The approach I will take in this memorandum is to parse §408A, piece by piece, not necessarily in the order in which the statute was drafted, explicating the statute by means of questions which the statute answers (we hope).

By the end of this memo, the statute will have been quoted in its entirety. This approach has the advantage of at least being thorough, and the conclusions subject to some sort of empirical check, which in this case is particularly apropos, because the statute is new, there are no regulations, and even the commentators differ on its precise meaning in some cases. I will, of course, add comments as appropriate, and at the end of the memo will devote a series of questions and answers to issues that are outside of the statutory language, and hence, not amenable to the parsing method.

This memo was written just days after the Roth Technical Corrections were enacted (the IRS Restructuring and Reform Act of 1998, PL 105-206, was signed into law 7/23/98), and so I have had little time to fully digest its implications. Please take this into account. The next version of this memo will be more polished.

So, except as otherwise provided in §408A, a Roth IRA is just like an ordinary IRA (Individual Retirement Account/Annuity). The "except" part is where the sizzle is, because there are some very important differences.

An ordinary IRA is created and described by IRC §408. The Roth IRA is described in §408A.

* * * *

§408(a) describes a conventional IRA. Is a SEP IRA an individual account described in §408(a)? Well, yes; but SEPs appear to be excluded under §408A(f).

The limit on Roth IRA contributions is defined by reference to the limit on regular IRA contributions: "The aggregate amount of contributions for any taxable year to all Roth IRAs maintained for the benefit of an individual shall not exceed the excess (if any) of — (A) the maximum amount allowable as a deduction under section 219."

The regular IRA limits are not particularly easy to describe, and to describe them in detail here would be a significant digression. Nevertheless, a summary will be attempted.

IRC §219 governs contributions to regular IRAs. A complete copy of this statute §219, including the special rules that apply only to volunteer firefighters, dog catchers and certified paleo-ornithologists, is contained in the following footnote which represents tax simplification at its worst. I quote this statute in its entirety, in part for your ready reference, and in part to make the point I wanted to make when I did not quote §408 in full.

A very good (free) source of information is the IRS’ own publication on the subject, Pub. 590. Dave Foltz, an attorney with Comerica Bank, recently called my attention to the fact that this publication was 8 pages in 1978, 48 pages in 1992 and 72 pages in 1996! The regulations explaining the minimum required distribution rules are only slightly longer, but then they are single spaced using small type.

When you consider that tens of millions of Americans have IRAs, it is somewhat of an insult to the electorate that their own representatives would pass a law this important and universal in its application that at its simplest level takes 78 pages to explain in layperson language.

It can also be accessed, as a link, from David Baker’s employee benefits web site: http://www.benefitslink.com/index.shtml.

The basic deduction limit under the regular IRA rules is $2000 per year, if neither the taxpayer nor the taxpayer’s spouse is an active participant in a qualified plan. If either the taxpayer or the taxpayer’s spouse is an active participant in a qualified plan —including being eligible to contribute to a 401(k) plan even if the taxpayer or spouse elects not to contribute—, the amount deductible depends on the taxpayer’s adjusted gross income (AGI). Here is an executive summary of the regular IRA deduction limits.

If the taxpayer is unmarried and is an active participant in a qualified plan, then the taxpayer cannot make a deductible IRA contribution if the taxpayer has $40,000 in AGI (adjusted for inflation after 1998). Between $30,000 and $40,000 the $2000 deduction limit is phased out pro rata.

If the taxpayer is married filing separately, then unless the spouses are not living together, no contribution can be made to a regular IRA if either spouse is an active participant in a qualified plan.

If the taxpayer is married filing jointly and is an active participant in a qualified plan, the taxpayer cannot make a deductible regular IRA contribution if the taxpayer has AGI over $60,000 (adjusted for inflation after 1998). Between $50,000 and $60,000 the $2000 deduction limit is phased out pro rata. (The $10,000 difference rises to $20,000 in the case of a joint return for a taxable year beginning after December 31, 2006).

