Planning for an individual retirement account (IRA) can be quite complicated. Taxpayers have several types of IRAS to choose from, all with different eligibility requirements and tax treatments to consider.

In choosing the IRA that will produce the best tax and financial results for you, you should start by reviewing some IRA basics.

Review
traditional
IRAs

Deductible
With a traditional deductible IRA, you take a tax deduction for the year that you make your contribution. Contributions and earnings grow tax-free until withdrawn, at which time they are subject to regular income tax.

Withdrawals must begin after you reach age 70 ?, and withdrawals before age 59 ? are generally subject to a penalty.

If you have a company retirement plan at work and your income exceeds certain levels, you may not be eligible for a traditional deductible IRA>

Nondeductible
Contributions to a traditional nondeductible IRA don't generate a tax deduction. But once a contribution is made, nondeductible IRAs are treated much like a deductible IRAs. Because contributions are deductible, they are not taxed when eligible for withdrawal. Earnings in a nondeductible IRA grow tax-free until withdrawn, and withdrawals must begin after you reach age 70 ?.

Spousal
Nonworking spouses are allowed to contribute up to $2,000 a year to a spousal IRA. A joint return must be filed, and total IRA contributions for both spouses cannot exceed their combined earnings.

Look at
a Roth
IRA

With a Roth IRA, contributions aren't deductible, but there's an important, offsetting benefit: principal and earnings in a Roth IRA are never again subject to tax id you meet certain requirements.

Example: You contribute $2,000 annually to a Roth IRA. Although you receive no tax deduction, this IRA can grow to any amount and it will never again be subject to tax. And for the rest of your life, withdrawals may be as large or small as desired, provided the IRA has been in existence for at least 5 years and you are at least 59 ? years old.

A Roth IRA isn't subject to mandatory distribution requirements. Also, spousal Roth IRAs are permitted. Eligibility for a Roth IRA is phased out at income levels of $95,000 to $110,000 for singles and at $150,000 to $160,000 for couples.

Deductible,
nondeductible,
or Roth?

If you are eligible to contribute to all three types of IRAs - deductible, nondeductible, and Roth - you can safely ignore the nondeductible IRA, since it's clearly less attractive than the other two. But deciding between a deductible IRA and a Roth IRA can be very difficult.

If you expect your tax bracket to increase during retirement, or stay the same as it is now, A Roth IRA is probably a better choice than a deductible IRA.

But if you expect your tax bracket to be lower during retirement, or you simply don't know, you might want to opt for a deductible IRA.

When making the IRA decision, you also may need to consider other factors, such as length of time until retirement, expected rate of return on investments, and the relative amount of your IRA and non-IRA assets.

Comparison of Traditional and Roth IRAs
Assume you have decided to put $2,000 away every year for the next 20 years. You expect the account will earn an annual average rate of return of 10%, and y our tax rate will be 28% before and after retirement.
	Traditional	Roth
Total contributions to IRA?????????????	$ 40,000	$ 40,000
	======	======
Tax savings invested (560/year @ 7.2% after tax)??....	$ 23,465	- 0 -
Accumulation in IRA ($40,000 plus 10% earnings)??..	$ 114,550 ------------	$ 114,550 -----------
Total accumulation ??????	$ 138,015	$ 114,550
Tax on IRA withdrawals ($114,550 x 28%)??.?.	<$ 32,074> -------------	- 0 - -----------
Net accumulation????????	$ 105,941	$ 114,550
In this case, you would net $8,609 more by using a Roth IRA

To roll
or not
to roll?

If you already have an IRA, and you meet certain qualification requirements, the law also allows you to roll your existing IRA into a Roth IRA without incurring a penalty.

There is, however, one big catch: you must pay regular income tax on whatever amount you choose to roll over. Once you pay this tax, your rollover Roth IRA will never again be subject to income tax and, like any Roth IRA, you won't be required to take mandatory distributions.

Should you choose the rollover option, in whole or part? Like the choice between a deductible IRA and a Roth IRA, this is a complex decision. But unlike the decision to contribute to one IRA or the other, the decision to roll an existing IRA into a Roth IRA triggers an immediate tax bill.

As a general rule, your current tax bracket and your projected tax bracket during retirement will be the most important factors in deciding whether to roll your existing IRA into a Roth IRA. Also important are the length of time until retirement and the source of cash to pay the tax, should you decide in favor of a rollover.

In general, a rollover pencils out more favorably if you can pay the tax from outside sources, instead of tapping the IRA that is being rolled.

Income resulting from rollovers made in 1998 could be spread over four years (1998 through 2001), so the resulting tax could be paid in four installments. Rollovers made now will be hit with the full tax bill all at once.

Let us help
you make the
right choice

Planning for your IRA is as important as ever. But planning has become more difficult, and mistakes can be costly. Give us a call. We are here to help guide you through the IRA maze.