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IT ALMOST ALWAYS WILL PAY TO SWITCH MONEY FROM A REGULAR IRA INTO A ROTH IRA

Second of two parts
on how to use the new Roth IRA
A new Individual Retirement Account is coming to town and a lot of investors are already lusting after it. It's called a Roth IRA and goes on sale in January.

But what about the regular IRA you've had for years? Should you keep it or ditch it? Generally speaking, you should probably ditch it, if you can. With either IRA, you can salt away up to $2,000 a year ($4,000 for couples). Here's the difference between the two:

The regular IRA: You tax-deduct your contribution and your earnings accumulate tax deferred. Taxes are due when you take the money out, and withdrawals must start no later than age 70 1/2 .

The Roth IRA: You contribute with after-tax money. If you hold for five years and follow a few other rules, all the profits on your Roth investments -- stocks, bonds, mutual funds and savings accounts -- will pass entirely tax free.

You can switch money from a regular IRA into a Roth if your adjusted gross income doesn't exceed $100,000 (that's a fixed ceiling, whether you're single or married filing jointly). In most cases, a switch is a great idea.

You may not think so at first. You have to pay income taxes on all the money you move. But as long as you handle the taxes right, the Roth will bring you out ahead, says Steve Norwitz of the Baltimore mutual-fund company T. Rowe Price.

T. Rowe Price ran a bunch of scenarios covering people of different ages and tax brackets. The conclusion: It almost always pays to switch money from a regular IRA into a Roth as long as you move the whole amount. Don't deduct even a dime for taxes. Pay the tax out of other savings or current earnings.

If you switch IRAs in 1998, you can pay the tax gradually, over the next four years -- a terrific break right there. If you switch in 1999 or later, your taxes will all be due at once.

What if you don't have other savings and can't pay the tax unless you use some IRA money? In that case, don't switch, Norwitz says. Leave your regular IRA intact. It would take years for a Roth to earn that tax money back.

But be sure to put your future contributions into a Roth.

Switching also may not pay if you'll drop from a high bracket while you're working into the low bracket when you retire.

Surprisingly, you might want to switch if you've already retired, Norwitz says. For example, take a 65-year-old who moves money from a regular IRA into a Roth, pays the tax from outside funds, holds the Roth for five years, and then withdraws a fixed income from it over the next 15 years. The Roth will pay more than a regular IRA would.

The Roth has two other advantages:

1 -- You can make annual contributions for as long as you like -- even after age 70 1/2 .

2 -- You don't have to make withdrawals, ever. The Roth can accumulate money for heirs, which they'll receive income-tax free.

If your income exceeds $100,000, the law doesn't allow you to switch funds from a regular IRA into a Roth. But you may be able to put all future contributions into a Roth.

You're eligible for a full $2,000 Roth contribution if you're single with an adjusted gross income under $95,000 or married under $150,000. Singles can make partial contributions with incomes up to $110,000 and couples up to $160,000.

You can withdraw the money you put into the Roth, tax free, at any time. To take your earnings tax free, however, you have to hold the Roth IRA for at least five years and withdraw in one of the following circumstances: You're over 59 1/2 , you're taking up to $10,000 to buy a first home, you're disabled, or your heirs take the IRA after your death. (Congress may also decide to limit tax-free withdrawals of money rolled over from other IRA plans.)

To help you decide whether it pays to convert, Price offers a free worksheet (call 800-333-0740). Also ask for Price's free report on the new tax legislation.

For software that compares all your new IRA options, get Price's IRA Analyzer ($9.95, for Windows 3.1 and up and IBM-compatible computers with a 486 processor or greater). With minor modifications, it's free on the Web site, www.troweprice.com.

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