Roth IRAs are gaining popularity among many tax-conscious investors. The chief advantage of Roth IRAs is the ability to have investment earnings completely escape taxation, both during accumulation and at distribution. This obvious advantage comes at a price, though: you don’t get a tax deduction as you would under a traditional IRA. The importance of the deduction depends on your tax bracket. If you are in the lower tax brackets the benefit of a deduction for a traditional IRA loses its luster and the Roth IRA decision makes sense. If you are in a high tax bracket it may make more sense to contribute to a traditional IRA. To help you in your decision-making lets look at the advantages and the disadvantages.

Advantages

• Tax-Free Distributions: Roth IRA distributions, subject to certain qualifications, are tax-free to the Roth IRA owner and their beneficiaries. Traditional IRAs will tax every dollar of a traditional tax-deductible IRA. With Roth IRAs there is no tax on withdrawals, so you may be able to withdraw less at retirement, thus allowing more of the Roth investment to continue to grow and compound. With baby boomers only just entering their retirement years, you can bet that Congress will increase tax rates in order to meet the need for future expenditures. The tax-free distribution benefit of a Roth IRA is a hedge against any future increases in the income tax rates.

• No Minimum Distribution Requirement: Traditional IRAs require the owner to begin withdrawal of their IRA money at age 70 ½. Roth IRAs have no such minimum distribution requirement. This means you can continue to build up your Roth IRA investment beyond age 70 ½. With many Americans living well into their 80’s and 90’s you can be looking at twenty years of additional build up of your Roth IRA investment. This could translate into a doubling or tripling of your Roth IRA investment dollars, something that is not available in a traditional IRA.

• No Retirement Participation Restrictions: For married couples, in a traditional IRA, if you participate in a qualified retirement plan, such as a 401(k) or 403(b), your IRA deduction is phased out as your modified adjusted gross income exceeds $83,000 in 2007. With a Roth IRA you’re eligible to make regular contributions even if you participate in a qualified retirement plan with your employer, as long as you modified adjusted gross income does not exceed $156,000 in 2007 (married filing jointly).

• No Penalties on Withdrawals of Contributions Before 59 ½: In a traditional tax-deductible IRA if you withdraw any money you will be subject to income tax and a 10% penalty on the amounts withdrawn. In a Roth IRA you may withdraw your contributions tax-free and penalty free, anytime. This is a huge advantage and provides numerous planning opportunities. For example, let’s say you have an emergency and no money, other than your Roth IRA money. You may withdraw your contributions tax-free and penalty-free. Life throws us curve balls and the Roth IRA provides flexibility to meet those life events that we all face at one time or another.

Disadvantages

• Income Limitations on Contributions: If you are married you will be limited in the amount you can contribute to your Roth IRA if your modified adjusted gross income exceeds $156,000 in 2007 ($99,000 for single taxpayers/ $0 for taxpayers who file married filing separately).

• No Tax Deduction: Contributions to Roth IRAs are not deductible.

Other Rules

• Five-Year Rule/Qualified Distribution Rule: If you open up a Roth IRA account you must wait five years to begin withdrawing earnings from the account or be subject to a 10% penalty as well as income tax on the earnings. Even after you meet this five-year test, only certain types of distributions are treated as qualified distributions. If you are 59 ½ or older you may begin withdrawals from a Roth IRA on a tax-free/penalty-free basis. If you pass away your beneficiaries may make withdrawals on a tax-free/penalty-free basis. If you become disabled, you may make withdrawals on a tax-free/penalty-free basis. If you are a qualified first-time homebuyer you may make distributions up to $10,000 (lifetime amount) on a tax-free/penalty-free basis.

• Conversions: As a general rule, you may convert your traditional tax-deductible IRA to a Roth IRA. When you do so you are subject to income tax on the traditional tax-deductible IRA’s value. You don’t want to pay this income tax from the IRA money, as it may subject the withdrawal to a 10% penalty. You want to pay the tax from savings. There are certain restrictions on conversions, however. If you plan on making the conversion in 2007, 2008 or 2009, you can do so only if your modified adjusted gross income is $100,000 or less. If you make the conversion in 2010, the $100,000 rule is gone and you are allowed to pay the tax over two years (2011 and 2012). If you make the conversion in 2011 or thereafter, there is still no $100,000 rule, however, you must pay the tax when you file your tax return for 2011 forward. Lastly, you are permitted to convert a portion of your traditional IRA to a Roth IRA. This allows you to time your conversions to maximize taxes as well as to provide a means to save funds to pay the tax on the converted amount.

• Allowable Contribution Amounts: If you are under age 50 you may make a $4,000 Roth IRA contribution in 2007, as long as you have $4,000 in earnings. If you are 50 or over you are allowed to make a $5,000 contribution in 2007 ($4,000 plus $1,000 “catch-up” contribution), as long as you have $5,000 in earnings.