Roth IRA

You must receive taxable compensation during the year To contribute to an IRA (Roth or traditional), you must receive taxable compensation during the year. For purposes of IRA contributions, taxable compensation includes wages, salaries, commissions, self-employment income, and taxable alimony or separate maintenance. Other taxable income, such as interest earnings, dividends, rental income, pension and annuity income, and deferred compensation, does not qualify as taxable compensation for this purpose. Your contribution for a given year cannot exceed your taxable compensation for that year.

Tip: The 2006 Heroes Earned Retirement Opportunities (HERO) Act allows members of the Armed Forces to include nontaxable combat pay as part of their taxable compensation when determining how much they can contribute to an IRA (their own or a spousal IRA) in tax years beginning after December 31, 2003. Prior to the Act, a serviceman or woman with only nontaxable combat pay was unable to make an IRA contribution. Service members have until May 28, 2009, to make retroactive IRA contributions for 2004 and 2005, and will have at least one year following the date of their contribution to claim any credit or refund that they may be entitled to for those years. For service members with only nontaxable combat pay, Roth IRA contributions will generally make more sense than nondeductible contributions to a traditional IRA.

Your ability to make annual contributions depends on your income and filing status If you file your federal income tax return as single or head of household and your MAGI for 2008 is $101,000 ($99,000 for 2007) or less, you can make a full contribution to your Roth IRA. Similarly, if you file your return as married filing jointly or qualifying widow(er) and your MAGI for 2008 is $159,000 ($156,000 for 2007) or less, you can make a full contribution. Otherwise, your allowable Roth IRA contribution is reduced or eliminated as follows:

*These income ranges are indexed for inflation each year.

If you are married filing a joint return, you may be able to contribute to a Roth IRA for your spouse even if he or she has little or no taxable compensation. If you are married filing separate returns and you lived apart from your spouse at all times during the taxable year, you are treated as a single taxpayer for purposes of the Roth IRA rules.

Tip: To calculate the exact amount of your allowable Roth IRA contribution, a step-by-step worksheet is available. See IRS Publication 590, Individual Retirement Arrangements (IRAs). Tip: These income limits don’t apply to rollover contributions to your Roth IRA.

You must not have already contributed the annual maximum to your traditional IRA Total contributions to all of your IRAs (traditional and Roth) cannot exceed $5,000 for 2008 ($6,000 if you’re age 50 or older). If you contribute the maximum allowed to your traditional IRA for any year, you cannot contribute to your Roth IRA at all for that year. If you make a partial contribution to your traditional IRA, your allowable Roth IRA contribution for that year is equal to the difference between the annual IRA contribution limit and the amount contributed to your traditional IRA (or vice versa).

Example(s): You have a traditional IRA and a Roth IRA. You contribute $2,900 to your traditional IRA for the year. You can contribute no more than $2,100 to your Roth IRA for that year ($3,100 if age 50 or older). Caution: The Pension Protection Act of 2006 provides that an active reservist or guardsman who receives a qualified reservist distribution can repay all or part of that distribution to an IRA at any time during the two year period beginning on the day after active duty ends (or, if later, the two year period beginning August 17, 2006). The regular IRA contribution limits don’t apply to these repayments. A qualified reservist distribution is a payment from an IRA, or a payment of elective deferrals and earnings from a 401(k) plan or 403(b) plan, to an active reservist or guardsman who is called to duty after September 11, 2001, and before December 31, 2007, for a period in excess of 179 days (or for an indefinite period). Caution: The Pension Protection Act of 2006 allows certain individuals who participated in the Enron Corporation 401(k) plan to make special IRA catch-up contributions of up to $3,000 per year for tax years 2007 through 2009. Taxpayers who make these special contributions aren’t allowed to make age 50 catch-up contributions. Tip: The annual contribution limits ($5,000 in 2008, $4,000 in 2007) don’t apply to rollover contributions.

A Roth individual retirement account (IRA) is a personal savings plan that offers certain tax benefits to encourage retirement savings. Contributions to a Roth IRA are never tax deductible on your federal income tax return, which means that you can contribute only after-tax dollars. But amounts contributed to the Roth IRA grow tax deferred and, if certain conditions are met, distributions (including both contributions and investment earnings) will be completely tax free at the federal level.

