A new kind of Individual Retirement Account (IRA) made its debut in January 1998. The "Roth IRA" named after Senator Roth, who championed it in Congress, has some attractive features despite its non-deductible nature. The Roth IRA gives you the opportunity to keep more of your earnings. Roth IRA contributions are not tax deductible, but while the funds are in the Roth IRA the income earned accumulates tax-free if certain specified conditions are met and distributions are tax-free.

Roth IRAs are not subject to the post 70½ required distribution rules. The distributions are not required to be made during the lifetime of the taxpayer. Plus, the Roth IRAs are not taken into account for purpose of the excise tax on excess distributions or the additional estate tax on excess accumulations. Traditional IRAs can be rolled over to a Roth IRA penalty-free but not tax-free. An individual can make annual nondeductible contributions to a Roth IRA in amounts up to $2,000 or 100% of compensation on the tax return whichever is less. This contribution must be reduced by the amount of contributions for the tax year made to all other IRAs. (Code Sec 408A(C)(1): Code Sec 408A(C)(2). The allowable contribution phases out ratably over the following levels of AGI:

* The AGI based contribution limits for Roth IRAs apply whether or not the taxpayer is a participant in a qualified retirement plan.

Advantages of a Roth IRA. The eventual pay out accumulations will be larger because the Roth IRA is taxed initially and then tax-free when distributed if you have held the funds for five years, and

• you are over 59½
• you are disabled or die
• first-time home buyer expenses up to $10,000

1. Distributions from Roth IRA are not required to be made during one's lifetime. If you die and leave your Roth IRA to your spouse, the funds can remain in your spouse's Roth IRA and it can continue to grow tax free. Your spouse is not required to take distributions in their lifetime.
2. You are not required to start withdrawals at age 70½ and you can continue to contribute as long as you have earned income.

Disadvantages of the Roth IRA. A regular IRA may have better protection against attachments by a third party in the event of litigation.

1. If you die and the funds in your Roth IRA are inherited by your children, they will be required to empty the Roth IRA either in a lump sum within five years of your death or through annual withdrawals as determined by their life expectancy. The withdrawals will be tax-free unless you die before your Roth IRA is five years old, in which case your children will owe taxes on the earnings.
2. Converting your regular IRAs to Roth IRAs will limit higher income tax credits and phase out some deductions.
   • Eligibility for $400 per child tax credit
   • Full eligibility for itemized deductions.
   • Full eligibility of the exemption for the year.
   • If your child is applying for financial aid and you add the converted Roth IRA income to your taxes, what will this do to the financial aid.

   Roth Conversion. Taxpayers, other than married filing separately, with modified AGI of $100,000 or less for a tax year may convert funds from a regular IRA to a Roth IRA. The amount converted can be all or part of the regular IRA. Amounts converted to the Roth IRA are included in income in the year of conversion except to the extent of the non-deductible basis in the regular IRA. The amount converted is subject to Federal and Maryland income tax, but the 10% premature distribution penalty does not apply. Modified AGI for limitation purposes does not include income from the Roth Conversion or allow an IRA contribution deduction to reduce modified AGI.

   Modified AGI for Roth IRA purposes is now determined using the same regulations as for the regular IRA. In other words, an IRA contribution deduction is not allowed in the modified AGI calculation for limitations.

   Example: John, a single individual who is not a participant in a qualified retirement plan, anticipates he will have AGI of $101,900 for 1999. John has regular IRAs that he would like to convert to Roth IRAs of $50,000. To reduce his 1999 AGI to the $100,000 ceiling to convert a regular IRA to a Roth IRA, John makes a $2,000 deductible contribution to his regular IRA. John's IRA contributions will not be allowed in the calculation for modified AGI and therefore, his income will not qualify John to convert his regular IRAs to a Roth IRA unless John finds other ways to reduce his AGI.

   Converting an existing IRA to a Roth IRA will give the taxpayer long-term tax-free growth on current retirement funds. This should be reviewed closely with a tax advisor checking on current marginal tax rates and the age of the taxpayer.

   If your income is slightly over $100,000 and you cannot convert your IRA to a Roth IRA, you may want to increase your contributions to a deferred compensation plan.

   Some questions you must consider before converting an IRA to a Roth IRA are:

   • Are there assets outside of the retirement savings that can be used to pay the taxes due on the conversion and can you easily afford to pay these taxes from those assets?
   • How long until I retire?
   • What will your tax rate be in retirement? If you feel this will be higher in retirement than it is now you will pay less taxes now.
   • Do you want to keep making contributions to an IRA after age 70½ ?
   • Do you wish to pass your IRA assets on to your heirs after your death?

   These are just some of the questions that should be considered before a regular IRA is converted to a Roth IRA. Careful planning should be done and all taxpayers that are considering converting their IRAs should start planning today.

