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Does anyone have a guestimate as to when the Roth IRA will become law so we can start playing?
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It is law now. Most of the mutual funds and brokerages should have the forms soon. E-Trade told me they will have them by the end of the Jan.
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gstone wrote:

<<
Does anyone have a guestimate as to when the Roth IRA will become law so we can start playing?
>>

=======================================================

The Roth IRA *is* law as of 1/1/98. Play away!
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[[ Does anyone have a guestimate as to when the Roth IRA will become law so we can start playing?]]

Welcome to the party!!!

Roth IRA rules became effective about 21 days ago on January 1, 1998.

Some brief information that may be of interest to you...

The NEW Roth IRA

Effective for tax years beginning after 1997, there's a new type of back-ended IRA - called the Roth IRA - to which taxpayers and spouses (even those who have attained age 70-1/2 and/or are a participant in another qualified employer pension or profit sharing plan) will be able make annual nondeductible contributions of up to $2,000 of compensation. Qualified distributions (defined below) from a Roth IRA will be tax-free.

Contribution limits: The amount that can be contributed to a Roth IRA for an individual will be reduced by the excess of:

1. the maximum amount allowable as an IRA deduction for the individual for the year (determined without regard to the ban on non-Roth IRA contributions for age-70-1/2 taxpayers and the AGI-based phaseouts for active plan participants), over

2. the total amount of the year's contributions to all non-Roth-IRAs maintained for the taxpayer's benefit.

In effect, what this really means is that you can not contribute to both a Roth IRA and a regular (non-Roth) IRA in the same year. So you may have a decision to make as to the IRA which might be best for you.

In addition: Contributions to Roth IRAs won't be available to higher-income taxpayers. The otherwise allowable Roth IRA contribution will be phased out if your Adjusted Gross Income (AGI) exceeds $150,000 for joint filers and $95,000 for single taxpayers, and will be gone completely when AGI reaches $160,000 (joint filers) or $110,000 (single taxpayers).

Remember: The phase-out ranges for Roth IRAs apply regardless of whether the taxpayer is an active participant in an employer-sponsored retirement plan.

Exclusion for qualified distributions from Roth IRAs: After the 5-year period (explained below), a distribution from a Roth IRA will be tax and penalty-free if it is:

1. made on or after age 59-1/2 or death,

2. made on account of disability, or

3. used for qualifying first time homebuyer expenses

An otherwise eligible distribution won't be qualified if made within the 5-tax-year period beginning with the first tax year for which a contribution was made to the individual's Roth IRA. For payouts properly allocable to rollovers from a non-Roth IRA (see below), the 5-year period begins with the tax year in which the rollover contribution was made.

Nonqualified distributions from Roth IRAs: Roth-IRA payouts that aren't qualified distributions will be taxed and the taxable portion of pre-age-59-1/2 withdrawals will be penalized, subject to the 10%-penalty exceptions applicable to premature distributions from non-Roth IRAs. If a nonqualifying payout is made, contributions to the Roth-IRA will be recovered tax-free before earnings are taxed. In addition, the proposed Technical Corrections bill (which has not yet been ratified and signed by the President, but is expected to become effective in early 1998) will add additional penalties for rollovers (discussed below) from a regular IRA that are withdrawn early. So if you are planning on taking advantage of the IRA rollover provisions, you must be very careful that you do not violate the early withdrawal restrictions.

Other payout rules: Distributions from a Roth IRA will not be subject to the required distribution rules of Code Sec. 401(a)(9)(A), or the incidental death benefit rules of Code Sec. 401(a).

Rollovers: Rollovers to a Roth IRA from either a non-Roth IRA or another Roth IRA are allowed only if they are qualified rollover contributions, i.e., those that meet the Code Sec. 408(d)(3) requirements (60-day rollover rules). A qualified rollover from one Roth IRA to another Roth IRA is tax-free and can be made regardless of the taxpayer's AGI. However, qualified rollovers from a non-Roth IRA to a Roth IRA, or conversions of non-Roth IRAs to Roth IRAs, are:

...treated as taxable distributions (but aren't subject to the 10% penalty tax on pre-age-59-1/2 distributions); and

...can't be made if the taxpayer's AGI for the year exceeds $100,000, or he is a married individual filing a separate return for the year.