A Roth IRA, like a traditional IRA, is not itself an investment, but a tax-advantaged vehicle in which you can hold some of your investments. You need to decide how to invest your Roth IRA dollars based on your own tolerance for risk and investment philosophy. How fast your Roth IRA dollars grow is largely a function of the investments you choose to fund the IRA.

For 2008, you can contribute up to the lesser of $5,000 or 100 percent of your taxable compensation to a Roth IRA. You may also be able to contribute up to $5,000 to a Roth IRA in your spouse’s name even if he or she receives little or no taxable compensation (see Spousal IRAs). However, not everyone qualifies to use the Roth IRA. Even if you do, you may not qualify to contribute the annual maximum. The amount you can contribute to a Roth IRA (if any) depends on your modified adjusted gross income (MAGI) for the year and your federal income tax filing status.

Tip: The Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 Tax Act) increased the annual IRA contribution limit (combined, for traditional and Roth IRAs) from $2,000 to $3,000 per person each year for 2003 and 2004, $4,000 for 2005 through 2007, and up to $5,000 each year for 2008 and beyond. These contribution limits are indexed for inflation beginning in 2009. The law also allows taxpayers age 50 and older to make additional “catch-up” contributions. These individuals can put up to $3,500 each year in their IRAs for 2003 and 2004, $4,500 for 2005, $5,000 in 2006 and 2007, and $6,000 each year for 2008 and beyond.

Tip: Consider contributing to a Roth IRA rather than a traditional deductible IRA if you expect that you may be in the same or a higher federal income tax bracket when you retire. If you can’t make deductible contributions to a traditional IRA and are trying to decide between making nondeductible contributions to a traditional IRA or contributing to a Roth IRA, you should probably choose the Roth IRA. If you are eligible to contribute to a Roth IRA, there is generally no advantage to making nondeductible contributions to a traditional IRA.

Tip: If you participate in a 401(k) or 403(b) plan at work, you may be able to make Roth contributions to the plan. Qualified distributions of these contributions and related earnings may be income tax free (and penalty free) at the federal level. The ability to make Roth contributions to your employer’s plan may be a factor in your decision of whether to contribute to a Roth IRA, or convert funds from a traditional IRA to a Roth IRA. Be sure to discuss your situation with a qualified professional before making any decisions. For more information, see Roth 401(k).

Caution: Special rules apply to qualified individuals impacted by Hurricanes Katrina, Rita, and Wilma; certain former Enron employees; and certain distributions to active duty reservists and national guardsmen after September 11, 2001.

You can contribute only after-tax dollars Contributions to a Roth IRA are never tax deductible on your federal income tax return. In other words, you can contribute only after-tax dollars to a Roth IRA. This is in contrast to a traditional IRA, which may allow you to deduct your contributions under certain conditions.

Contributions are limited to the annual maximum (or possibly even less) You cannot contribute a total of more than $5,000 per year to all of your IRAs (Roth and traditional) for 2008 ($6,000 if you’re age 50 or older by the end of the calendar year).

Example(s): You have two traditional IRAs and a Roth IRA. You can contribute no more than $5,000 overall in 2008. You can contribute the entire $5,000 to any of the three IRAs, or you can divide the $5,000 contribution among them in any manner you choose.

Tip: You may also be able to contribute up to $5,000 to an IRA in your spouse’s name in 2008 even if he or she has little or no taxable compensation ($6,000 if your spouse is age 50 or older). See Spousal IRAs. Caution: The Pension Protection Act of 2006 provides that an active reservist or guardsman who receives a qualified reservist distribution can repay all or part of that distribution to an IRA at any time during the two year period beginning on the day after active duty ends (or, if later, the two year period beginning August 17, 2006). The regular IRA contribution limits don’t apply to these repayments.

Caution: The Pension Protection Act of 2006 allows certain individuals who participated in the Enron Corporation 401(k) plan to make special IRA catch-up contributions of up to $3,000 per year for tax years 2007 through 2009. The regular IRA contribution limits don’t apply to these repayments. Taxpayers who make these special contributions aren’t allowed to make age 50 catch-up contributions.

