A Roth IRA is an individual retirement account created by the Taxpayer Relief Act of 1997. Named for former Senate Finance Committee Chairman William Roth, Jr., this IRA offers more incentives to boost your retirement savings, as well as more ways to use your nest egg.

Unlike traditional IRAs, contributions to a Roth IRA are never tax-deductible. However, the money in your Roth IRA, including earnings, can be withdrawn tax-free. Of course, you must conform to the plan provisions to get this tax-free advantage.

You are eligible if you earn compensation and your income is less than limits set by Congress. A single filer who has modified adjusted gross income (MAGI) up to $95,000 can make the full Roth IRA contribution for that year. Each spouse filing a joint federal income tax return showing a MAGI up to $150,000 can make the full Roth IRA contribution for that year. Some people with higher MAGI may be able to make smaller contributions.

The amount of a full Roth IRA contribution varies. If you meet the eligibility tests described previously and you are under age 50, you can contribute up to $4,000 for 2005 through 2007. For owners age 50 and older, your limits increase to $4,500 for 2005 and $5,000 for 2006 and 2007.

A smaller contribution can be made if your MAGI is between $95,000 and $110,000 for single filers, and between $150,000 and $160,000 for joint filers. When income exceeds $110,000 for single filers and $160,000 for joint filers, a regular Roth IRA contribution cannot be made for that year.

You may be able to receive a tax credit for making contributions for the 2005 and 2006 tax years. The full credit is 50 percent of the first $2,000 of contributions. The full credit is available for joint filers who have joint MAGI up to $30,000, heads of households with MAGI up to $22,500, or other filers with MAGI up to $15,000. Smaller tax credits are available for joint filers with MAGI up to $50,000, heads of households with MAGI up to $37,500, or other filers with MAGI up to $25,000.

Yes, and you can contribute past age 70 1/2, as long as you continue to earn compensation.

No. The amount you contribute to your 401(k) or other employer-sponsored plans will not be affected by your Roth IRA. However, you must conform to the plan contribution limits for your employer-sponsored plan.

Yes, you can maintain both types of IRAs at the same time. You can even make contributions to both types of IRAs in the same year. But your contributions to both Roth and traditional IRAs cannot exceed the maximum contribution.

You can withdraw most contributions without paying income tax at any time. Distributions are treated as first being attributable to your contributions until all of your contributions have been distributed.

There are two requirements to qualify for tax-free withdrawals of the income your Roth IRA has earned. First, your Roth IRA must meet the “five-year test.” In other words, it must be five years after the first year for which Roth contributions were made. Second, one of the following conditions must apply:

(a) You are over age 59 1/2
(b) Funds are going to your beneficiary upon your death
(c) You have become disabled
(d) You are using the funds for a first-time home purchase (lifetime limit is $10,000  per person).

If you have made a conversion contribution, please read further for taxation issues regarding conversions.

Good news. If you make early withdrawals from a Roth IRA to which you have only made regular contributions within the maximum annual limits, the amounts are considered to come from your already-taxed contributions first, with no additional taxes or penalties due. When you begin to withdraw earnings from the account, this money will be subject to ordinary income taxes, plus an additional ten percent early distribution tax.

No. The Roth IRA is more flexible than a traditional IRA because you are not required to start taking minimum distributions when you reach age 70 1/2. If you don’t need the cash, you can let your money continue to grow tax-free for as long as you like. However, minimum distributions must be made to your beneficiaries following your death.

Yes. You can convert your traditional IRA to a Roth IRA if your MAGI in the year of the conversion is under $100,000. This limit is the same for both single filers and married couples who file jointly. Married taxpayers who file separately are not eligible for a Roth conversion. Use care and be sure to get all the facts. This is a complicated decision.

No, the MAGI is calculated prior to adding the amount of the IRA conversion contribution.

Yes. Upon conversion, you will owe ordinary income taxes on your investment earnings and on deductible contributions you have made to your traditional IRA. This amount is taxable income in the year the money leaves the traditional IRA. Basically, you owe tax on any money that has not been taxed before. But you will have the opportunity to withdraw earnings made after the conversion, free of any taxes.

The ten percent early withdrawal penalty is waived on IRA conversions.

A distribution that is attributed to an IRA conversion contribution is not subject to income tax. If the distribution is made within five years after the conversion, then the ten percent early withdrawal tax applies, unless there is an exception.

Yes. A rollover or transfer from one Roth IRA to another Roth IRA is tax-free and can be made regardless of your MAGI.

Experts recommend that you first contribute at least enough to your company plan to take full advantage of any employer match. After getting the full employer match, the best approach varies, depending on your circumstances. Consult with a tax professional if you are unsure.

With the same earnings rate, you can have more after-tax dollars during retirement by making the Roth contribution. This will occur if you receive distributions after you attain age 59 1/2 and at least five years after the year for which you made your first Roth contribution.

If you meet the age 59 1/2 and five-year tests, with the same earnings rate, you will have more after-tax dollars during retirement by making the Roth contribution.

In general, a person who can afford to make the maximum Roth IRA contribution will benefit more from making Roth IRA contributions. This may not be true if you are close to retirement and it appears that your tax bracket will go down substantially after retirement. You should also consider a deductible traditional IRA contribution if losing the deduction would reduce the amount you can contribute. Seek tax advice if you are in doubt.

Yes. Upon your death, the entire proceeds can be passed on tax-free to your beneficiaries, once the five-year test has been met. This means there may be a delay before your beneficiaries will be able to receive the income earned within the Roth IRA on a tax-free basis.

