LOISELLE, GOODWIN & HINDS
CERTIFIED PUBLIC ACCOUNTANTS

Whether to Make a Contribution to a Regular IRA or a Roth IRA

As you probably know, the Taxpayer Relief Act of 1997 created a new type of individual retirement account called the Roth IRA. The key benefits of a Roth IRA are that distributions (including distributions of earnings) are tax-free if certain specified conditions are met, you don't have to start taking distributions after you reach age 70-1/2, and you can continue to make contributions even after you reach that age. Your right to make contributions to a Roth IRA is not affected by whether you are an active participant in an employer-sponsored retirement plan. As long as your AGI is below specified limits, you can make an annual contribution of $2,000 to a Roth IRA. For example, if you contribute $1,000 to a regular IRA, you may not contribute more than $1,000 to a Roth IRA in the same year.

The key disadvantage of a Roth IRA is that you are not allowed to deduct any part of your contribution in computing your taxable income. If you're eligible to make a contribution to a Roth IRA, and you are not able to deduct a contribution to a regular IRA because your income exceeds specified levels and you're an active participant in an employer-sponsored pension or profit sharing plan, you will always benefit from contributing to a Roth IRA instead of to a regular IRA. If you can deduct your contribution to a regular IRA, in deciding whether to contribute to a regular IRA or a Roth IRA, you have to weigh the benefits of an immediate tax deduction for your contribution against the benefits of not having to pay a tax when you make withdrawals. This will depend, in part, on whether you expect to be in at least as high a tax bracket when you start making withdrawals as you are in when you make your contributions.

You should also consider whether you will need to take withdrawals from your IRA after you retire or whether you want to use your IRA primarily to build up an estate for your heirs. If building an estate is your primary concern, you should probably make contributions to a Roth IRA instead of to a regular IRA.

Another factor to consider is the effect of withdrawals from an IRA on the taxability of your social security benefits. Since withdrawals from a regular IRA are includible in your gross income, they will increase your adjusted gross income, and thus will probably increase the part of your social security benefits that are subject to tax. On the other hand, the loss of the deduction for a contribution to a regular IRA may cause an increase in your AGI now, and thus cause you to lose part of certain tax benefits (or deductions) that are phased out when AGI exceeds specified levels.

Please contact us to discuss any questions you may have about your eligibility to contribute to a Roth IRA, and whether, if eligible, you should make contributions to a Roth IRA instead of a regular IRA.

(08/06/97)

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Last modified: July 09, 1999