Tip: The annual contribution limits don’t apply to rollover contributions.

Your ability to contribute in 2008 depends on your income and tax filing status

*These income ranges are indexed for inflation each year.

Tip: If you are married but did not live with your spouse at any time during the year and you file a separate return, you are considered single for Roth IRA contribution eligibility purposes.

Withdrawals are taxable under certain conditions A withdrawal from a Roth IRA (including both contributions and investment earnings) is completely tax free only if it is a qualified distribution (see Strengths, above).

If your withdrawal is a nonqualified distribution, the portion of your distribution that represents investment earnings will be subject to federal income tax, and may also be subject to a 10 percent premature distribution tax if you are under age 59½ (unless one of the exceptions applies). Only the portion of a nonqualified distribution that represents your contributions will not be taxed or penalized, since those dollars were taxed once already.

Caution: Long-term capital gains are generally subject to tax at rates that are lower than ordinary income tax rates. Additionally, under the Jobs and Growth Tax Relief Reconciliation Act of 2003, qualifying dividends paid to individual shareholders from domestic corporations (and qualified foreign corporations) are taxable at the lower long-term capital gains tax rates as well. Taxable distributions from IRAs that represent such long-term capital gains and dividends, however, will not enjoy this tax benefit–they are taxable at ordinary income tax rates.

Special penalty provisions may apply to withdrawals of Roth IRA funds that were converted from a traditional IRA If you roll over or convert funds from a traditional IRA to a Roth IRA, special rules apply. If you are under age 59½, any nonqualified withdrawal that you make from the Roth IRA within five years of the rollover or conversion may be subject to the 10 percent premature distribution tax (to the extent that the withdrawal consists of converted funds that were taxed at the time of conversion). The reason for this special rule is to ensure that taxpayers don’t convert funds from a traditional IRA solely to avoid the early distribution penalty. See Converting or Rolling Over Traditional IRAs to Roth IRAs for more information. See Premature Distribution Rule for exceptions to the 10 percent penalty tax.

Tip: The five-year holding period begins on January 1 of the tax year in which you convert the funds from the traditional IRA to the Roth IRA. When applying this special rule, a separate five-year holding period applies each time you convert funds from a traditional IRA to a Roth IRA.

Caution: This 5-year period may not be the same as the 5-year period used to determine whether your withdrawal is a qualified distribution.

Example(s): In 2005 you open your first Roth IRA account by converting a $10,000 traditional IRA to a Roth IRA. You include $10,000 in your taxable income for 2005. You make no further contributions. In 2008, at age 55, your Roth IRA is worth $12,000, and you withdraw $10,000. The distribution is not a qualified distribution because 5 years have not elapsed from the date you first established a Roth IRA. And because you are making a nonqualified withdrawal within 5 years of your conversion, the entire $10,000 is subject to a 10% premature distribution tax unless you qualify for an exception. This “recaptures” the early distribution tax you would have paid at the time of the conversion. You open a regular Roth IRA account in 2001 with a contribution of $100, and make no further contributions to the account. In 2005, at age 60, you convert a $100,000 traditional IRA to a Roth IRA. In 2008 you withdraw $50,000 from this Roth IRA. Because you are over age 59½ in 2008, and because more than 5 years have elapsed from January 1, 2001 (the year you first established any Roth IRA), your withdrawal is a qualified distribution and is totally free of federal income taxes. Even though your withdrawal was within 5 years of the conversion, no penalty tax applies.

States differ in their treatment of Roth IRAs Although most states follow the federal income tax treatment of Roth IRAs, some may not. You should check with your tax advisor regarding the tax treatment of Roth IRAs in your particular state. In addition, some states may provide Roth IRA funds with less creditor protection than they provide traditional IRA funds.

Tip: Federal law provides protection for up to $1,095,000 (as of 4/1/07) of your aggregate Roth and traditional IRA assets if you declare bankruptcy. (Amounts rolled over to your Roth IRA from an employer qualified plan or 403(b) plan, plus any earnings on the rollover, aren’t subject to this dollar cap and are fully protected.) The laws of your particular state may provide additional bankruptcy protection, and may provide protection from the claims of your creditors in cases outside of bankruptcy.

