100,000 per year and are not married filing separately.

In order to determine if a rollover to a Roth IRA makes sense, the taxpayer needs to consider his or her future tax brackets, investment returns both before and during retirement, the period of time before any withdrawals will be taken, and for what duration. As a general rule, many taxpayers who qualify are better off rolling to the Roth in order to take tax free distributions at retirement, particularly if tax rates are expected to be higher in the future.

For those who qualify, the Roth IRA should be considered a desirable retirement accumulation vehicle.

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