Taxpayers who make qualified rollovers from non-Roth IRAs (or convert the accounts to Roth IRAs) before Jan. 1, '99, can spread out the taxable income of the distribution (but NOT the tax) over 4 tax years beginning with the year that the distribution takes place.

Planning Suggestion: Taxpayers who made nondeductible contributions to pre-Roth IRAs, if eligible, should give careful consideration to rolling the amount in the non-Roth IRA over to the Roth IRA. If they do, they will be taxed only on amounts earned (including capital gains) in the non-Roth IRA, and not on the amount of the nondeductible contributions.

The new Roth IRAs will be especially beneficial for those people who cannot make a regular deductible IRA contribution (due to pension plan participation and income limitation restrictions). Make sure to check it out and see if these new Roth IRAs are right for you. Obviously, if you have any questions, you can direct them my way.

TMF Taxes
Roy
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Roy, After receiving my W2, I noticed that a military officer is considered (for tax purposes) a pension plan participant? So I reviewed the Armed Forces IRS Pub and sure enough this is the case. In June I opended a traditional IRA, and maximized my 97 contribution. 1) Is that contribution non-deductible because I do not itemize or becuase I am considered to have a pension plan? 2) When I phoned the company which handles my IRA about conversion, they stated I would have to open a Roth under a distinctly separate account, however I could contribute to either account or both but not to exceed 2K. Your post contridicts this by saying I can only contribute to one in any tax year. Am I understanding correctly that I can maintain both a traditional and Roth version and is 98 the only year I can role this a non-roth to a roth?
Three questions to a post, I'll break them up in the future. Thanks Again, Brian
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I hope I didn't give you or anyone the impression I just crawled out from under a rock. I have talked with my broker (E*Trade), my old broker (Advantage Capital), my local bank and credit union. None are ready for Roths yet. The only one who gave me a prediction was E*Trade who said late Jan. or early Feb. Supposedly there were still some legal details to work out. Do I just have poor choices for financial institutions, or is there some issues that are still pending with Roths?
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[[Roy, After receiving my W2, I noticed that a military officer is considered (for tax purposes) a
pension plan participant? So I reviewed the Armed Forces IRS Pub and sure enough this is the
case. In June I opended a traditional IRA, and maximized my 97 contribution. 1) Is that
contribution non-deductible because I do not itemize or becuase I am considered to have a pension
plan?]]

It is possible that your regular IRA contribution is non-deductible, but that will be based upon your Adjusted Gross Income level...and nothing else. If you are covered by a pension plan, IRA deductiblity depends upon your AGI. If you are a single person, with AGI greater than $25k, your regular IRA deduction will be limited. If your AGI is greater than $35k, your regular IRA will be completely non-deductible. For additional information on regular IRAs, check out IRS Publication 590 at the IRS web site.

[[ 2) When I phoned the company which handles my IRA about conversion, they stated I would
have to open a Roth under a distinctly separate account, however I could contribute to either
account or both but not to exceed 2K. Your post contridicts this by saying I can only contribute to
one in any tax year. Am I understanding correctly that I can maintain both a traditional and Roth
version and is 98 the only year I can role this a non-roth to a roth?]]

Well, I wasn't there when you called your broker. But I can tell you (and, I believe, the post also notes) that you have only $2k to deal with. It can ALL go to a regular IRA. Or it can ALL go to a Roth IRA. Or it can be split up between a regular IRA and a Roth IRA. The decision is yours regarding annual $2k contributions.

Finally, you can (assuming you otherwise qualify) to rollover your regular IRA to a Roth IRA in any year beginning in 1998. But rollovers that take place in a year AFTER 1998 will not be allowed the special "break" to spread the taxable income over a 4 year period.

TMF Taxes
Roy

SPECIAL NOTE: I try to answer as many questions as I can each week, and I generally select those that have not been asked before. If you don't get a detailed answer to your question, it is probably because my time is so limited during tax season, or because it has already been asked and answered in this folder in the past, or because it has been discussed in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's School area (http://www.fool.com/school.htm) and check out "Other Features" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov)
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What did you mean "can spread the taxable income (but NOT the tax) over four years...
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dandoersdan Wrote:
<What did you mean "can spread the taxable income (but NOT the tax) over four years...>

My understanding is that the tax is paid for the year in which it is reported. I think what is meant here can be illustrated by the following example:

In 1998 and 1999, you are in the 28% bracket and roll your regular IRA into a Roth IRA (during 1998). The amount you are going to roll over is $10K. In the year 2000 and 2001 you earn enough to become a part of the distinguished 31% tax bracket. You will pay 28% tax on 1/4 of the rollover amount ($2500) during tax years 1998 and 1999, and 31% tax on 1/4 of the rollover amount during tax years 2000 and 2001. You would pay the 31% (in 2000 and 2001) even if the $10K added to your AGI for 1998 was still in the 28% tax bracket.

