It’s Your Money Column – Consider Roth Iras for Your Retirement Portfolio

Question: I am within five years of retiring and I’ve seen my individual retirement accounts (IRAs) drop drastically in value. I know that I’ll have to pay tax on those IRAs when I start taking money out. Is there anything that I can do now?

Answer: There are two steps you might consider that relate to tax consequences of your retirement funds.

First, if you haven’t already, think about making new contributions to a Roth IRA. Although your contributions do not reduce your taxable income when you make your initial contributions, you will not pay tax when you begin to withdraw funds five years after your first contribution and are at least 59½ years old. Remember, you can withdraw contributions tax-free at any time, but earnings generally have to stay in until you’re 59½.

You have until April 15, 2003, to establish a Roth IRA for the 2002 tax year. You may contribute $3,000 (if you have that much in earned income) to establish a Roth IRA in your name. If you are 50 or older, you can put an additional $500 in a Roth IRA for 2002. You can also contribute $3,500 to a Roth IRA for a nonworking spouse who is at least 50. Check income and other eligibility requirements carefully.

Second, you can convert your traditional IRAs to a Roth IRA, but this must be done by Dec. 31, 2002. The advantage of converting to a Roth IRA is that all withdrawals after five years will be tax-free as long as you are at least 59½ years of age when you start withdrawing. Another advantage of switching is that Roth IRAs do not have minimum distribution rules requiring you to begin taking distributions when you are 70½.

The major drawback to the switch is that you must pay tax on the value of the IRA in the year that you convert. Because of the drop in value of many people’s IRAs, paying tax today may be better than in the future if you anticipate that your IRAs will grow in value in the future. If you plan to retire and need to use the money in a short period of time – five to 10 years – it may not be worth it to pay taxes now.

The conversion decision is complicated, so check the Internal Revenue Service Web site for specifics about IRAs:,,id%3D12590,00.html.

If you think that converting to a Roth IRA might be an advantage to you, contact a tax adviser right away.