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Roth IRAs have a flip side

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Roth IRAs have become a hot retirement saving tool for many people this year. The basic idea of a Roth IRA is to pay tax on money you earn now, invest the money and receive all principal and earnings tax free when you retire. Most other retirement plans (such as regular IRAs, 401 plans and Keoghs) save tax now, but all principal and earnings are taxed when the money is withdrawn at retirement.

As an accountant, I would advise people to be cautious in choosing Roth IRAs over other retirement arrangements. Paying tax now in anticipation of a future tax break is a risky proposition. A case in point is the $125,000 one-time exclusion that used to be available for home sales for individuals 55 and over. The new 1997 law replaced this rule with a more favorable $500,000 exclusion on all home sales. Any taxpayers that paid tax on a home sale gain to "save" their one-time exclusion ended up paying more tax than they could have.Future events that could affect the attractiveness of a Roth IRA include:

-A complete overhaul of the tax code in which Roth IRAs are treated the same as other retirement plans.

-Future government budget crises in which Roth IRA earnings are taxed to some degree.

-Future revisions to the tax treatment of other retirement plans in which some or all of the earnings are tax-free.

Then again, if the rules stay the same, Roth IRAs will be a great retirement tool for many.

Jim Law

Pleasant Grove