Mike
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[[ What did you mean "can spread the taxable income (but NOT the tax) over four years]]

Read my second installment on the Roth IRA in the Fools School area. It'll give you definitions and explanations.

TMF Taxes
Roy

SPECIAL NOTE: I try to answer as many questions as I can each week, and I generally select those that have not been asked before. If you don't get a detailed answer to your question, it is probably because my time is so limited during tax season, or because it has already been asked and answered in this folder in the past, or because it has been discussed in the Taxes Frequently Asked Questions area. In order to visit the Taxes FAQ area, go to the Fool's School area (http://www.fool.com/school.htm) and check out "Other Features" in the list box, OR you can jump directly to the Taxes FAQ area (http://www.fool.com/school/taxes/taxes.htm). Additionally, if any references were made to the IRS Web Site, you can get there by pointing your web browser to (http://www.irs.ustreas.gov)
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[[In 1998 and 1999, you are in the 28% bracket and roll your regular IRA into a Roth IRA (during
1998). The amount you are going to roll over is $10K. In the year 2000 and 2001 you earn enough
to become a part of the distinguished 31% tax bracket. You will pay 28% tax on 1/4 of the rollover
amount ($2500) during tax years 1998 and 1999, and 31% tax on 1/4 of the rollover amount
during tax years 2000 and 2001. You would pay the 31% (in 2000 and 2001) even if the $10K
added to your AGI for 1998 was still in the 28% tax bracket.]]

Mike...

Sorry, BUT THIS IS COMPLETELY INCORRECT. YOUR INCOME WILL STAND ALONG FROM YEAR TO YEAR, IN ADDITION TO ANY ROTH IRA "SPREAD" INCOME. IT IS MEANINGLESS WHAT YOUR TAX RATE MAY BE IN THE YEAR OF ROLLOVER.

Read on for the real rules...
The New Roth IRA - Part II

Last week we received an introduction to the Roth IRA. This week we'll look a look a little closer at some of the other provisions in this new IRA.

Rollover from a regular IRA to a Roth IRA

As most of you know, a rollover from a regular IRA to a Roth IRA is possible if certain provisions are met. First, the rollover must be qualified. The term "qualified rollover" can get a little complex, but it is basically a rollover that meets the 60-day rollover time period, and is not in violation of the "one-year" rollover rules. For additional information regarding qualified rollovers, check out the IRS Publication 590 at the IRS web site (http://www.irs.ustreas.gov).

But, assuming that you can get over the "qualified" distribution rules, you still have one other hurdle to overcome: The Adjusted Gross Income (AGI) limitations. The law states that if your AGI is greater than $100,000, you may NOT make a rollover from a regular IRA to a Roth IRA. This $100,000 limitation applies not only to single filers, but also to married people filing jointing, and head of household filers. But don't think that you can beat the AGI limitations by filing a married-separate tax return: you can't. The law specifically states that if you are a married taxpayer filing a separate tax return, you may NOT rollover your regular IRA to a Roth IRA…regardless of your AGI.

And remember that the AGI limitations are computed without regard to the amount of the rollover. Huh? Well, an example here might be appropriate.

Jack, a single person, has 1998 AGI of $75,000. Jack also has a regular IRA that he wants to rollover to a Roth IRA in the amount of $40,000. For AGI limitation purposes, Jack's threshold is $75,000 (the amount of his "normal" AGI, without regard to the rollover amount), and NOT the combination of his "normal" income and his "rollover" amount. Jack's income tax AGI and taxable income WILL change if he decides to make this rollover, but that's an issue that we'll discuss in detail a little later.

Rollover Taxation Issues

OK…you've decided that you CAN make a rollover. Now you need to know more about the tax issues involved in making the rollover.

