Roth IRAs: 

 Just the Facts 



STEPHEN F. LAWLOR, CPA 



The new Roth IRAs created by the Taxpayer Re- 

 lief Act of 1997 have created quite a stir in 

 the investment and personal finance world. 

 You cannot watch a business report or read a per- 

 sonal finance publication without being bombarded 

 by advertisements for "Roth IRAs." The way facts, 

 figures, and information are thrown around in these 

 ads, you would think the Roth IRA can do every- 

 thing but cure cancer. This article will hopefully 

 separate the facts from the hype and give you a bet- 

 ter understanding of this new savings vehicle. 



The Roth IRA is an individual retirement account 

 and, except for certain notable exceptions, is the 

 same legal structure as traditional IRAs. Beginning in 

 1998, you will have a choice of where to put your 

 annual $2,000 IRA contribution: either into a tradi- 

 tional IRA or a Roth IRA (assuming you qualify for 

 the traditional IRA: i.e., you are not involved in a 

 qualified plan at work). You get only one $2,000 

 limit, so if you choose traditional IRAs, you cannot 

 contribute to a Roth or vice versa. You can, however, 

 split your limit ($1,000 Roth, $1,000 traditional for 

 example) as long as it's not over $2,000. If your 

 spouse works or if your income is over $4,000, you 

 can make an additional $2,000 contribution for your 

 spouse. You receive no deductions on your tax re- 

 turn for a contribution to a Roth IRA as you do with 

 traditional IRAs. However, while the money is held 

 in a Roth IRA account, you pay no taxes on its earn- 

 ings and, if you qualify, pay no tax when you take 

 money out. There are two rules to satisfy in order to 

 make a distribution qualified. First, it has to have 

 been at least five tax years since you put your first 

 dollar into your Roth account and second, one or 

 more of the following must apply: 



1. You are over 59 1/2 



2. The distribution is instigated by your death or 

 disability 



3. The distribution is to pay qualified "first-time 

 homebuyer expense" (up to $10,000 and can not 

 have owned a home in the last two years) 



However, even if you take a distribution and you 

 don't qualify under these rules, you still won't be 

 taxed as long as you don't withdraw more than you 

 have contributed to the Roth IRA. Once you with- 

 draw more than you have contributed, the earnings 



withdrawn will be subject to tax and penalty. 



In addition, there is no age at which you must 

 start withdrawing money from your Roth IRA and 

 you can keep contributing to the Roth IRA even after 

 age 70 1/2. (There are certain income levels which 

 preclude taxpayers from contributing to a Roth IRA. 

 These levels start at $95,000 for single people and 

 $150,000 for married filing jointly.) 



Traditional IRAs may be converted to Roth IRAs 

 begmning in 1998. In order to qualify, your adjusted 

 gross income must be $100,000 or less; however, 

 when calculating this $100,000 limit, you do not need 

 to include the amount you intend to convert. In the 

 year of the conversion, you must pay tax on the 

 amount you convert to a Roth IRA (no penalty) and 

 then, going forward, all Roth IRA rules will apply to 

 that money (i.e., tax-free qualifying withdrawal). In 

 addition, if you make the conversion in 1998, you 

 can spread the tax you pay on the conversion over 

 four years. This rule, however, only applies to 1998 

 conversions and to no other years. 



After learning the facts, the obvious questions are, 

 "Should I contribute to a Roth IRA or a traditional 

 IRA?" and "Should I convert to a Roth IRA?" The 

 answers to these questions are not simple and they 

 involve many assumptions, such as tax rates when 

 you retire, assumed earnings returns, and how long 

 the money will be held in the Roth IRA. Many invest- 

 ment companies provide on-line Roth analyzers to 

 monitor particular situations. But remember, before you 

 take the plunge, talk to your tax professional and make 

 sure you don't get caught in the hype. 



Stephen F. Lawlor, CPA, is a shareholder of Nathan 

 Wechsler & Company, 33 Pleasant Street, Concord, NH 

 03301-4004 (phone: 603-224-5357). The firm has Roth vs. 

 regular IRA analyzer software at its disposal. 



This article was furnished by the Business Forum Of- 

 fice (BFO) located at UNH in Roorn 216 of McConnell 

 Hall. The BFO oversees a number of programs addressing 

 the needs of businesses. The Center for Family Business 

 offers several membership programs: the Penley and 

 Shapiro programs provide seminars and newsletters on 

 leadership, ownership, and psychological issues that can 

 arise in family-owned businesses. 



For information, contact Peter Parady at 603-862-1107. 



OCTOBER.NOVEMBEI 