   Tip: Rollovers to a Roth IRA can only be from a deductible or nondeductible IRA. Taxpayers cannot convert a 401(k) or 403(b) into a Roth IRA. However, the taxpayer can convert the 401(k) and 403(b) into a regular IRA and then convert the IRA into the Roth IRA.

   One commonly asked question on the IRA rollover is: My regular IRA has a nondeductible contribution included and has grown to be four times larger than the deductible contributions. Can I just convert the nondeductible portion of the Roth IRA and avoid the income tax? No, because all withdrawals must be prorated to match your IRAs ratio of contributions to earnings.

   Recharacterization Rules: Taxpayers that convert a regular IRA to a Roth IRA contribute to a Roth or regular IRA and later change their mind are permitted to recharacterize their conversion or contribution.

   For 1999 a Recharacterization election must be made on or before the due date (including extensions) for filing the return for the tax year for which the original contribution was made (Reg. 1.408A-5). Therefore, a Recharacterization must be done by April 15 if no extensions are filed. Proper filing of extensions can extend the deadline to August 15 or October 15.

   Recharacterization involves a trustee-to-trustee transfer to return a converted amount to a regular IRA, or move a contribution to a regular or Roth IRA. An amended tax return, Form 1040X, needs to be filed to reflect any Recharacterization.

   The IRS has announced a special deadline for 1998 Recharacterization. (Ann 99-57) Taxpayers may recharacterize amounts from 1998 up to October 15, 1999 without having filed extensions in 1998. However, this provision only applies to taxpayers who filed their returns on time; either on April 15 or the extended due dates.

   Distributions From Roth IRAs. Qualified distributions from Roth IRAs are not included in income if the distribution is made after the five tax year period begins. The taxpayer must meet one of the following:

   1. On or after attaining age 59½ .
   2. At or after death (to beneficiary or estate).
   3. On account of disability.
   4. For the first time home purchase expenses under Code Sec. 72(t)(2)(F).

   Distributions that are not qualified distributions are treated as made first from contributions to all of an individual's Roth IRAs and are nontaxable to that extent. Distributions in excess of contributions are taxable.

   Five Year Holding Period. The holding period for "qualified distributions" from an individual's Roth IRA begins with the first tax year for which the individual made a contribution to a Roth IRA. Note: Once the five year tax holding period is met any distributions from the Roth IRA, even one allocable to contributions made within five years, may be excludable as a qualified distribution.

   Special ordering rules determine what amounts are treated as withdrawn first from a Roth IRA. Any distributions allocable to a qualified rollover contribution are allocated first to the part of that contribution required being included in gross income. ('98 Act Par. 6005(b)(A) Code Sec. 408A(d)(4)(B)).

   Distributions from a Roth IRA are treated as having been distributed in the following order:

   1. Nontaxable contributions to the Roth IRA (other than rollover contributions).
   2. Income from a qualified rollover contribution (i.e., from the conversion of a regular IRA into a Roth IRA) nontaxable to the extent already included in income because of the conversion.
   3. The remaining portion of the qualified rollover contribution (nontaxable).
   4. Earnings on contributions (taxable if the distribution is not a qualifying distribution).

   Use of your Roth IRA to Purchase a Home. If you are a first time home buyer and you have had your Roth IRA for five taxable years up to $10,000 of the funds can be used in "first-time home buyer" expenses. This phrase is broad and includes you, your spouse, or any child, or grandchild, or ancestor of you or your spouse. The "first-time" requirement is met as long as the person for whom the home expenses are paid has not owned a principal residence for two years prior to purchase (or the date construction or reconstruction begins).

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   Comparing the Roth IRA With Other IRA and Investment Choices

   	Investment Account Non-IRA	Non Deductible IRA	Deductible IRA	Roth IRA
   Annual Savings or IRA Contributions	$2,000.00	$2,000.00	$2,000.00	$2,000.00
   Amount from above Deductible on Tax Return	N/A	N/A	$2,000.00	N/A
   Number of Years to Accumulate	20	20	20	20
   Number of Years for the Distributions	20	20	20	20
   Annual Investment Rate of Return (average)	8%	8%	8%	8%
   Federal Tax Rate (estimated)	28%	28%	28%	28%
   Maryland Tax Rate (estimated)	7.75%	7.75%	7.75%	7.75%
   Deduct State Tax as an itemized deduction	yes	yes	yes	yes
   Accumulated Value	$71,999.00	$98,846.00	$98,846.00	$98,846.00
   Future Value of Taxes			$24,192.00
   Total Accumulation	$71,999.00	$98,846.00	$123,038.00	$98,846.00
   From Accounts Over the 20 Years	$112,654.00	$137,265.00	$123,833.00	$186,439.00
   From Tax Savings Accounts			$37,852.00
   Total Distributions Over 20 Years	$112,654.00	$137,265.00	$161,685.00	$186,439.00
   Monthly Income at Retirement	$469.00	$572.00	$674.00	$777.00
   Note: The $24,192 future value of taxes in the deductible IRAs represents the investment each year of the tax savings from the deductible IRA.

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