In effect, the funds rolled over from the regular IRA to the Roth IRA that would have been taxable had the distribution not been part of a qualified rollover, will be subject to income tax at your normal tax rate…plain and simple. If your IRA consists only of prior deductible contributions and the earnings thereon, the total amount of the rollover will be subject to taxation. If part of your IRA consists of prior non-deductible contributions, they will not be taxed again at the time of the rollover to a Roth IRA. And if your IRA consists of funds from a prior rollover from another qualified pension plan (such as a pension/profit sharing plan, 401k plan, 403b plan, Keogh plan, SEP plan, etc.), all of the funds will be taxable to you at the time of the rollover.

But wait, you mumble. Wasn't there something about spreading the tax over a period of years? Well…kinda. Let's look closer.

The law says that if all or any part of a regular IRA is rolled over to a Roth IRA in a qualified rollover contribution BEFORE January 1, 1999, the amount required to be included in gross income as a result of that rollover contribution MUST be included in gross income ratably over the four tax-year period beginning with the tax year in which the rollover is made.

That sentence is quite a mouthfull, but gives you a lot of information. It says that:

1. A qualified rollover contribution which takes place in 1998 will receive a special tax break. And that special tax break is ONLY available for rollovers which take place in 1998. And this means that the rollover MUST occur in 1998…no later than December 31, 1998…and not a day later. Any rollover from a regular IRA to a Roth IRA that takes place after December 31, 1998 will NOT be allowed this special tax break.
2. The special tax break is that the income that must be reported based on the IRA rollover MUST be spread evenly over a four-year period. Note that it is the INCOME which must be spread over the four tax year period…and NOT the tax itself. Please also note that this spread of income MUST take place…it is NOT an election.
3. This "spread out" income will impact any and all tax issues that are based upon AGI…except for any current or future Roth contribution and/or rollover issues. But your medical expenses (7.5% AGI floor), miscellaneous deductions (2% AGI floor), taxability of social security (based upon AGI), passive loss limitations (based upon AGI) and many, many other tax provisions that use AGI as a guidepost will be impacted. And, in some cases, severely impacted.
4. Because the rollover is "qualified", the 10% penalty for an early withdrawal from an IRA account will NOT be imposed. In effect, the transfer can be made without paying the 10% IRA early withdrawal penalty. But, should you decide to remove your funds "early" from the Roth IRA, you may be subject to an even greater penalty…up to 20% in some cases. We'll discuss this penalty issue in detail next week.

Confused? Well, let's continue with the example of Jack and his rollover. Jack's 1998 AGI is $75,000, and he wants to make a $40,000 rollover from his regular IRA to a Roth IRA. For 1998, Jack's AGI for income tax purposes will be $85,000 (his regular AGI of $75,000 plus one-fourth of his $40,000 rollover amount). In 1999, 2000 and 2001 Jack will add an additional $10,000 (representing his "spread out" of his 1998 rollover) to his normal AGI for that year, and will pay tax on that "spread out" income at his normal tax rate for those years. If Jack delayed his rollover until 1999, this additional $40,000 rollover income would NOT be spread out, but would be added to his normal 1999 AGI and would be taxed in total in 1999. In either case, Jack would NOT be hit with a 10% early withdrawal penalty on the amount of the IRA rolled over to the Roth IRA (assuming Jack keeps his nose clean and doesn't take the funds out of his Roth IRA "early").

And, as mentioned above, all of the tax issues that use AGI for a benchmark (except Roth contributions and rollovers) will now be based upon Jack's new 1998 AGI of $85,000.

So Jack can look forward to paying more tax dollars to Uncle Sammy over the next four tax years. In effect, Jack is trading tax dollars now for the tax free status of the Roth earnings in the future. Is that appropriate? Perhaps for Jack, based upon his personal situation, the answer is yes. But it is certainly NOT appropriate for everybody. In fact, for many people, the rollover of a regular IRA to a Roth IRA may actually cost them tax dollars in the long run.

Which is why the Roth IRA rollover debate has now become very heated. The decision to make this rollover is one that is very personal, based upon personal status, goals, age, intentions, etc., etc., etc. Therefore, the "rollover or not" question can only be answered by you, based upon your personal financial and tax situation.

