Opening a Roth IRA can boost your retirement savings significantly and the time to start saving is now. The sooner you contribute or convert to the Roth IRA, the sooner you begin the five-year holding period to qualify for income tax-free distributions.

You are eligible to make annual nondeductible contributions to a Roth IRA, up to $2,000 or 100 percent of earned income which ever is less, if your modified adjusted gross income (MAGI) fall below certain limits (married filing jointly phase out between $150,000-160,000, single filers $95,000-$110,000). Earnings in a Roth IRA grow tax-deferred, and qualifying withdrawals are income tax-free. Taxpayers whose joint or single MAGI is $100,000 or less are eligible to convert an existing traditional ITA to a Roth IRA.*

New changes make converting easier

In July 1998, the IRS Restructuring Bill enacted corrections to the 1997 Taxpayer Relief Act, creating even more incentive to fund a Roth IRA.

Under the new law, if you convert and later exceed the annual income limit for conversion, you can transfer your funds (and any gains or earnings) back to a traditional IRA without a penalty as long as you do so prior to your tax-filing deadline. This also applies to the annual contributions of $2,000.

"Some individuals have been wary about converting their IRAs simply because of the possibility of losing their IRA assets," said Jim McCarthy, vice president and IRA product manager for Merrill Lynch. "These changes provide a comfort factor for investors with unpredictable annual income."

Market volatility can be a plus

Taking advantage of recent market volatility can lessen your conversion tax liability. Eligible taxpayers may want to consider converting into a Roth IRA is the market value of their IRA assets has declined, or reversing an earlier Roth IRA conversion in order to reconvert the IRA assets to create a potentially lower tax liability.

"A few months ago, your traditional IRA may have been worth $100,000," said McCarthy. "But due to recent market volatility, it may now be worth $85,000. If you convert now, you can take advantage of the four-year tax spread and your conversion tax liability will be based upon a lower asset value."

While the conversion strategy may reduce the Roth IRA conversion tax liability, the IRS recently restricted the number of time taxpayers can re-characterize an IRA. During 1999, a tax payer who has already converted a traditional IRA can reconvert that amount only once.

Look at the overall picture

Look at your individual investment goal and talk to your financial consultant if:

· You have not yet established an IRA and want to start investing in a tax-favored savings vehicle.

· You have several IRAs with different account custodians and want to consolidate your accounts to better manage your assets, reducing paperwork and fees.

· You already have an IRA and are considering the benefits of converting.

· You have already converted your IRA and you want to unconvert it to decrease tax liability.

(* Married separate filers are ineligible to convert regardless of income.)

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