Roth IRA Summary

2. No required minimum distributions, and contributions can be made after age 70½.
These features make the Roth IRA a versatile planning tool—especially as Americans lead longer and healthier lives. Today, the average 70-year-old male can expect to live another 10 years; the average female, another 14 years.

What's in it for you:
The potential for additional years of tax deferral, since the Traditional IRA requires you to take minimum distributions beginning at age 70½. What's more, you can continue to contribute to a Roth IRA for as long as you have earned income.

3. Penalty-free early withdrawals for a first-time home purchase.
As with the Traditional IRA, you can withdraw Roth IRA funds for a qualified first-time home buyer expense (up to a lifetime maximum of $10,000).

What's in it for you:
Another funding alternative to help make the American dream of home ownership easier to attain.

4. Qualified distributions will not be included in gross income or subject to the 10 percent early withdrawal tax.

What's in it for you:
Tax-free distributions after age 59½ if your contributions have been in the account for five years or more. In addition, you can take tax-free distributions for a qualified first-time home buyer expense as outlined in #3 above. You also can withdraw contributions without taxes or penalties at any time.

5. Penalty-free conversion of an existing IRA to a Roth IRA for individuals with MAGI less than $100,000.
The amount you convert will be immediately subject to ordinary income tax in the year for which it is converted. The $100,000 MAGI limit applies to both individual and joint taxpayers.

What's in it for you:
An opportunity to accumulate a larger account balance because earnings in a Roth IRA will grow tax-free instead of tax-deferred.

Is the Roth IRA for Me?
The prevailing wisdom holds that you may benefit from a Roth IRA if:

You are just starting your career and your anticipated tax rate in retirement will be higher than your current rate.
Your MAGI is under $100,000.
You don't qualify for a tax-deductible IRA.
You are nearing retirement and are developing long-term distribution strategies.

Consider the previous example under the Traditional IRA:
Pete and Julie are married with a joint MAGI of $110,000 in 2000. Both work, but only Julie participates in her employer's retirement plan. While Julie cannot deduct her contribution because she participates in her plan at work and the couple's MAGI exceeds $60,000, she can contribute up to $2,000 to a Roth IRA because their MAGI is less than $150,000. Pete can fully deduct his $2,000 contribution for the reasons stated before.

Should I Convert My IRA to a Roth IRA?
The answer depends on your financial situation, but the prevailing wisdom holds that converting an existing IRA to a Roth IRA may make sense:

If you can pay the taxes to convert without tapping your IRA.
If you're certain your MAGI will be under $100,000.
If you funded an IRA with nondeductible contributions. Remember, however, the earnings being converted will be taxed at your current rate.
If you are in a lower tax bracket and you expect to let your account grow for decades. Chances are, if you have to tap your account balance to convert, the tax bill won't set you back too far and you'll have years of tax-free earnings to potentially make it up.
If you are approaching mandatory distribution age. A partial conversion could reduce future tax bills.

Consider this example:
John is 35, married and has $45,000 in his Traditional IRA. He anticipates joint taxable income of $54,000 in 2000, which falls into the 28 percent federal income tax bracket. If he converts the Traditional IRA to a Roth IRA, that amount will be added to his taxable income and he will owe an additional $12,600 in taxes. If John pays these taxes out of his own pocket, the Roth IRA, earning 10 percent compounded annually, will grow to $785,222—all of it tax-free—when he takes a lump-sum distribution at age 65. If he leaves the money in his Traditional IRA, earning the same 10 percent return., John's lump-sum distribution at age 65 would be taxed at a marginal rate of up to 39.6 percent, leaving him $500,671 after taxes were taken out.

Remember, these examples are for illustrative purposes only and no one can predict future tax rates.

Roth IRA Summary

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