The law may change in the future Most of the advantages offered by the Roth IRA depend on the federal government’s promise that qualifying distributions from Roth IRAs will always be tax free. It is unlikely, but if the law changes, all bets are off. Remember that Social Security benefits were once not subject to federal income tax, but federal law was later changed to tax a percentage of such benefits in certain situations.

Income Tax Contributions to a Roth IRA are made with after-tax dollars Unlike deductible contributions to a traditional IRA, you do not have the option of deducting Roth IRA contributions and reducing your taxable income on your federal income tax return. You can contribute only after-tax dollars to a Roth IRA.

Qualified distributions are tax free A withdrawal from a Roth IRA (including both contributions and investment earnings) is completely tax free (and penalty free) at the federal level if made at least five years after you first establish any Roth IRA, and if one of the following also applies:

You have reached age 59½ by the time of the withdrawal The withdrawal is made due to qualifying disability The withdrawal is made to pay for first-time homebuyer expenses ($10,000 lifetime limit) The withdrawal is made by your beneficiary or estate after your death Tip: The five-year holding period begins on January 1 of the tax year in which you make your first contribution (regular or rollover) to any Roth IRA. Each taxpayer has only one five-year holding period for this purpose.

Even if a withdrawal does not qualify for tax-free treatment, only the portion representing earnings is taxable If you make a withdrawal from a Roth IRA that does not meet the above conditions, the portion of the withdrawal that represents investment earnings will be subject to federal income tax at ordinary income tax rates (even if the funds represent long-term capital gains or qualifying dividends), and may also be subject to a 10 percent premature distribution tax if you are under age 59½. However, the portion of the withdrawal that represents Roth IRA contributions will not be subject to federal income tax or penalty as those dollars were already taxed. Roth IRA withdrawals are treated as being made from contributions first and investment earnings last. All of your Roth IRAs are aggregated when determining the taxable portion of your nonqualified distribution.

Technical Note: Technically, a distribution from a Roth IRA that is not a qualified distribution, and is not rolled over to another Roth IRA, is included in your gross income to the extent that the distribution, when added to the amount of any prior distributions (qualified or nonqualified) from any of your Roth IRAs, and reduced by the amount of those prior distributions that were previously included in your gross income, exceed your contributions to all your Roth IRAs. For this purpose any amount distributed to you as a corrective distribution is treated as if it was never contributed. Caution: If you convert funds from a traditional IRA to a Roth IRA, special rules may apply if you subsequently withdraw funds from the Roth IRA. See Converting or Rolling Over Traditional IRAs to Roth IRAs.

Gift and Estate Tax When you die, the assets in your Roth IRA are considered when determining if estate tax is due Unless you name your spouse as beneficiary (unlimited marital deduction) or a charity as beneficiary (charitable deduction), the full value of your Roth IRA at the time of your death is included in your taxable estate to determine if federal estate tax is due. In addition, your state may impose a state death tax.

Q. If I have a large tax balance due next April because of my Roth IRA conversion, will I be able to avoid the underpayment penalties related to estimated taxes?

A. No. There is no exception to the underpayment penalty just because the balance due was caused by a Roth IRA conversion. There are other exceptions to the underpayment penalty that you might want to review that may allow you to dodge the penalty, but there is no “safe harbor” simply because the underpayment was caused by a Roth IRA conversion.

Qualified distributions are completely tax free A withdrawal from a Roth IRA (including both contributions and investment earnings) is completely tax free (and penalty free) if (1) made at least five years after you first establish any Roth IRA, and (2) one of the following also applies:

You have reached age 59½ by the time of the withdrawal The withdrawal is made due to qualifying disability The withdrawal is made for first-time homebuyer expenses ($10,000 lifetime limit) The withdrawal is made by your beneficiary or estate after your death Withdrawals that meet these conditions are referred to as qualified distributions. If the above conditions aren’t met, any portion of a withdrawal that represents investment earnings will be subject to federal income tax and may also be subject to a 10 percent premature distribution tax if you are under age 59½. See Questions & Answers.