The desirability will differ with each individual’s financial circumstances. Certainly, you should weigh the potential tax savings during retirement against the cost of your tax bill for the conversion. Because this decision is a complicated one, you should consult a tax professional. Consider several key questions:

• Would most of the funds in your traditional IRA be subject to income tax in the conversion?
• Can you afford to pay the income taxes due on the conversion from funds outside of your IRA funds?
• What tax bracket are you in now, and what tax bracket do you think you will be in when you retire?
• How long is it before you retire?
• Will the taxable income from the conversion bump you into a higher tax bracket?
• How will the income from the conversion affect the taxation of any Social Security retirement benefits you receive?
• Is the Roth IRA useful to you as an estate planning tool?

In many states, treatment of the Roth IRA for state tax purposes is the same as the treatment of the account for federal tax purposes by the IRS. Consult your tax adviser for more information on state taxes for the Roth IRA.

A traditional IRA is a type of retirement plan that has been in existence since 1975. Traditional IRAs offer tax-deferred earnings and the possibility for tax-deductible contributions. These tax advantages make the traditional IRA a powerful tool in creating a balanced, long-term savings plan.

You can contribute to a traditional IRA if you earn compensation and you will not reach age 70 1/2 by the end of the year. If you file a joint tax return, you can treat your spouse’s com­pensation as your own (except your combined contributions cannot exceed your combined compensation). All earnings in a traditional IRA are not taxed until they are withdrawn. The ability to defer taxes on the earnings, and to withdraw in a year when you may be in a lower tax bracket, can mean more after-tax dollars for your retirement.

If you meet the eligibility tests described above and you are under age 50, you can contribute up to $4,000 for 2005 through 2007. For owners age 50 and older, your limits increase to $4,500 for 2005 and $5,000 for 2006 and 2007.

Yes, your participation in an employer-sponsored retirement plan will not affect your ability to contribute to a traditional IRA (assuming age and compensation requirements are met). However, higher-income earners will lose their ability to deduct their traditional IRA contribu­tions if participating in an employer-sponsored plan.

Yes, you can. However, the limits on annual contributions described on the previous page apply to any combination of traditional and Roth IRA contributions that you make for the year.

The table below summarizes the deduction rules. If you are single, or married and neither spouse is an active participant in a qualified retirement plan, your traditional IRA contribu­tion is deductible regardless of income. If you or your spouse is an active participant, you may deduct contributions only if your income is below certain limits.

Smaller deductions are available if your income is within the phase-out range, which is deter­mined by your filing status. Higher-income earners with retirement plans may still con­tribute, but deductions are not available if income is over the phase-out range.

If you have questions about your specific tax situation, please consult your tax advisor for an interpretation of how these rules apply to you.

You may be able to receive a tax credit for making contributions through tax year 2006. The full credit is 50 percent of the first $2,000 of contributions. The full credit is available for joint filers who have joint MAGI up to $30,000, heads of households with MAGI up to $22,500, or other filers with MAGI up to $15,000. Smaller tax credits are available for joint filers with MAGI up to $50,000, heads of households with MAGI up to $37,500, or other filers with MAGI up to $25,000.

You will owe income taxes when you withdraw from your traditional IRA. However, if you make nondeductible contributions to a traditional IRA, a portion of each withdrawal will be treated as the nontaxable return of these contributions.

In general, you must pay a ten percent tax on early distributions or withdrawals before age 59 1/2. But the early distribution tax does not apply in the following situations:

a) Amount is rolled over or directly transferred to another traditional IRA
b) Amount is properly converted to a Roth IRA
c) Withdrawal of an excess contribution before the tax return is due
d) Withdrawal of an excess contribution after the filing deadline if certain conditions are met
e) Payment is made to your beneficiaries after your death
f) Withdrawal of up to $10,000 is for first-time home purchase
g) Amount is used to pay for qualified post­secondary education expenses
h) Amount is used to pay for medical expenses in excess of 7.5% of adjusted  gross income (AGI)
i) Amount is for pre-59 1/2 periodic payments
j) Distribution is to an owner who is disabled (as defined by the IRS code)
k) Distribution is for medical insurance premiums during unemployment that lasts 12 weeks or longer

You must begin taking required minimum distributions from your traditional IRA at age 70 1/2. The minimum distributions each year will be computed using an IRS formula. You are allowed to delay the first year’s payment until April 1 of the following year, but you will receive two years’ worth of payments in your 71 1/2 year if you choose to delay.

If you are entitled to receive an eligible rollover distribution from an employer’s plan, you can continue deferring taxes by moving the money into a traditional IRA. The best way to do this is to inform the plan administrator that you want the funds moved directly to your traditional IRA in a direct rollover. The plan administrator will inform you before making an eligible rollover distribution.

You can move money from your traditional IRA to a Roth IRA if your adjusted gross income for the year is $100,000 or less, and you are either single, or married and filing a joint tax return. In the year you convert, you will have to pay federal income taxes on the amount that you move, except the portion that is treated as the return of your traditional IRA basis. You may also be subject to state income taxes.

You may designate one or more beneficiaries to receive your IRA after your death. If your spouse is your beneficiary, he or she may directly transfer your traditional IRA to his or her own IRA tax-free. In addition, all benefici­aries have the option of taking a lump-sum payment or periodic payments over a number of years. Any tax-deferred money in your traditional IRA at the time of death will be taxed when it is distributed to your beneficiaries.