Financial News & TipsALAN MOORE / L’Observateur / January 12, 2000Introduced by the Taxpayer Relief Act of 1997, the Roth IRA has several important features which may offer significant tax savings. Benefits ofthe Roth include no federal income tax on qualified distributions, certain penalty-free withdrawals, contributions after age 701/2, and no required distributions after age 701/2.

Published 12:00 am Wednesday, January 12, 2000

Unlike the Traditional IRA, Roth IRA contributions are always non- deductible. In addition, the Roth IRA is only available to individuals whomeet certain Modified Adjusted Gross Income (MAGI) limitations.

Single taxpayers can make an annual contribution of up to $2,000 of earned income to the Roth IRA if their MAGI is less than $95,000 or a partial contribution if their MAGI is between $95,000 and $110,000.

Married taxpayers filing jointly can make annual contributions of up to $2,000 each if their joint MAGI is less than $150,000 and the combined earned income of both spouses is at least the contributed amount. Marriedtaxpayers filing jointly can make partial contributions if their MAGI is between $150,000 and $160,000. Married taxpayers filing separately canmake partial contributions if their MAGI is between $0 and $10,000. If youexceed the MAGI limitations and are under age 70 1/2, you may be able to contribute to a Traditional IRA.

You can invest in both a Roth IRA and a Traditional IRA, but your combined contribution cannot exceed $2,000 per individual. Roth IRA contributionsare always non-deductible. While contributions to a Roth IRA are nevertax-deductible, earnings may be federal income tax and penalty free if certain conditions are met. For distributions to be qualified, the Roth IRAmust exist for a minimum of five years after the first tax year for which a contribution was made and must either be made after age 59 1/2, due to death or disability, or made for qualifying first-time home-buyer expenses (up to a $10,000 lifetime limit).

Withdrawals from Roth IRAs that do not meet the requirements for qualified distributions are includible in income to the extent of earnings on contributions; however, contributed amounts are always distributed before investment earnings. Therefore, you can withdraw up to theaggregate amount of your contributions at any time, for any reason, federal income tax and penalty-free. All non-qualified withdrawals beyondcumulative contributions will be subject to both ordinary federal income taxes and a 10% early withdrawal penalty.

Unlike Traditional IRAs, people who continue to work after age 70 1/2 can make Roth IRA contributions, provided they have sufficient earned income.

Minimum distribution rules that require distributions to begin after age 70 1/2 do not apply to Roth IRAs. This is particularly valuable if youintend to work past that age and do not wish to distribute assets from your tax-favored IRA.

If you have a Traditional IRA, either deductible or non-deductible, you may be interested in “converting” it to a Roth. You are eligible for theconversion privilege if your single or joint AGI is $100,000 or less (not including the rollover). Married persons filing separately cannot convertto a Roth IRA. Ordinary federal income taxes will apply to the amount ofthe conversion. (Amounts converted before January 1, 1999 were eligiblefor a four-year “spread-out” of taxation.) While any applicable 10% earlywithdrawal penalty does not apply to converted amounts, if you elect to pay the taxes from the amount converted, the dollars paid in taxes may be subject to the 10 percent early withdrawal penalty.

It may be difficult to determine at a glance whether converting a Traditional IRA to a Roth IRA will benefit you; there are a number of resources available over the Internet or through a financial advisor which can help you to “do the math.” So, remember, when it comes to yourinvestments, don’t overlook the opportunity to reduce your tax liabilities and improve investment opportunities.

(Alan S. Moore is a financial advisor with Legg Mason Wood Walker Inc., adiversified financial services and securities brokerage firm that is a member of the New York Stock Exchange, Inc. and SIPC.)

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