If the taxpayer is married filing jointly and is not an active participant in a qualified plan, but the taxpayer’s spouse is an active participant in a qualified plan, then the applicable dollar amount is $150,000 and the phase-out amount is $10,000. Such a taxpayer can deduct $2000 if AGI is $150,000 or less, can deduct $1000 if AGI is $155,000, and can deduct nothing if AGI is $160,000 or more.

Until 1998, the AGI limits applied without modification to both a husband and wife if either was an active participant in a qualified plan. The IRS Restructuring and Reform Act of 1998 eased this rule in those cases where the taxpayer is not an active participant in a qualified plan, but the taxpayer’s spouse is. In that case, under the new rules described above, the applicable dollar amount is $150,000 and the phase-out amount is $10,000. Part of the fun of being a tax lawyer is that the rules change every Monday.

A taxpayer can make a nondeductible contribution to a regular IRA, but with the advent of the Roth IRA, no one should ever do this if the Roth IRA is available as an alternative. Unfortunately, the AGI limits may make the Roth IRA unavailable as an alternative.

The advantage of making a nondeductible contribution to a regular IRA is that the growth while in the IRA is tax free. Unlike a Roth IRA, however, the earnings are taxable when withdrawn.

The amount that can be contributed to a nondeductible regular IRA is the same as that which can be contributed to a regular deductible IRA ($2000), except that there are no AGI limitations. Of course, the AGI limits apply to a regular IRA only if the taxpayer or spouse is an active participant in a qualified plan; but then, if the taxpayer or spouse is not an active participant in a qualified plan, the taxpayer would certainly prefer a deductible regular IRA contribution to a nondeductible regular IRA contribution.

The concept of an AGI limit is common to both Roth IRAs and regular IRAs; unfortunately, the limits do not correspond exactly.

Note that there are different limits applicable to Roth IRA rollovers. These will be discussed later.

Taxpayers whose adjusted gross income exceeds the "applicable dollar amount" may still contribute to a Roth IRA if the excess is within 10 to 15 thousand dollars. In the inimitable style of the IRC, the pro rata phase out is described as follows:

Until 2005, "adjusted gross income shall be determined in the same manner as under section 219(g)(3), except that any amount included in gross income under subsection (d)(3) shall not be taken into account."

Income included under (d)(3) means income recognized as a result of the rollover from a regular IRA to the Roth IRA. Not taking the conversion from the regular to the Roth IRA into account can indirectly effect such things as the amount of passive losses that the taxpayer can theoretically recognize in determining AGI. For example, under the statute, as amended, the taxpayer can compute AGI as if passive losses would be available, when in fact they will be lost as a result of the recognition of the conversion income.

The difference between the current rule and the rule in 2005 is that in and after the later date, amounts required to be distributed under the minimum distribution rules during the lifetime of the IRA owner will not be included in determining whether the taxpayer’s adjusted gross income exceeds the rollover Roth IRA AGI limits. Note that this change does not apply to the Roth IRA contribution (non rollover) limits.

This change is important, and it is too bad this rule is not in effect now. It means that a client interested in qualifying to make a Roth IRA rollover might need to make the rollover before his or her required beginning date (RBD, April 1 of the year following the year the taxpayer reaches age 70&1/2), if the minimum required distributions after the RBD would cause the taxpayer’s AGI to exceed the $100,000 limit discussed below.

Whether or not a minimum required distribution (MRD) is required to be taken into account in applying the AGI limits, in no event can the MRD be rolled over to a Roth IRA or to any other IRA.

What all this means is that an individual cannot contribute any more to a Roth IRA than he or she can to an ordinary IRA, and that any contribution to an ordinary IRA will reduce the amount available for contribution to a Roth IRA; except that the limitation on contributions after age 70&1/2, and the AGI and active participation limitations applicable to regular IRAs, do not apply to Roth IRAs. Of course Roth IRAs have their own AGI limits. The fact that the limits are not the same contributes some confusion to the area.

Unlike a regular IRA, a Roth IRA can receive contributions from a 71 year old who is an active participant in a qualified plan, if the special Roth AGI limits can be met.

