The Roth IRA did have a lot of wind taken out of its sails when the senator lost his bid to allow account holders to contribute as much of their earned income as they wanted to their IRAs. Other than that setback, the main portion of the bill passed much as reported it would a year ago. This retirement plan is now set up in a way that will finally provide the golden parachute to the individual retiree that the corporate world has been providing to its executives for years. This is especially true for those who will be self-directing their IRAs.

For those of you who haven't a clue what a self-directed IRA is, don't fret. I will be revisiting the fundamentals of the Self-Directed IRA over the next few columns.

For the time being, let me give you a quick explanation. Banks administer IRAs for individuals and provide product for those IRAs to invest in. Typically the products provided by banks are certificates of deposit and mutual funds. Insurance companies provide another home for IRAs and also provide the product for investment: usually annuities. A third option is stockbrokerage houses, which allow investment in products they sell: Primarily stocks with mutual funds.

An independent administrator administers the self-directed IRA. That means the administrator has no product to sell. You, the account holder, are the one who chooses the products in which to invest.

After January 1, 1998, you will be able to establish a new Roth IRA or convert your old IRA to a Roth IRA. Let me stress that even though the Roth IRA with its tax exempt status sounds like it would be good for all, conversion can be costly and establishing a new Roth IRA has its limitations as well.

You will have to pay any taxes due on your old IRA at the time of conversion and in the newly established IRA you will be required to leave the money in your IRA for a minimum of five years. If you convert your existing IRA to a Roth in 1998, and your adjusted gross income is less than $100,000, you will be allowed to spread the tax payments over four years. After 1998 this benefit goes away.

There are several differences between the Roth IRA and the traditional IRA as amended for 1998, which are worthy of discussion. One is eligibility.

Under the traditional IRA only taxpayers who are under the age of 70 1/2 and are still working are eligible to contribute. The Roth IRA will allow taxpayers of any age with adjusted gross incomes below $110,000, if single, and $160,000, if married and filing jointly, to invest.

As mentioned earlier, there are no taxes at all on profits to the Roth IRA if the account has been open for at least five years. The traditional IRA provides for tax deferment until the money is withdrawn. The traditional IRA still has deductible contributions for taxpayers whose income is below $30,000 for single taxpayers and $50,000 for those filing jointly.

There are withdrawal penalties with the traditional IRA if taken before age 59 1/2 unless the money is issued for a first home or college tuition. The Roth IRA will incur no penalties if the account has been open for at least five years and the taxpayer is at least 59 1/2 or is using the money to buy a first home.

Another significant change is the distribution rules. Under the old rules the investors must start taking money out of the account by age 70 1/4 or face penalties. There is no such requirement with the Roth IRA.

There are substantial changes that are being brought about by the introduction of the Roth IRA and while it is not for everyone, it can be a tremendous benefit to those who are in position to take advantage of it. At the very least you should meet with your investment advisor and discuss the changes and what they mean to your retirement plan.

As always, let me caution you to seek the assistance of appropriate professional advice from your attorney, CPA, and a good investment advisor before accepting any investment advice for your IRA.

Copyright © 1997 by Patrick W. Rice