Roth Isn't a Good Thing for Everyone

By Jane Bryant Quinn

NEW YORK -- It's the Year of the Roth, the new Roth Individual Retirement Account.  You're seeing the ads everywhere, from banks, insurance companies, mutual funds and brokerage firms.

They all make a Roth investment sound like the greatest thing since Post-it Notes.  For some people, that's true, but not for everyone.  In many cases, it's smarter to put your money into a more traditional retirement account.

IRAs are for workers who can save up to $2,000 a year ($4,000 for married couples).  And without doubt, the Roth is an interesting buy. There's no tax deduction for the money you put in.  But the earnings you build can be withdrawn entirely tax free, as long as you follow the rules.

You qualify for a full Roth contribution as long as your adjusted gross income (AGI) doesn't exceed $95,000 if you're single or $150,000 for married couples.  Above that, the size of your contribution phases out.  The Roth rules, in a nutshell:

• You can keep on contributing as long as you work.  Contributions can be withdrawn tax free anytime you want.
• After holding the Roth for five years, you can also withdraw your earnings tax free if you're at least 59 1/2, or disabled, or need up to $10,000 to buy a first home.
• You can leave your money in the Roth as long as you want.  There are no mandatory withdrawals.  If you die, your heirs will get your Roth income tax free, as long as you held it at least five years.  (Estate taxes are due, however, if you're wealthy enough.)

The value of this investment almost jumps off the page.  For example, say you're in your 20s and saving for a home.  The Roth makes your savings account tax free.  If you can't afford $2,000 (or $4,000) a year, maybe your parents can put up the money for you.

And say your teen-ager has a job and is spending the money (or maybe saving it for college).  No problem.  You can still fund that child's Roth, with a sum equal to his or her earnings, up to $2,000.  That's a bonanza, if left to grow.

Roths are also terrific for heirs.  The money can accumulate over your lifetime; then pass to your spouse tax free and continue to accumulate; then pass to a child or another beneficiary -- payable over the recipient's lifetime.

But what if you expect to draw out most of that money as you age? Here's where other retirement plans might come out on top.  There are several alternatives: 401(k)s and 403(b)s for employees; plans designed for the self-employed; and traditional IRAs.  All of them let you tax-deduct your contribution and accumulate earnings tax-deferred.  You pay income taxes on the money you take out.

It would be nice to have a fully funded retirement plan, plus a Roth on the side.  But here's how to choose if you can't afford both:

• An employee plan is always a winner if it matches the money you put in.
• Employee plans are also better if you might suddenly need cash.  Most 401(k)s will give you a loan, which lets you put the money back.  With Roths, you can take out the money you contributed, but it can't go back into the plan if you keep it more than 60 days.
• What if your company doesn't match your contributions? What if you're self-employed? In these cases, which plan to choose will depend on your current tax bracket versus the bracket you think you'll be in when you retire, said Greg Jenner of the consulting firm, Coopers & Lybrand.

A traditional, tax-deductible plan is better for workers whose tax brackets are currently high but will probably fall to 15 percent.  You'd avoid a high tax when your money went into the plan and pay a low tax when it came out.

But a Roth accumulates more money for people whose tax brackets will rise, stay the same or fall just a little bit.  You don't know what your future tax rates are going to be, of course. The Roth locks in today's rate, which may be fine with you.

Hot-air alert: I've looked at a lot of sales literature for Roths.  The brochures that compare them with traditional IRAs (and, by extension, any tax-deductible account) invariably show the Roth as the star.

You have to go to the footnotes to learn that the seller assumed that your tax bracket won't decline.  If that's not true in your case, send the salesperson back to the drawing board.

IRA Information