Next week we'll look at distributions from a Roth IRA, and what impact those distributions may have on your personal tax situation.
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Mike wrote:
[[In 1998 and 1999, you are in the 28% bracket and roll your regular IRA into a Roth IRA (during 1998). The amount you are going to roll over is $10K. In the year 2000 and 2001 you earn enough to become a part of the distinguished 31% tax bracket. You will pay 28% tax on 1/4 of the rollover amount ($2500) during tax years 1998 and 1999, and 31% tax on 1/4 of the rollover amount during tax years 2000 and 2001. You would pay the 31% (in 2000 and 2001) even if the $10K added to your AGI for 1998 was still in the 28% tax bracket.]]

note: you really don't pay tax on your AGI, but to keep all the numbers *easy* to play with, assume this person has no deductions...

let me try to paraphrase what I think Mike wrote:
a $10,000 rollover in 1998 appears on taxes as four $2,500 additional incomes. in 1998, 1999, 2000, and 2001. So if you earn 50,000 in 1998 you report 52,500 as AGI and pay taxes on that (in the 28% bracket). If you earn 55,000 in 1999 you report 57,500 as AGI (pay tax in the 28% bracket). In 2000, you earn 65,000 and report 67,500 AGI (which puts you squarely in the 31% tax bracket) then in 2001 you make 65,000+ and again report a 31% AGI. so you pay pay _more_ taxes than you would if you could just include a lump sum addition of 10,000 to your AGI.

I think Mike was trying to point:
- if a lump addition to your AGI now, will keep you in your current tax bracket
and
- you end up in a higher tax bracket over the next four years

then "spreading" the rollover actually hurts you; you would be better off if you could elect to pay your lower tax bracket rate *now*.

TMFTaxes (while tripping over his caps lock) wrote:
[[Sorry, BUT THIS IS COMPLETELY INCORRECT. YOUR INCOME WILL STAND ALONG FROM YEAR TO YEAR, IN ADDITION TO ANY ROTH IRA "SPREAD" INCOME. IT IS MEANINGLESS WHAT YOUR TAX RATE MAY BE IN THE YEAR OF ROLLOVER.]]

Beyond saying Mike was wrong, I don't understand...
the phrase: "your income will stand along from year to year".
I also don't understand how it is "meaningless what your tax rate rate may be in the year of the rollover", because you are paying tax at your current rate on one quarter of the total roll over?

Onto what I think TMFTaxes was saying... in his "Part II" post:

summary of the numbered part:
1. the "special" spreading is *only* available in the 1998 calendar year.
2. you don't have a choice about it... you must use the "special" spread.
3. everything which is based on AGI, except your ability to do addition rollovers will be effected by the "special" AGI addition. (including taxation rate).
4. you don't pay 10% penalty on rollovers. but if you try to touch the money within 5 years after the rollover you pay a 20% penalty. <ick> =)

then in the center of the next paragraph TMFTaxes:
"For 1998, Jack's AGI for income tax purposes will be $85,000 (his regular AGI of $75,000 plus one-fourth of his $40,000 rollover amount). In 1999, 2000 and 2001 Jack will add an additional $10,000 (representing his "spread out" of his 1998 rollover) to his normal AGI for that year, and will pay tax on that "spread out" income at his normal tax rate for those years."

This seems to be saying exactly what I think Mike said... except Mike pointed out that your future [income + rollover spread] could raise you into a higher tax bracket.

TMFTaxes, your posts are very helpful. I have been reading messages here for about 4 weeks... just couldn't understand what you meant in your reply. I thought Mike's statement was correct...

Could you please clarify, your reply?

Thanks,
Kilmarnoch

ps. i sure hope this looks better posted than it does in this crappy little editing window. ;)
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[[TMFTaxes, your posts are very helpful. I have been reading messages here for about 4 weeks...
just couldn't understand what you meant in your reply. I thought Mike's statement was correct...

Could you please clarify, your reply?]]

Mike seemed to imply in his response, at least in my reading, that your tax rate in the year of conversion would control the tax rated charged on any conversion funds over the next three years.

That is not the case. I just didn't want anybody to get the impression that if they were in the 15% rate in 1998 (the conversion year), that they would be able to carry over that 15% rate to their conversion amounts in 1999,2000,and 2001...even if their tax rate mushroomed to 39.6%. Nothing could be further from the truth.

If I misunderstood Mike's post, I apologize.

TMF Taxes
Roy
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