On Roths, Rollovers, Tax Obligations and Other Matters Relating to IRA Accounts : On Roths, Rollovers, Tax Obligations and Other Matters Relating to IRA Acounts

Q. May a nonworking spouse contribute up to $2,000 a year to one of the new Roth individual retirement accounts?

K.H.

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A. Both spouses, working and nonworking, may contribute up to $2,000 each to a Roth IRA assuming the couple meets the income requirements. There must be at least $4,000 in earned income for the tax year, and the couple’s adjusted gross income may not exceed $150,000.

Please note the difference between “earnings” and “adjusted gross income.” At the bottom end of the eligibility spread, the ability to contribute is a matter of simple earnings. At the upper end, what matters is adjusted gross income, which includes more sources and is often a somewhat higher figure than earnings.

If you are otherwise largely unemployed or without much in the way of earned income (i.e., retired or independently wealthy), you may open a traditional IRA or one of the new Roth IRAs so long as you have at least $2,000 per year in earnings. And if you are older than 70 1/2 and have earnings, you may still contribute to a Roth IRA (but not to a traditional one).

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Q. I am 72 and take the required minimum annual disbursement from my traditional IRA. May I roll this account over to one of the new Roth IRAs? Would there be any advantage to doing this? Would I still have to take the minimum annual disbursement? Is the Roth IRA included in my estate?

F.P.

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A. Assuming that your adjusted gross income does not exceed $100,000--the figure is the same whether you are single or married and filing a joint return--you may convert your traditional IRA to a Roth IRA even if you are retired and already taking mandatory distributions. The only caveat is that in the year you make the conversion, you must also take your minimum annual distribution from your traditional IRA.

The conversion will require you to pay taxes on any portion of your traditional IRA that has not already been subject to taxation. If you make the conversion in 1998, you may spread your tax obligation out over four years--this bonus is available only to those who make the conversion this year--by dividing the taxable amount of the converted IRA by four and declaring that fractional amount as taxable income in each of the next four years.

The rollover amount will not count for the purposes of determining your income eligibility for a Roth rollover, so if, with this rollover amount, you exceed $100,000 in adjusted gross income, you still qualify for the rollover.

However, depending on the size of your IRA, the rollover amount may well push you into a higher tax bracket, something you should consider carefully. A thorough analysis is especially important if you have already started taking distributions and you believe there is a chance you may need to tap this money in the future for your retirement living expenses. In this case, you may be better off taking the distribution in smaller increments and paying taxes on it annually.

If you think you won’t need your IRA funds, transferring them to a Roth IRA is especially nice for your heirs, since they can inherit these funds free of all income tax responsibility. But your Roth IRA, along with your other assets, will still be included in your estate for the purpose of determining any estate tax obligations.

Carla Lazzareschi will respond in this column to financial questions of general interest. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.