In this What-if Scenario we present key aspects of the Roth IRA:

		Quick Overview
		Eligibility
		Comparison of retirement vehicles
		Conversion from other accounts
		Taxes
		Withdrawals
		Links

We've also compiled a list of Internet resources for you to explore. We highly recommend, however, that you visit with financial, tax, and estate planning experts to be sure you are making the best financial decision for you, your spouse, and your heirs.

You contribute after-tax dollars and then you don’t pay taxes on that money again. Your contributions are not deductible, but the money in your Roth IRA earns and compounds tax-free. You don’t pay current income tax on the interest, dividends, or capital gains earned in your Roth IRA. You are not taxed at withdrawal as long as you take qualified distributions.

If both husband and wife have an earned income less than $4000, their combined Roth IRA contributions are limited to 100% of their income.

If one spouse has less than $2,000 of earned income, he or she may establish a Roth IRA account based on the income of the higher-earning spouse. They may each establish a Roth IRA and contribute up to $2,000 to each account.

We highly recommend that you fund any IRA as soon as the new tax year begins, since the impact of long term compounding becomes quite significant in your retirement years.

This limit includes all of your IRAs combined. The maximum total yearly contribution any individual can make to all IRAs (traditional and Roth) is $2,000.

The $2,000 limit also includes your maintenance and brokerage fees. You can’t contribute $2,100 to cover the fees in order to get a full contribution amount.

This $2,000 limit does not count rollover contributions from other accounts.

The law does not set a minimum contribution amount, although some firms may have a minimum contribution requirement.

Converting might also be a good idea if you can afford to pay the conversion taxes from another source of savings. Preferably you should pay these taxes from a source other than your retirement funds. By paying the income taxes due from your non-IRA accounts, you basically convert your tax-deferred account to a tax-free one. This makes it a much more valuable part of your collection of investment assets.

Remember that you can do a partial rollover to a Roth and keep a portion of your traditional IRA.

Your unique conversion situation requires a careful analysis of the potential long-term gain versus paying taxes now and never having to pay taxes for a qualified distribution in the future.

If you are close to the $100,000 Adjusted Gross Income limit, you might consider the following income shifting techniques:

	Avoid making any IRA distributions
	Convert your taxable bonds or CDs to tax-free municipal bonds
	Purchase T-Bills or CDs in which the income is realized in the next tax reporting year
	Delay until next year any social security payments

You may also discover to your surprise that if your modified adjusted gross income (AGI) exceeds $100,000 in 1998, the IRS permits a "one-time" recharacterization of your converted Roth IRA from November 1st to December 31, 1998. The reconversion is accomplished by a trustee-to-trustee transfer. In 1999 you can undo a Roth IRA conversion only one time.

Two additional reasons you may find it appropriate to "undo" a Roth Conversion include: (1) Should you find you don't have enough money to pay the tax bill on a Roth conversion, you can undo it; and (2) the additional taxable income could limit the amount of college financial aid your child is awarded, you can undo it.

If you believe you might save on your 1998 or 1999 tax bill by undoing a Roth IRA conversion, it is highly recommended that you review your tax situation with a financial planner or tax preparer, as the rules are complex and you need to be sure your tax planning is consistent with the new IRS interim rules on Roth IRA conversions.

What is not taxed: contributions you did not deduct on your tax return.

If you convert by December 31, 1998, taxes due can be paid all in the first year, or distributed evenly over four years. If you wait until 1999 you will have to pay all taxes that year; you will not be allowed to spread the tax payments out over four years.

Let's say you have $40,000 of taxable income as a result of your 1998 conversion. You have the option of spreading the tax over four years or paying all $40,000 at once. If you choose to spread it out over four years, you will pay tax on $10,000 of it according to the current year’s tax rate. If you expect to move into a different tax bracket within four years, think carefully about how including those $10,000 each year will affect the tax on your total income.

You can withdraw earnings tax-free and penalty-free if:
	Your Roth IRA account has been in existence for at least five years. The five-year period starts the year you open the account, regardless of whether you opened the account in January or in June.
	AND
	You are over 59½, or You are making the withdrawal on account of your total disability, or The withdrawal is made to a beneficiary or to the estate after your death, or You are withdrawing up to $10,000 for your first home purchase.

Penalty for early withdrawal of earnings is generally 10%.

You can withdraw before age 59½ without penalty if:
	You make substantially equal periodic withdrawals (at least annually) for a minimum of five years or until age 59½, whichever is the longer time period.
	For any medical expenses above 7½% of your Adjusted Gross Income.
	For health insurance premiums if you have been unemployed for more than 12 weeks. This is penalty-free and tax-free.
	For certain higher education expenses. This is penalty-free but you will pay taxes.

Keep in mind that although you do not pay a penalty, you may still pay taxes on the earnings.

Here are a few observations on some of the limitations to online calculators:

	Some calculators may not include the opportunity costs and accurately calculate the time value of money.
	Some may not accurately calculate the minimum required distribution rules. They may over-simplify the calculations or are not flexible enough to cover a variety of withdrawal alternatives.
	Many calculators do not incorporate inheritance planning. Estate planning alternatives may be oversimplified or completely ignored.

Take a look at DataChimp's Article "Comparing the Calculators"

Because these calculations can be very critical to making a wise decision, you should consult with your financial advisor. He or she will have the more complex, professional financial calculators to create a more detailed analysis and modeling of your specific financial situation.