Roth IRAs

A Roth IRA turns the traditional IRA formula on its head. You pay taxes up front on the money that you put into the account, but once you reach age 59-1/2, and after  having had the Roth IRA for five years, you can withdraw the money, including  interest earned, tax free.

For some people, paying taxes now to enjoy tax-free income later may actually make more financial sense in the long term. For one thing, the Roth IRA lets you shelter more money for retirement. The annual contribution limit is the same for both a traditional IRA and a Roth IRA, but because your Roth contribution is made with after-tax income, your annual contributions can compound substantially over the years without incurring any future tax liability.

Whether the Roth IRA is a better option really depends on what you think your   future tax rate will be. In the past, retirees routinely moved into a lower tax bracket. However, with more people maintaining high levels of income even in retirement, it may make more sense to pay taxes on your contribution today, while you're still employed, so you can enjoy the tax-free withdrawals later.

You can certainly have both a traditional and a Roth IRA. But most financial       advisers suggest that you convert any traditional IRA into a Roth IRA to take full advantage of the long-term benefits of Roth IRAs. Before converting, though,   consider these factors:

• You can only convert if your adjusted gross income is $100,000 or less for the year the conversion occurs.
  
• You must pay taxes, which can be substantial depending on how much you've amassed in your current IRA, on all the deductible contributions you have made, and the earnings on those contributions. And, to avoid being hit with penalties, you must pay these taxes with non-IRA money. In fact, tax experts caution that if you don't have other cash handy to pay the tax, you're probably better off sticking with a traditional IRA.
  

• If you are already covered by a company retirement plan, you are still    eligible.
  
• If you are single and earn $95,000 or less a year, you contribute up to $3,000 (or $3,500 if you are 50 or over) to a Roth IRA.
  
• If you are married and earn $150,000 or less a year, you can put up to $3,000 (or $3,500 if age 50 or older) into a Roth IRA annually.
  

Annual Contribution Limits (Excluding Rollover Contributions):
For years 2002 and beyond, the contribution limits to your traditional or Roth IRA is the lesser of 100 percent of earned income or the following:

                Year             Maximum Contribution Amount Per Individual
          2002 to 2004                                  $3,000
          2005 to 2007                                  $4,000
          2008 and after                                $5,000

If you are age 50 or older by the end of the year of which the contribution is being made, you may also contribute an additional $500. As we mentioned earlier, this is referred to as a catch-up contribution.

The Choice

Making the choice between a Traditional and a Roth IRA is not a difficult one. The factor that you will most consider is the timing of the income tax benefit. With a Traditional IRA, the tax benefit is usually taken when the contribution is made to the IRA. For the Roth IRA, because you cannot take a tax deduction for the      contributions made, qualified distributions are tax-free. If you are unable to take a deduction for a contribution made to a Traditional IRA, it may make better sense to contribute to a Roth IRA instead. Should you decide later that you contributed to the wrong type of account, you can always change you mind and move the contributions to the other type of IRA. This is referred to as a "re-characterization." Should you decide to re-characterize your IRA contribution, you must contact your IRA custodian to determine their documentation and procedural requirements.

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