by ward

Created on: May 20, 2008   Last Updated: July 14, 2008

Every year the Congress of the United States makes changes to Roth IRA rules. It is vitally important for the private American investor to familiarize themselves with these changes in order to both maximize their investment income and avoid penalties. First, though, let's review what you are putting your money into when you contribute to a Roth IRA.

BACKGROUND

The individual retirement account, or IRA, is a tax-sheltered retirement plan and was originally created in 1974 to assist individuals not covered by company pensions. Under the U.S. tax law of 1981, IRA provisions were liberalized to allow individuals to contribute up to $2,000 per year (up from $1,500) to such accounts, and the coverage was extended to employees already in corporate pension programs. These contributions are deductible from federal income tax payments. IRA monies may be placed in high-yield investments, with taxation deferred until money is withdrawn after retirement.

In 1998, Congress instituted the Roth IRA. Named after Congressman William Victor Roth, Jr., the Roth IRA is an account or annuity set up in the United States solely for the benefit of you or your beneficiaries. As an individual retirement plan, it differs from traditional IRAs in that contributions are not deductible. The earnings are tax-free, but there are no tax-deduction benefits for the contributions made each year. Contributions can be made to your Roth IRA after you reach age 70 and you can leave amounts in your Roth IRA as long as you live.

DEDUCTION SUBJECT TO 2% ADJUSTED GROSS INCOME (AGI)

If you encountered big losses from the investments inside your Roth IRA, as many people had in the year 2000, you may take a miscellaneous expense deduction for losses above 2% of the amount of your adjusted gross income. This is called a deduction subject to the 2% AGI floor and much more can be learned by referring to the IRS Publication 590, page 33, under "Recognizing losses on IRA investments."

CONVERTING A TRADITIONAL IRA TO A ROTH IRA
You need to consider a few things before you convert to a Roth IRA, including deductions. Conversion might be a good idea if:
*You didn't take tax deductions on most of the money you contributed to your current IRA;
*You think you want to wait until after 70 1/2 to start getting money out of your IRA;
*And if you think you'll be in the same or a higher tax bracket when you retire.
Conversion might not be a good idea if:

*You did take a tax deduction when you contributed to your current IRA (this is because when you convert, you'll have to pay taxes on it.)

Learn more about this author, ward.
Click here to send this author comments or questions.