SHOULD YOU CONVERT TO A ROTH IRA?

This "Financial Focus" column is prepared by Edward Jones Investments, headquartered in St. Louis. Jones includes branches throughout the nation, including Cape Girardeau and Jackson.

(Editor's note: First of a two-part series on the Roth IRA)

Most taxpayers know about the tax-advantages of a Roth IRA. What many aren't so sure about is whether it makes sense to convert their existing IRA into a Roth IRA. The short answer is, it depends.

If you convert your existing IRA into a Roth IRA, you have to pay taxes on the converted funds. On the other hand, converting to a Roth means that instead of deferring taxes on your future investment earnings, you could withdraw your money tax free in the future. Making a wise decision requires taking a closer look at the rules for converting.

To qualify for conversion, your adjusted gross income must be less than $100,000, whether you're single or married filing jointly. Married people filing separate returns aren't eligible to convert.

If you convert, you'll owe federal income taxes on the converted amount, excluding any past nondeductible contributions. If you have made any nondeductible contributions, no additional taxes are due on that money because it has already been taxed. People who convert by Dec. 31 have the option of spreading the tax liability over the next four years by including one-quarter of the converted amount in income each of the four years. After 1998, the total tax on the entire amount converted is due in the year of the conversion.

You can convert all or part of your IRA. Converting your traditional IRA to a Roth does not affect your ability to make future contributions to either type of IRA.

How will withdrawals from a Roth conversion IRA be taxed? You can withdraw money entirely tax-free after five years if you are over age 59 1/2 or disabled. You can also take out up to $10,000 tax-free after five years for a first-time home purchase. If you take money out before five years or before age 59 1/2, earnings will be taxable. Withdrawals before age 59 1/2 also may be subject to an additional 10 percent penalty tax.

The Roth IRA conversion rules are specific and sometimes confusing, but you owe it to yourself to investigate your options. Look over information from your fund for answers. It's also a good idea to consult with a financial or tax professional before attempting any IRA conversions.

There are benefits and costs associated with converting to a Roth IRA. The bottom line is this: Will you come out ahead by paying taxes now on your existing IRA funds in exchange for receiving all future earnings tax-free?

Next week, we'll focus on the factors that will help you answer that question.

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