Subsection (c)(2)(B) provides that "the aggregate amount of contributions for any taxable year to all Roth IRAs maintained for the benefit of an individual shall not exceed the excess (if any) of . . . the aggregate amount of contributions for such taxable year to all other individual retirement plans (other than Roth IRAs) maintained for the benefit of the individual."

It is important to note that the regular IRA contribution limitations under discussion do not apply to Roth IRA rollovers, a subject that will be discussed in detail later.

"Contributions to a Roth IRA may be made even after the individual for whom the account is maintained has attained age 701/2."

Since no deduction is allowed for a contribution to a Roth IRA, the main significance of fixing the contribution year is for purposes of computing the 5-year time period required for tax free distributions, discussed below, and for computing the annual deduction limitations for regular Roth IRA contributions.

§408A(d) covers the definition of a "qualified distribution" (including the 5-year rule), rollovers from non Roth IRAs to Roth IRAs, etc.

§219(g)(4), in turn, provides:

The statute, as amended, appears to say that if a Roth IRA was established more than five years prior to the distribution, it makes no difference that contributions to the already established Roth IRA were made within five years of the distribution! This reading is supported by the Senate Committee Reports to the IRS Restructuring and Reform Act of 1998. Query, what happens if you set up a Roth IRA today, with a $1 contribution, withdraw it tomorrow, and make a "real" Roth IRA contribution or rollover 5 years from now? Is the 5 year distribution rule a concern any longer?

Prior to its amendment, IRC §408A(d)(2(B)(ii) applied a separate five year waiting period for Roth rollover IRAs. Prior to its amendment, IRC §408A(d)(2(B) read:

While the provision just quoted was still in effect, the IRS indicated that it was important to keep rollover Roth IRAs and annual contribution Roth IRAs separate, but the IRS Restructuring and Reform Act of 1998 would appear to make this no longer necessary. My reading of the recent amendments is that the five year period begins, not when a particular contribution is made, but when the first contribution is made, and that the rule is the same for rollovers as for other contributions. We will have to see if this reading is correct.

Note that the statute does not require that the distribution be on the 5th anniversary of the establishment of the Roth IRA. Rather, the distribution must be made after the end of the 5 taxable year period in order to entirely avoid income taxation. So, if a contribution were made on April 14 of 2002 which was attributed to taxable year 2001, the first tax free distribution of earnings could be made January 1, 2006, taxable year 6, a total of 3 years, 8 months and 16 days.

408(d)(4) overrides the general rule of 408(d)(1) that causes inclusion of IRA distributions in gross income under §72. §408(d)(4) provides that 408(d)(1) "does not apply to the distribution of any contribution paid during a taxable year to an individual retirement account or for an individual retirement annuity to the extent that such contribution exceeds the amount allowable as a deduction under section 219 if (1) the contribution is returned before the due date of the individual’s tax return (including extensions if applicable), (2) no deduction is allowed under §219, and the income attributable to the excess contribution is returned as well.

I think that this provision is in the statute simply to assure that the income on the returned contribution will be taxed.

If a distribution is not a qualified distribution, it is not necessarily exempt from income. If the taxpayer has already paid tax on the amount distributed, then it would be tax exempt, even if not part of a qualified distribution. If (or rather, since) the account has earnings and appreciation, it is necessary to determine whether it is the earnings and appreciation that is being distributed as a part of the nonqualified distribution, or whether it is after-tax contributions are being returned. The IRS Restructuring and Reform Act of 1998 gives us ordering rules with which to make this determination.

As in the case of a regular IRA, a nonqualified distribution from a Roth IRA, if includable in income, will now be subject to the 10% premature distribution tax of §72(t), if the taxpayer is under age 59&1/2, for example. In addition, even previously taxed distributions (which are therefore not includable in income when distributed) will be subject to §72(t) if a rollover contribution is withdrawn before the end of the 5-year period. This is a matter that will be discussed later in this outline.

