Beginning in 1998, eligible taxpayers can contribute up to $2,000 in a new individual retirement account known as a Roth IRA. This investment is NOT deductible. Eligible taxpayers may also convert their traditional IRAs to Roth IRAs.

A Roth IRA is a trust account set up in the United States solely for the benefit of one individual. A Roth IRA is similar to a traditional IRA in many ways. However, it differs from a traditional IRA in that contributions are nondeductible, and can be made over the age of 70½. Distributions, if left in for five years and taken out in a qualified manner, are nontaxable. In addition there are no minimum distributions required from a Roth IRA while the owner is alive.

In general, you do not include in your gross income qualified distributions from your Roth IRA. You may have to include part of other distributions from Roth in your income.

A qualified distribution is generally, any payment or distribution; made on or after you reach age 59½, made because you are disabled, made to a beneficiary or to your estate after your death, or that is a qualified purpose distribution. A distribution is not a qualified distribution if either of the following applies. It is made within the five tax year period beginning with the first tax year for which a contribution (including a conversion contribution) was made to a Roth IRA set up for your benefit. In the case of a distribution allocable to a conversion contribution from an IRA other than a Roth IRA, if made within the five-year tax period beginning with the tax year in which you made the conversion it will be subject to an additional 10% tax regardless of whether it is included in gross income, unless an exception applies.

A Qualified special purpose distribution is a qualified first time home buyer distribution used to buy, build or rebuild the main home of a first time home buyer who is either the person for whom the Roth IRA was set up, the spouse of that person, or the child, grandchild, or ancestor of that person.

Part of any distribution that is not qualified may be taxable. To figure the taxable part, add the distribution to all previous distributions from the Roth IRA. Subtract from that the total of all contributions made to the Roth IRA in the following order: regular contributions, and conversion contributions, on a first in, first out basis. The result, if greater than zero, is the taxable part of the distribution. For this purpose all your Roth IRAs are treated as one account.

You also must include in gross income any amount you withdraw from a traditional IRA to convert to a Roth IRA, in the same manner that it would have been taxed 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 within 60 days from the date you receive it into a Roth IRA. Conversions are only allowed if your modified adjusted gross income is $100,000.00 or less, and if you are married, you must file a joint return. Single filers may also convert to a Roth IRA subject to the same income limit.

Conversions are not subject to the early distribution tax. In 1998 and only in 1998, if a conversion is done, you may include the conversion amount in your gross income ratably over the four-year period beginning in the year of withdrawal. Ratably, is defined as, including one quarter of the taxable amount or the conversion in your income in the year of the conversion and in each of the next three 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 may be subject to the early distribution tax. Taxable Roth distributions are taxed as ordinary income and may be subject to an early distribution tax. Select Topic 558, Early Distributions from IRAs, for more information.

If you decide to convert back into a traditional IRA for any reason you may do so until the due date of the return, by transferring the conversion contribution including any net income allocable to a traditional IRA in a trustee to trustee transfer.

For more information regarding conversions refer to Publication 590 Individual Retirement Accounts. Publications and forms may be downloaded from this site or ordered by calling 1-800-829-3676.

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