Roth IRAs: Right For You?

Individual retirement accounts (IRAs) aren’t just for retirement anymore. Different types of IRAs will let you save for your first home or for higher education expenses--as well as for retirement. Let’s take a look at the Roth IRA.

The Roth IRA allows you to contribute up to $3,000 a year in 2002 through 2004, $4,000 a year in 2005 through 2007, and $5,000 a year in 2008. Beginning after tax year 2008, the limits will be adjusted annually for inflation in $500 increments.

Income limits also come into play. Singles can contribute if modified adjusted gross income (from line 31 on your federal form 1040, as adjusted) is less than $95,000. Contributions gradually phase out as modified adjusted gross income reaches $110,000. Similarly, income limits run from $150,000 to $160,000 for married couples filing jointly.

Contributions to a Roth IRA are not tax-deductible. Instead, earnings grow tax-free and you pay no taxes when you withdraw the money--provided it’s been in the account at least five years and: You’re older than 59½, or you become disabled, or you die and it’s paid to your beneficiary, or you use the money for a first-time home purchase ($10,000 lifetime withdrawal limit).

Another Roth IRA benefit is that you don’t have to begin withdrawing money at age 70½, as is the case with traditional IRAs. Your earnings will continue to grow tax-free, for as long as you like.

You can convert funds from a regular IRA to a Roth IRA if your modified adjusted gross income doesn’t exceed $100,000 for both singles and married couples filing jointly. But you should know that distributions are taxed in the year you convert the funds.

Another factor is tax liability. If you’ll be in the same or higher tax bracket during retirement, the Roth IRA with its tax-free withdrawal is a good choice to consider. If you qualify for and need tax deductions now, you might do better with a traditional IRA (see your tax adviser).