Tip: The five-year holding period begins on January 1 of the tax year in which you make your first contribution (regular or rollover) to any Roth IRA. Each taxpayer has only one five-year holding period for this purpose. Tip: Because the 5-year holding period runs from the first day of the plan year in which you establish any Roth IRA you should establish one as soon as you can, even if you can afford only a minimal contribution. The earlier you satisfy the 5-year holding period, the sooner you may be able to receive tax-free qualified distributions from your Roth IRA.

Fewer restrictions on making withdrawals prior to retirement The ability to make tax-free withdrawals from a Roth IRA under certain conditions (”qualified distributions”) can be a compelling reason to use this type of IRA. Furthermore, even if you make a withdrawal that fails to meet those conditions (a “nonqualified” distribution), you may not be taxed on the full amount of the withdrawal. That’s because when you withdraw funds from your Roth IRA, distributions are treated as consisting of your contributions first and investment earnings last. Since amounts that represent your contributions have already been taxed, they are not taxed again or penalized (even if you are under age 59½) when you withdraw them from the Roth IRA. Only the portion of a nonqualified distribution that represents investment earnings will be taxed and possibly penalized.

Caution: If you convert funds from a traditional IRA to a Roth IRA, special penalty provisions may apply if you subsequently withdraw funds from the IRA within five years of the conversion (and prior to age 59½).

You can contribute to a Roth IRA after age 70½ Unlike traditional IRAs, you can contribute to a Roth IRA for every year that you have taxable compensation, including the year in which you reach age 70½ and every year thereafter.

Your funds can stay in a Roth IRA longer than in a traditional IRA The IRS requires you to take annual required minimum distributions from traditional IRAs beginning when you reach age 70½. These withdrawals are calculated to dispose of all of the money in the traditional IRA over a given period of time. Roth IRAs are not subject to the required minimum distribution rule. In fact, you are not required to take a single distribution from a Roth IRA during your life (although distributions are generally required after your death). This can be a significant advantage in terms of your estate planning.

You can contribute even if covered by an employer-sponsored retirement plan Unlike a traditional IRA where you make deductible contributions, your ability to contribute to a Roth IRA (or to make nondeductible contributions to a traditional IRA) does not depend on whether you or your spouse is covered by an employer-sponsored retirement plan. The fact that one of you is covered by such a plan has no bearing on your allowable contribution to a Roth IRA. However, remember that your ability to contribute to a Roth IRA does depend on your tax filing status and MAGI for the year.

Investment choices are broad and diverse Like a traditional IRA, you can establish a Roth IRA with a bank, mutual fund company, life insurance company, or stockbroker. You can even have multiple IRA accounts with more than one institution. Furthermore, you can choose from a wide range of specific investments to fund your Roth IRA. Intense competition for IRA dollars has led to a large number of IRA providers and investment choices.

Caution: The IRS has ruled that the wash sales rules apply if you sell stock or other securities outside of your IRA for a loss, and purchase substantially identical stock or securities in your IRA (traditional or Roth) within 30 days before or after the sale. The result is that you cannot take a deduction for your loss on the sale of the stock or securities. In addition, your basis in your IRA is not increased by the amount of the disallowed loss.

When you die, your beneficiaries may pay no income tax on proceeds As long as any Roth IRA you have established has been in existence for at least five years at the time of your death, your beneficiaries will not have to pay any federal income tax on post-death distributions from any Roth IRA you own. Even if you haven’t satisfied the five-year holding period at the time of your death, distributions to your beneficiary will still be tax free if he or she waits until the date you would have satisfied the five-year holding period before taking distributions from the Roth IRA. Tax-free distributions to your beneficiarycan make the Roth IRA a very valuable estate planning tool. However, bear in mind that the value of your Roth IRA will be included in your taxable estate to determine if federal estate tax is due.

