Dear Clients and Friends:

Many taxpayers have been making annual contributions to an individual retirement account (regular IRA), and now have a substantial amount in that account. Any amount you withdraw from your regular IRA--and you have to start making withdrawals the year after you become 70-1/2--will be included in your gross income in the year withdrawn, except to the extent the amount withdrawn is attributable to nondeductible contributions.

The Taxpayer Relief Act of 1997 created a new type of individual retirement account called the Roth IRA. Distributions from a Roth IRA (including distributions of earnings) are tax-free if certain specified conditions are met, and you don't have to start taking distributions after you reach age 70-1/2. The tax-free status of Roth IRA distributions can be especially helpful after you retire in reducing the part of your social security benefits that are subject to tax.

The key disadvantage of a Roth IRA is that you are not allowed to deduct any part of your contribution in computing your taxable income.

You can roll over amounts in a regular IRA to a Roth IRA, or you can convert a regular IRA to a Roth IRA in any year that your adjusted gross income (AGI) is not more than $100,000. You must, however, include the amount rolled over in your gross income in the year it is distributed from your regular IRA to the extent that amount is attributable to deductible contributions and earnings. However, the amount rolled over is not subject to any early withdrawal penalty.

Although it's rare for a tax planner to recommend recognizing income earlier than is otherwise necessary, in your situation it may be worthwhile for you to incur the tax cost of rolling over or converting a regular IRA into a Roth IRA to get the benefits that a Roth IRA offers. Whether this is the case will depend on several factors, including whether you will need to take distributions from your IRA after you retire, whether you can pay the tax resulting from the rollover or conversion from funds other than funds currently in your regular IRA, the tax bracket you'll be in when you make the rollover or conversion, and the bracket you expect to be in when you have to start taking withdrawals.

Please call 315-363-3338 if you wish to discuss this area further or have questions about related topics.

Very truly yours,

G. William Hatfield
Certified Public Accountant
Certified Financial Planner