By Ann Coleman (TMF AnnC)
February 18, 2000

Nothing is inevitable except death and taxes, right? Wrong. Well, partly wrong, anyway.

There was a time when the tax code had far more loopholes in it than it does today, and you heard much talk about corporate tax shelters. Most of those loopholes (but certainly not all) have been closed, but the Roth IRA is a tax "loophole" for average taxpayers that really does let you get around the inevitability of at least some taxes.

In fact, the Roth IRA gives taxpayers who qualify a far more generous tax shelter than most corporations ever got. Tax-free savings -- not tax-deferred, but tax-free. OK, you know that. You might even have a Roth, and if so, congratulations, you're excused from class today. But while the Roth IRA has been very popular, there are still too many folks who don't have one, but should.

Roths are not appropriate for everyone. For one thing, high income folks don't qualify. Singles with adjusted gross incomes (AGI) over $110,000 and married couples with AGIs over $160,000 are ineligible for the Roth's benefits, but presumably they will manage to scrape by using other retirement plans. And some people may have accumulated so much cash in their retirement accounts that current contributions are not as critical for them. (Just one of the advantages of starting to save early is that you can skip your contributions in middle age when you need to be putting kids through college or caring for an elderly parent or changing careers, etc., if you get a good start early on and if your contributions earn a reasonable rate of return.)

But the majority of us need to be saving for retirement and most of us qualify for the Roth. So... have you made your Roth IRA contribution yet? In fact, have you made two Roth contributions yet? It's not too late to make your contribution for 1999, which means that right now is that unique time of year when you can actually double the cash that goes into Uncle Sam's grand giveaway.

Here's how it works. You can make an IRA (Roth or traditional) contribution for 1999 up until April 17, 2000, and, of course, you can make your contribution for 2000 any time between January 1, 2000, and April 16, 2001. (The extra days are because April 15 falls on the weekend this year and next. Enjoy the brief reprieve.) Right now we are in the overlap period so if you didn't contribute last year, you can make both contributions right now.

The key words are RIGHT NOW. Get off your duff and get every spare penny you have into a Roth IRA account, NOW. Not next year. Otherwise you will pay taxes that you could have avoided. Who wants to do that?

If you qualify for a Roth and haven't contributed yet, and if you have money sitting in a brokerage account or (shudder) a savings account, money market, etc., that you won't need for the next five years, let me strongly, strongly urge you to shelter that cash from future taxes. And in so doing you will be taking a major step toward providing for your future. (Or even for your children's future. One of the often overlooked advantages of a Roth account is that it is free from income taxes even when part of an estate, so any cash in a Roth will pass to your heirs without that final income tax bite, which can be a big one.)

Another advantage of the Roth is that after five years you can withdraw your contributions -- not the gains, they have to wait for retirement -- but if you need the cash you originally contributed, you can take it out without penalty. How much better can it get?

OK, I've convinced you, right? Here's exactly what you do.

1. First, call your broker (or find a discount broker) and ask them to send you the forms you need to set up a Roth IRA. Ask for transfer forms also if you are transferring assets from a brokerage account or mutual fund. Don't dither about which broker, you can switch later. The important thing is to get one.
2. Now, while those forms are in the mail, hop over to our new Retirement Area and read all about Roth IRAs. If you have a small traditional IRA, you might even want to consider converting it to a Roth (conversion of large traditional IRAs are rarely worthwhile but we have the tools to help you decide if it might work for you).
3. This is the important step. Fill out all the forms and send them in. Don't make me write all this stuff again next year.

Fool on and prosper!