Caution: The five-year holding period applies independently to Roth IRAs you hold as a beneficiary, and Roth IRAs you hold as your own. If your sole beneficiary is your surviving spouse, and your spouse treats your Roth IRA as his or her own when you die, then distributions from the Roth IRA will be tax-free only if your spouse satisfies the requirements for a qualified distribution (that is, your spouse satisfies the five-year holding period, and the distribution is made after your spouse attains age 59½, becomes disabled, dies, or incurs qualifying first-time homebuyer expenses). The five-year holding period–for both the inherited IRA and any other Roth IRAs your spouse may own–ends on the earlier of (a) the end of your five-year holding period, or (b) the end of the five-year holding period applicable to your spouse’s own Roth IRAs.

Contributions are discretionary Like a traditional IRA, you do not have to make a contribution to your Roth IRA for any year unless you choose to. Within the limits on the amount that you can contribute each year, you can exercise complete discretion in deciding how much and when to save.

A Roth IRA is relatively simple to maintain Like a traditional IRA with deductible contributions, a Roth IRA is relatively simple to maintain. There are no annual reporting requirements for Roth IRAs.

Traditional IRAs can be converted to Roth IRAs If you qualify, you can convert your traditional IRA funds to a Roth IRA. This may be advisable if you have determined that you will reap more benefits from the Roth IRA than the traditional IRA. In general, you qualify if you (a) don’t file your federal income tax as married filing separately, and (b) your modified adjusted gross income (whether you are single or married filing jointly) is $100,000 or less. (These restricitons are repealed for tax years after 2009.) However, you should carefully consider the income tax consequences and other issues associated with converting funds. See Converting or Rolling Over Traditional IRAs to Roth IRAs for a detailed discussion.

“Catch-up” contributions are allowed if you’re at least 50 Individuals age 50 and older may make an additional yearly “catch-up” contribution up to $1,000 to a traditional or Roth IRA (over and above the regular contribution limit). The purpose of this provision is to help older individuals increase their savings as they approach retirement.

You may qualify for a tax credit Certain low- and middle-income taxpayers can claim a partial, nonrefundable income tax credit for amounts contributed to a traditional or Roth IRA. The maximum annual contribution eligible for the credit is $2,000. The maximum credit is $1,000 (50 percent of $2,000) per taxpayer, but the actual amount of the credit (if any) depends on your MAGI. Only joint returns with an MAGI of $53,000 or less, head-of-household returns of $39,750 or less, and single (including married filing separately and qualifying widow/widower) returns of $26,500 or less are eligible for the credit (these income limits are adjusted for inflation). Here are the credit rates based on 2008 MAGI limits:

To claim the credit, you must be at least 18 years old and not a full-time student or a dependent on another taxpayer’s return. The credit is in addition to any income tax deduction you might qualify for with respect to your IRA contribution.

Caution: The amount of any contribution eligible for the credit may be reduced by any taxable distributions you (or your spouse if you file a joint return) receive from an IRA or employer-sponsored retirement plan (or any nontaxable distributions from a Roth IRA) during the same tax year, during the period for filing your tax return for that year (including extensions), or during the prior two years.

Q. I’m retired and drawing Social Security. Can I contribute part of my Social Security benefits to a Roth IRA account?

A. Nope — sorry. To make a Roth IRA contribution, you must have earned income. Earned income is generally income you receive from working — as compensation for your labor in one form or another. It’s reported to you on a W-2 form, or you report it on Schedule C (Business Income) or Schedule F (Farm Income) with your normal tax return. Earned income generally does not include Social Security benefits, pensions, interest, dividends, rental income, or capital gains.

Q. When I convert my regular IRA to a Roth IRA, do I have to pay the taxes all at once?

A. ‘Fraid so. You’re required to report the entire conversion income in the year of conversion. For conversions occurring in 1998, the income could have been spread out over several years… but that option is no longer available.

Q. If I convert my IRA to a Roth IRA, will that income increase my adjusted gross income for the current year?

A. Absolutely. The income you have to report for an IRA conversion to a Roth IRA will have an impact on any and all tax issues that are based on AGI — except for any Roth contribution and/or conversion issues. (In other words, if you meet the AGI limitation rules to convert or contribute to a Roth before taking the conversion income into consideration, this income won’t make you ineligible based on an increased AGI.) But, any tax provisions that use AGI as a guidepost will be affected — including medical expenses (7.5% AGI floor), miscellaneous deductions (2% AGI floor), taxability of Social Security (based on AGI), passive loss limitations (based on AGI), and many others.