It is a fundamental (though not in all cases universal) concept of income taxation that income is only taxed once and that the cost or other basis of an asset is recaptured tax free if the asset is sold or exchanged. Now tax has already been paid on amounts contributed to a Roth IRA. Therefore, even if a distribution is not a qualified distribution, all or a portion of the amount distributed will have already been taxed; and, consequently, the taxpayer will have a basis in it.

Both before and after the IRS Restructuring and Reform Act, withdrawals from Roth IRAs received very favorable treatment. Originally, the statute simply provided that if a distribution was made, the taxpayer’s contributions (basis) would be treated as distributed first. While retaining this original approach, the IRS Restructuring and Reform Act of 1998 replaced this broadly favorable rule with a more precise set of ordering rules.

The Senate Committee Reports to the IRS Restructuring and Reform Act of 1998 describes the new rules this way:

The new statute, §408A(d)(4)(B), is somewhat imposing, but the essential import is that after-tax contributions to a Roth IRA (including rollovers) will come out first, and it is only after all previously taxed contributions are recovered that distributions will be taxable, and then only if the distribution is a not a qualified distribution. The statute, as amended, provides:

I assume that the phrase "required to be includable in gross income" is a reference to previously taxed regular and rollover contributions, which means it would be tax-free at this point. A hasty reading (to which I do not subscribe) might give the opposite impression: that the allocation is made to distributions now required to be taxed.

In sum, if a nonqualifying distribution is made, the distribution will be treated as having been made out of non rollover contributions first, which means the distribution proceeds will be tax free to that extent. After all non rollover contributions have been deemed distributed, nonqualifying distributions will be treated as coming out of rollover contributions on a FIFO basis, and within the distributions attributable to rollover contributions, the previously taxed contributions will be deemed to be distributed first, which means these distribution proceeds will be tax free. Any remaining amounts will be allocated to income and appreciation, and therefore taxed.

Except for 1998 Rollovers from a regular IRA to a Roth IRA on which 4-year income averaging is elected (which are a special case), the ordering rules go a long way towards mitigating the downside risk of establishing a Roth IRA. The worst that can happen is that income on the account will be recaptured, but then only if the distribution is nonqualifying (e.g., made within five years of establishment) and then only after the amounts on which tax has already been paid have been distributed tax-free.

Example: Suppose a taxpayer contributes $2000 per year to a Roth IRA for three years, and in year three also makes a $1 million Roth Rollover contribution. In year four the taxpayer withdraws $5000 and in year five withdraws $50,000. The $5000 withdrawal in year three is tax free, representing a recapture of $5000 of the $6000 non rollover contributions. Another $1000 would be recaptured in year four tax free. Of the remaining $49,000 nonqualifying distribution made in year four, it too would be nontaxable because it would be attributed to the portion that has already been taxed when rolled over. (I think.)

The rule would be different if the rollover were made in 1998 and the taxpayer elected to spread income recognition attributable to the rollover over four years, as permitted for 1998 rollovers only. The technical corrections require that income deferred under this special provision be recaptured if distributions are made within the four year period. This is discussed in detail later in this outline.

Are all Roth IRAs to Be Aggregated For Purposes of the Ordering Rules?

The statute is somewhat ambiguous with respect to whether all Roth IRAs are to be aggregated for purposes of applying the ordering rules, but it is implied that this is the case. Immediately prior to §408A(d)(4)(B), the ordering rules quoted above, there is an aggregation rule:

In this regard I note that 408(d)(2)(A) requires that "all individual retirement plans shall be treated as 1 contract."

On the other hand Subparagraph (B) begins: For purposes of applying this section and section 72 to any distribution from a Roth IRA, such distribution shall be treated as made . . . " [Emphasis added.]

One of the most attractive features of the Roth IRA is the ability of some persons to rollover a regular IRA or a qualified plan distribution to a Roth IRA, so that the minimum required distribution rules will not apply during life and so that distributions from the Roth IRA in the future will not be subject to income tax.

Disregarding 408(d)(3)(B) means disregarding the rule that only one rollover per year is permitted.

