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The New Roth IRA

A new retirement planning vehicle is now available which also has an attractive estate planning component to it. The new Roth IRA offers the kind of tax-free buildup and withdrawal many investors will find very appealing. Most U.S. citizens who have earned income can contribute to a Roth IRA, even those who are actively participating in an employer-sponsored pension or profit sharing plan. As long as your adjusted gross income (AGI) does not exceed $150,000 ($95,000 for single filers), you can make a contribution up to $2000 to this new type of IRA each year beginning with 1998.

Although your contributions to a Roth IRA are not deductible, there are many other valuable tax advantages. They include the following:

Tax-Free Earnings Growth. As with traditional IRAs, you do not pay taxes on any earnings while they remain within the Roth IRA.
Tax-Free and Penalty-Free Withdrawals. Roth IRA annual contributions are after-tax contributions. The rules provide that if you take a withdrawal from the Roth IRA you are considered to have first withdrawn your after-tax contributions. Thus, withdrawals are tax-free and penalty-free to the extent of your annual contributions. Also, unlike traditional IRAs, you will not owe taxes or penalties on earnings withdrawn from a Roth IRA as long as the account has been in existence for at least five years and you are at least age 59.
Tax-Free and Penalty-Free Withdrawals for First-Time Home Purchase. As long as the Roth IRA has been established for at least five years, you can take a tax-free and penalty-free withdrawal prior to age 59 to apply toward the purchase of a home. There is a lifetime limit of $10,000 on withdrawals for this purpose.
Penalty-Free Withdrawals for Higher Education. You can also withdraw from your Roth IRA prior to age 59 to pay for eligible higher education expenses for you, your spouse, your children, or your grandchildren without being subject to the 10% penalty. However, these withdrawals will be subject to income taxes.
Contributions After Age 70. Unlike traditional IRAs, contributions can be made after age 70 (assuming you continue to work and have earned income).
No Restrictions on Retirement Distributions. The Roth IRA does not require you to begin taking distributions at age 70. This gives you more time to accumulate tax free earnings if you do not need to take distributions.
Income Tax-Free at Death. An attractive estate planning aspect to the Roth IRA is that upon your death distributions to your beneficiaries will be income tax-free (but not estate tax-free). This feature will help preserve more of your estate to be passed on to your beneficiaries.

Another planning opportunity arises from the provision that Roth IRA owners with adjusted gross income under $100,000 can convert all or part of their IRA assets to a Roth IRA. The amount converted is not considered part of the $100,000 income limit. However, the taxable portion of the amount converted must be included in taxable income. If the conversion is done in 1998, the taxable amount is spread equally over 4 years. If it is done after 1998, the taxable amount must be included in the year of the conversion.

The new Roth IRA offers many advantages over the traditional IRA. However, you will need to discuss all options with your tax advisor to determine if the Roth IRA makes sense for you. §