In some cases, your AGI may be severely affected. This must be taken into consideration when you decide to make a Roth IRA conversion.

Establish a Roth IRA Where you choose to establish your Roth IRA and the specific investments you choose depends on your own personal needs and preferences. You have a wide variety of choices, and you should carefully consider the matter before making your decision. How fast your Roth IRA dollars grow is more a function of investment strategy and performance than of tax exemption. Consider whether you want to establish a Roth IRA with a:

Bank

Financial institution

Mutual fund company

Stockbroker

Life insurance company

You should also consider the types of investments (e.g., stocks, bonds, mutual funds, CDs, annuities) that will best suit your goals and risk tolerance, as well as the fees that are associated with opening and maintaining your Roth IRA. Finally, keep in mind that you can establish multiple IRA accounts with more than one institution.

Tip: Employers who maintain certain retirement plans (like 401(k), 403(b), or 457(b) plans) can allow employees to make their regular IRA contribution–traditional or Roth–to a special account set up under their retirement plan. These accounts, called “deemed IRAs,” function just like regular IRAs. Advantages include the fact that your retirement assets can be consolidated in one place, contributions can be made automatically through payroll deduction, you can take advantage of any special investment opportunities offered in your employer’s plan, and your protection from creditors may be greater than that available in a standalone IRA. The downside is that your investment choices in your employer’s plan may be very limited in comparison to the universe of investment options available to you in a separate IRA. Also, the distribution options available to you and your beneficiaries in a deemed IRA may be more limited than in a standalone IRA. Because of the administrative complexity involved, most employers have so far been reluctant to offer these arrangements. Check with your plan administrator to see if this is an option for you.

You have until the due date of your federal tax return for the year (usually April 15) to make a contribution for that year If you want to make a Roth IRA contribution for the year, you have until the due date of that year’s federal income tax return. For most people, this is April 15 of the following year. Your contribution deadline is not extended by any extension you may receive to file your return. So, if you obtain an automatic four-month extension, you may have additional time to file your tax return but you don’t have any additional time to make a Roth IRA contribution.

Tip: Beginning with the 2007 tax year, the Pension Protection Act of 2006 allows you to direct the IRS to deposit all or part of your federal income tax refund directly to an IRA (subject to the normal rules governing the amount, timing, and deductibility of IRA contributions.

Designate the IRA as a Roth IRA To be a Roth IRA, the IRA must be designated as a Roth IRA at the time you establish it.

Designate the year for which the contribution is made If you contribute to your Roth IRA after December 31, you should tell the Roth IRA trustee or custodian for which year the contribution is being made. For example, if you make a contribution in February 2008 for the 2007 tax year, you should clearly identify the contribution as being made for 2007. Otherwise, the trustee or custodian may assume that the contribution is for 2008 (the year in which it is received) and report it as such. Talk to your custodian or trustee about how you should identify your contribution.

Q. I want to contribute to my Roth IRA, but my custodian says that I can’t put annual contributions into an account that has been converted. Is this true? And, if so, what should I do?

A. There’s no legal reason for you to separate your contribution and conversion funds into separate accounts. Under the old Roth IRA rules, contributions and conversions had different five-tax-year start times depending on conversion and/or contribution dates. Because of these staggered start times, the IRS suggested that contributions and conversions be maintained in separate Roth IRA accounts. That suggestion was made to the various financial institutions, and the institutions passed that information on to their clients.

But, with the changes made to the Roth IRA rules by the Tax Reform Act of 1998, the need for these separate accounts has been negated. It is now acceptable to commingle your Roth IRA conversions and contributions. While there are still staggered start times for contributions vs. conversions, the rules surrounding those start times are much clearer. So, having conversions and contributions in the same account, while still tricky, aren’t impossible to deal with. So, if your broker still insists that you separate your conversion funds and contribution funds, make sure to tell him or her of the new law that removed the segregation restrictions. And, if that doesn’t work, consider finding a new broker.