Many people think that the rollover rules are very simple. In fact, they are very simple compared to the rules prior to the Small Business Job Protection Act. Now the rules can be described in one subsection that can be squeezed into only two pages. §408(d)(3) is set forth in a footnote below.

IRC §408A, by its terms, applies only to rollovers from other Roth IRAs and from regular IRAs. For some reason, qualified plans are not mentioned. A rollover from a qualified plan to a Roth IRA could easily be accomplished, however, by first rolling over (or making a direct transfer) to a regular IRA, and from there to a Roth IRA.

However, in most cases it would appear that a rollover from the SRA or SEP to a regular IRA, followed by a rollover or conversion to a Roth IRA, would be possible.

The primary disadvantage in making a Roth IRA rollover is that income tax must first be paid on the amount rolled over. Unlike a regular rollover, no deduction is allowed for a rollover to a Roth IRA. The statute is explicit on the question of income inclusion:

Roth IRAs established before 1999 means Roth IRAs established in 1998, because prior to 1998 there was no such thing as a Roth IRA. This is a one-shot tax break only applicable in 1999.

Note that the election is all or nothing: a partial election procedure is not described in the statute.

As indicated above, if a taxpayer does not elect out of §408A(d)(3)(A)(iii), the taxpayer will recognize any income attributable to a rollover made in 1998 from a regular IRA to a Roth IRA ratably over four years, 1998-2001. In order to prevent taxpayers from using this provision simply as a loophole to spread the income, followed by an immediate withdrawal from the Roth IRA, the IRS Restructuring and Reform Act of 1998 amended §408A by adding elaborate provisions designed to accelerate income if withdrawals are made the first three years of the 4-year averaging period (i.e., before 2001).

Under the statute, income tax would be owed on any distributions made in 1998, 1999 or 2000 made out of amounts rolled over to a Roth IRA in 1998, until the total that was originally deferred has been recognized. For example, if $100,000 were rolled over in 1998, and no withdrawals and no election to accelerate were made, $25,000 would be recognized in each of 1998, 1999, 2000 and 2001. If, however, $15,000 were withdrawn in 1999, we presume that $40,000 would be recognized in that year ($25,000 + $15,000).

At this point (1999) $65,000 in tax has been paid, with $35,000 and two years left to go. If $50,000 were withdrawn in 2001, $35,000 is all that could be taxed under this portion of the statute (unless contributions were exhausted under the ordering rules) because only $35,000 remains. However, what if nothing were withdrawn?

(a) Does the taxpayer still recognize $25,000 as if still under the original schedule? Or (b), is the $35,000 that is left paid ratably over two years ($17,500 per remaining year)? Or, (c) since the taxpayer was to have paid a total of $75,000 over the first three years, and since the taxpayer has already paid $65,000 due to the withdrawal, maybe all that is owed in year three is $10,000. In this case a $25,000 payment in year four would round out the deficit.

My money is on (a): that the taxpayer must pay $25,000 each year, plus whatever has been withdrawn that year, not to exceed a total of $100,000 (except to the extent that the withdrawal is not a qualifying distribution and all contributions have been recaptured).

Contrary to the usual Roth distribution rule, basis is recovered last if the 4-year averaging recapture provisions apply.

The statute accelerates the tax due if a taxpayer dies within 4-years of making a 1998 rollover that was being averaged. However, the exception in cases where the taxpayer’s spouse is the beneficiary applies if the spouse acquires the interest in "any Roth IRA to which such qualified rollover contribution is properly allocable." This certainly suggests that if there is more than one 1998 Roth rollover IRA, only one of which names the spouse as the beneficiary, then the one of which the spouse was the beneficiary should qualify for the exception.

Note that unless the spouse is also a beneficiary of the taxpayer’s estate, the spouse may not be inclined to make the election to defer the tax, since the obligation to pay the tax would be on the estate if the exception does not apply. If the spouse makes the election anyway, is the payment of the tax a gift to the beneficiaries of the estate? Hopefully not.

