The New Array Of IRAs

Here's a tax break that just got better. B.E. checks out the new rules and regulations helping you save for retirement helping you save for retirement or college. .

ground rules, here’s the new lineup of IRAs available to you.

Roth IRA (new for 1998).

In the past, withdrawal penalties made the plain-vanilla IRA a bit hard to swallow. Even in the direst emergency, there was no getting to the money without the 10% penalty. That’s what spurred Washington to set Up the new Roth IRA. If you think you might ever have to tap into your retirement savings, you can withdraw any or all of the money you’ve contributed in a Roth IRA without penalty, under certain circumstances.

But you’ll want to note a couple of things. First, you can contribute up to $2,000 per year to a Roth IRA instead of (not in addition to) a regular IRA. Second, the ability to withdraw penalty-free comes at a price, namely that Roth IRA contributions are not deductible.

And, while you can take out the money you’ve out into a Roth IRA before you reach age 59 1/2, you can’t tap any of the capital gains, dividends or interest your savings might have earned.

“When you take money out, you’re considered to be taking out contributions first, then earnings,” points out Seymour Goldberg, senior partner in the law firm of Goldberg & Ingber P.C. in Garden City, New York. “And withdrawals of contributions don’t count as taxable income.” Keep in mind, however, that if you start your Roth IRA, you must wait at least five years before withdrawing earnings.

But not everyone qualifies for a Roth IRA. For one, to contribute the full $2,000 per year to a Roth, your adjusted gross income cannot exceed $95,000 on a single return or $150,000 for joint filers. And while partial contributions are allowed up to $110,000 (single) or $160,000 (joint), taxpayers who make more are shut out of Roth IRAs.

There’s another aspect to the new Roth IRA. “As of 1998, you can convert a regular IRA to a Roth IRA,” says Lawrence Grabenstein, a certified financial planner with Investment Management & Research in Calverton, Maryland. “You’ll have to pay the deterred income tax but, for 1998 conversions, the deferred tax
can be paid over four years. After converting, if you hold on to a Roth IRA at least five years, until age 59 1/2, you’ll owe no tax on the withdrawals.”

Again, there’s a catch. Roth IRA conversions will be permitted only if your adjusted gross income is under $100,000 on a single or joint return. (The income you realize from the conversion itself won’t count toward this limit.)

So just how do you choose between an old-fashioned IRA and the new Roth variety? “The more years you have until retirement and the higher your anticipated retirement tax bracket, the greater the advantage of a Roth IRA,” says Nick Nichols, a CPA with Abrams, Little-Gill, Loberfeld, Tishman & Witty, an accounting firm in Chestnut Hill, Massachusetts. This is also the best scenario for those with incomes under $100,000 who are thinking of converting from a regular IRA to a Roth.

In other words, Roth IRAs work well for young people

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