Roth IRA to cause quite a stir in investment industry Information will abound on tax-free money

Mutual funds

October 05, 1997|By Jerry Morgan | Jerry Morgan,NEWSDAY

The Roth IRA. Tax-free money.

Get used to hearing those terms linked because you are about to be inundated by mailings, phone calls, Web sites, workbooks and the like as brokers, mutual fund companies, banks, financial planners, investment advisers, accountants and your cousin Bill all proclaim the coming of the Roth. There will be some major marketing efforts even though the account is not available until next year.

At stake are billions of dollars in millions of IRA accounts, those the investment companies already have and those they want.

The Roth is the new individual retirement account, created in the recently enacted tax legislation, whose proceeds can be withdrawn after five years tax-free if you are 59 1/2 or older.

xTC "We are already getting a tremendous interest in it," said Steve Norwitz, vice president of T. Rowe Price in Baltimore. "We are getting many phone calls from people who want to open an account and who want to know about converting from a regular IRA to a Roth."

T. Rowe Price, which has been offering retirement planning kits and software for years, is readying a new $9.95 software program that will take investors through the various scenarios of deductible, nondeductible and Roth IRAs. It will allow you to see if you qualify for Roth, and if you can and should convert your existing IRA to a Roth IRA.

The conversion question is a complex one that involves income limits, age, time until retirement and how long you plan to leave the money alone before you start withdrawing it. It also means checking to see whether you would do better with a tax-deductible IRA, getting the tax break upfront and reinvesting that money.

Strong Funds already has a simple IRA calculator on its Web site; Fidelity is planning one. Vanguard, Janus and Dreyfus also are preparing marketing campaigns.

Brokers at Smith Barney will begin receiving software shortly to help their customers work through the permutations, said Ellen Breslow, the company's director of individual retirement plans.

The Roth even has its own website,, which contains a link to the Strong calculator as well as a compilation of articles, some of which are for sale.

Why all the fuss? To oversimplify the Roth for a minute, it is an individual retirement account into which you can put up to $2,000 a year, leave the money for at least five years and until you are over 59 1/2 , then withdraw, tax free, what you put in plus the earnings. The contribution to the Roth is not tax-deductible when you put it in, only when you take it out.

Because the proceeds from a non-tax-deductible IRA are taxable when you withdraw them, the Roth IRA is "a no-brainer for those who don't qualify for a tax-deductible IRA," said Judith McMichael, a marketing vice president for Fidelity Investments in Boston.

Yet the Roth is anything but simple.

A couple filing jointly can put a total of $4,000 a year into a Roth IRA if they have adjusted gross income up to $150,000, or can make a reduced contribution on income up to $160,000. A single person with an income up of $95,000 can deposit $2,000, and a reduced amount on up to $100,000 in income.

But a married couple filing separate tax returns do not qualify for the Roth unless each has income of less than $15,000 -- that's not a mistake, the final zero is not dropped.

It is just one of those anomalies that the industry is trying to get Congress to reconsider if it files a bill making technical corrections to the tax act. Such bills are often proposed to iron out problems noticed after legislation is passed.

The big money for the accounts is expected to come from conversion of existing IRAs, especially those six-figure accounts rolled over from pension plans. Again, Congress didn't make it easy. To convert, your income can't exceed $100,000, even though you can open a Roth with a $150,000 income.

Converting any of your IRAs to a Roth is the real reason you need the calculators. The conversion is considered a withdrawal, so it is taxed, but there is no 10 percent penalty if you roll all the money into a Roth. If you convert in 1998, you have four years to pay the taxes.

That works like this: Say you have $100,000 in an existing IRA, and an income of $80,000. Each year for four years you would pay taxes on another $25,000 in income in order to pay the tax on the withdrawal. The four-year spread is available only in 1998. And the rollover cash does not count toward the income limits for conversion or for Roth eligibility.

You have to put the entire amount of the conversion into the Roth. If you use any of it to pay the taxes, you will have to pay the 10 percent penalty on that amount only. If you can't afford to pay tax on the full amount out of pocket, you can transfer less money from your existing IRA and have a more affordable tax bill. You aren't required to move the full amount from one account to another.

The Roth IRA may be a good idea for you, and you will get a great deal of information telling you that. But you have until the end of 1998 to work the calculations through and still get the four-year tax benefit, so don't get swept away by the Roth flood.

Pub Date: 10/05/97

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