Interestingly, the corrective transfer can be made by the extended tax return due date, though the original contribution would have had to have been made by April 15 to be considered as having been made on account of the preceding year.

It might even be the case that a market crash following a Roth IRA conversion causes the taxpayer to wish he had waited until the next year to effect the rollover. This new provision of the law would appear to allow the taxpayer to do just that.

Note that a rollover will not work. It has to be a "trustee-to-trustee transfer." According to the Senate report, a trustee-to-trustee transfer can include transfers between IRA trustees, transfers between IRA custodians, transfers from and to IRA accounts and annuities, and transfers between IRA accounts and annuities with the same trustee or custodian.

However, the IRS Restructuring and Reform Act of 1998 makes an exception to this rule in the case of nonqualifying distributions attributable to rollovers that are withdrawn within 5 years, thereby closing a loophole allowed under the original statute. See below.

408A(d)(3)(F) was added to address this loophole:

The ordering rules treat distributions as coming from non-rollover contributions first, from taxable rollover contributions second, and from nontaxable rollover contributions next.

Note that even if a distribution is a qualifying distribution —meaning that a Roth IRA has been established for at least 5 years— then a nontaxable premature distribution tax could still apply, if the taxpayer is under age 59&1/2 at the time, because the 5-year period referred to in §408A(d)(3)(F)(i)(II) begins "with the taxable year in which such contribution was made" rather than "within the 5-taxable year period beginning with the 1st taxable year for which the individual made a contribution to a Roth IRA" and because the statute makes the tax applicable "as if such portion were includible in gross income"

IRAs are generally not covered by ERISA, and therefore cannot rely on the ERISA legislation giving creditor protection to certain pension plans. However, many states have "shield laws" which classify IRAs as exempt assets. Now, a Roth IRA is an IRA; so in many cases a state’s IRA shield law will protect a Roth IRA as well as a regular IRA. But each state’s statute will have to be carefully read, because the wording could make a difference. For example, in Texas, the statute does not extend to IRAs that are not tax deductible. Whether the statute covers a Roth rollover IRA on which tax was paid is not clear. Arguably it doesn’t. Many states, including Texas, are expected to pass legislation shortly to make sure that Roth IRAs are treated the same as regular IRAs for purposes of creditor protection.

The idea is that the Roth IRA is established in the form of a trust in which the owner has given up all benefits and rights. Because the minimum distribution rules do not apply to a Roth IRA during life, the owner is not required to take distributions. At death, the IRA continues for the benefit of the owner’s beneficiaries, who are irrevocably designated when the IRA is established. The owner has made a taxable gift at the time the IRA is established. But since the IRA will compound tax free during the owner’s life and thereafter for the life expectancy of the beneficiary, the size of the gift and the size of the benefit ultimately enjoyed will be very disproportionate. For example, a $1 million gift could easily generate $30 million in benefits over thirty to forty years. Further, that $30 million would be income and estate tax free. Not bad, if it works.

The IRS has indicated informally that it intends to apply the AGI limits to a husband and wife jointly, but it is not at all clear that the statute requires this. There is nothing in the technical corrections that address this issue.

The rollover AGI limit for a married taxpayer filing jointly as well as for a single person is $100,000. It would stand to reason that each spouse (each taxpayer) can effect a Roth IRA rollover if that spouse has AGI that does not exceed $100,000, particularly since this is the limit for a single person. Moreover, it would have been easy enough for the statute to have referred to combined AGIs if that had been intended.

In the case of the AGI contribution limit applicable only to a taxpayer [sic] filing a joint return, the literal wording of the statute is extremely important, in my opinion. The statute reads:

Now, this provision (§408A(c)(3)(C)(ii)(I)) applies only to joint returns. Therefore, if the word "taxpayers" (plural) had been substituted for "taxpayer" (singular) there would have been no ambiguity whatsoever, because a joint return is never filed by a single taxpayer. In other words there is not even a reason for claiming that the word taxpayer (singular) was used for convenience, in a generic sense. Because a joint return is always filed by more than one taxpayer, the use of the word taxpayer (singular) can only refer to the taxpayer who is making the Roth IRA contribution; since, otherwise, there would have been no imaginable reason not to have used the plural.

