Beginning in 1998, taxpayers can invest up to $2,000 in a new investment
vehicle known as a Roth IRA. This contribution is NOT deductible.
A Roth IRA is a trust account set up in the United States solely
for the benefit of one individual. It is a retirement account. Distributions
from this account generally can only be used after the owner has reached
age 59½. However, it differs from traditional IRAs in that contributions
are not deductible. You may continue to make contributions to your Roth
IRA after reaching age 70½. If contributions are left for at least
five years and taken out in a qualified manner, distributions are nontaxable.
Include in gross income amounts you withdraw to convert into a Roth
IRA, any amount that would have been taxable had you not converted it.
Conversions can be done in two ways one way is through a trustee to trustee
transfer, the second way is by taking the IRA out of one account and depositing
it into another within 60 days from the date you receive it into a Roth
IRA. Conversions are only allowed if your modified adjusted gross income
is more than $100,000 or you are married filing a separate return.
Conversions are not subject to the early distribution tax for people
under the age of 59½. In 1998 and only in 1998, if a conversion
is done, you may calculate the tax ratably over the four-year period beginning
in the year of withdrawal. Ratably, is defined as, adding on one quarter
of the taxable amount or your IRA to your income for each of the next four
years. The taxable amount is calculated on Form
8606 and transferred either to the 1040, or the Form 1040A IRA, distributions
lines. If you do not qualify for a conversion your IRA distribution is
taxable and subject to penalty.
If you decide to convert back into a traditional IRA for any reason
you may do so until the due date for filing the return, only if the original
conversion was a trustee to trustee transfer. There is no other exception
to the 60-day rule.
For information on Roth IRA distributions select Topic
428. For information regarding conversions see Publication
590, Individual Retirement Accounts. Forms and publications
can be downloaded from this site,
or ordered by calling 1-800-829-3676.
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