You may be able to invest up to $2,000 in a Roth IRA for 2001. For 2002, you may be able to invest up to $3,000 in a Roth IRA or $3,500 if you are 50 years old or older in 2002. This contribution is NOT deductible.

A Roth IRA is an account or annuity set up in the United States solely for the benefit of you or your beneficiaries. It is an individual retirement plan. However, it differs from traditional IRAs in that contributions are not deductible. You may contribute to a Roth IRA if you have taxable compensation and your modified adjusted gross income is less than $110,000 ($160,000 if you are married and file a joint return, and $10,000 if you are married, lived with your spouse and file a separate return). The amount you may contribute to a Roth IRA is gradually reduced if your modified adjusted gross income is between $95,000 and $110,000 (between $150,000 and $160,000 if you are married and file a joint return, and between $0 and $10,000 if you are married, lived with your spouse and file a separate return). The amount you may contribute to a Roth IRA is reduced by contributions you make to a traditional IRA. The amount you may contribute to a Roth IRA also may not exceed your taxable compensation. You may continue to make contributions to your Roth IRA after reaching age 70 1/2.

Distributions made more than 4 years after the end of the first year a contribution was made to a Roth IRA set up for your benefit, are not taxable if made either:

• after you are 59 1/2,
• because you are disabled,
• to a beneficiary or your estate after your death, or
• to buy, build or rebuild a first home.

Distributions that are a return of your regular contributions are tax-free.

You may be able to convert (roll over) your traditional IRA to a Roth IRA. Conversions can be done through a trustee-to-trustee transfer, or by taking the IRA out of one account and depositing it into another within 60 days from the date you receive it. Conversions are only allowed if your modified adjusted gross income is $100,000 or less. If you are married, you must file a joint return unless you did not live with your spouse at any time during the year. You must include in gross income any amount you convert from a traditional IRA to a Roth IRA. The taxable amount is calculated on Form 8606 (PDF) , Nondeductible IRAs and Coverdell ESAs and shown on Form 1040 (PDF) or Form 1040A (PDF). If you converted to a Roth IRA in 1998, you may be including the taxable amount ratably over a 4-year period. Taxable amounts converted to a Roth IRA after 1998 must be included in your gross income in the year of the conversion. If properly converted, the 10% additional tax on early withdrawals will not apply.

If you converted your traditional IRA to a Roth IRA, but were not eligible to do so, unless you recharacterize the amount you converted, your conversion will be treated as a taxable distribution from your traditional IRA that may be subject to additional tax, and will be treated as a regular contribution to your Roth IRA that may be subject to an excise tax if it is an excess contribution.

You may decide to recharacterize your Roth IRA conversion by transferring in a trustee-to-trustee transfer, the amount you converted (including net income allocable to that amount) back to a traditional IRA. You may do this prior to the due date, including extensions, for filing your tax return. Show the conversion and recharacterization on Form 8606.

For information on Roth IRA distributions, refer to Tax Topic 428. For information regarding Roth IRAs, refer to Publication 590 (PDF), Individual Retirement Arrangements.

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