I see no reason why an inherited IRA could not be converted to a Roth IRA by a surviving spouse, especially if the IRA were either rolled over by the spouse to a regular IRA first, or if the spouse elected to treat the IRA as his or her own under §408(d)(3)(C). However, this is not explicitly addressed in §408A.

I do not think that a beneficiary of an IRA who is not a spouse can make a Roth IRA conversion, because only a spouse can rollover an inherited IRA. Further, I think it would be imprudent for a spouse-beneficiary to make a Roth IRA rollover without first becoming the owner (rather than the beneficiary) of the IRA.

The last cited site is maintained by David Rhett Baker, an attorney in Orlando. This is the mother of all pension web sites and the mother of all pension links. I am telling you, this is a "must" for the professional pension advisor.

As indicated in Announcements 97-122 and 98-14, the IRS has promulgated Forms 5305-R (trust account IRA) and 5305-RA (custodial account IRA), similar to the 5305 IRA prototype forms. These forms leave much to the imagination. For example, it is implied (perhaps), but not stated, that the IRA beneficiary (or, for that matter, the owner) can withdraw funds from the IRA without the permission of the IRA trustee.

On Dec. 17, the staff of the Joint Committee on Taxation released the 1997 Blue Book (General Explanation of Tax Legislation Enacted in 1997, JCS-23-97). The "Blue Book" contains useful information on Roth IRAs.

The Senate Committee Reports to the IRS Restructuring and Reform Act of 1998 contains very helpful information explaining the reasoning behind the Roth IRA amendments found in that act.

Whether it makes sense to convert a regular IRA to a Roth IRA of course depends on the circumstances of the taxpayer. Much has already been written on this subject. There are by now dozens of Roth IRA calculators available on the internet to help taxpayers make this decision.

I would pose a simple thought experiment to illustrate the point: Suppose, that a taxpayer has $1 million in a regular IRA. In one case the IRA is converted to a Roth IRA; in the other it is not. If it is not converted, it doubles in value after x number of years, at which point the IRA is liquidated and income taxes are paid. Assume the income tax rate is 50%. At this point, the taxpayer or his or her beneficiaries have $1 million income tax free to utilize.

In the other example, the IRA is converted. This means that income tax must be paid. So now we only have $.5 million to put in our Roth IRA. At the end of the period of x years, the Roth IRA doubles in value and is liquidated. Assuming 5 years have passed, no income taxes are paid. At this point, the taxpayer or his or her beneficiaries have $1 million income tax free to utilize.

Now there are several facts that we can add to our example that give the Roth IRA a decided advantage.

For one thing, if the taxpayer were over age 70&1/2 the regular IRA would not be growing tax free because the premature distribution rules would require that at least a portion of the IRA be distributed (and taxes paid on it) each year. This alone tilts the scale in favor of conversion.

More significant, however, is that if the taxpayer had rolled over $1 million, and paid the $.5 million out of other funds, then, in effect, the $.5 million will grow tax free during our theoretical time period.

Income taxes will have to be paid in any event, so the taxpayer is not really out the .5 million by paying the tax early. As the example showed, the time-value use of the pre-paid tax is not the issue that it would first appear without doing the math. All that really happens is that the $.5 million now grows in the Roth IRA tax free instead of outside of the IRA in investments subject to annual income tax and capital gains.

Thus, at the end of the term, the period, the taxpayer or heirs would have $2 million tax free. The assumption is that the $.5 million can be double faster in the Roth IRA than outside of it. This is the primary advantage of the Roth IRA rollover —this and the fact that lifetime minimum distributions do not have to be made.

A further aid to the decision of whether or not to convert or contribute to a Roth IRA can be found in any of the dozen or more calculators and programs, most of them free, which can be found on the world wide web. See, for example, http://www.rothira.com/, mentioned earlier.