Last week, we dealt with readers who earn too much money to contribute to Roth IRAs, This week, we turn to a legal strategy for accomplishing the same goal: getting more assets into a Roth individual retirement account. Two weeks in a row. Doesn't seem like I have enough money to benefit from reading their website.

You can also convert a traditional IRA to a Roth, but there are some tricky restrictions to doing this, some of which involve tax rules scheduled to change up to and through 2010. I don't normally like to post an entire article from the WSJournal. But this particular question posed to their ENCORE section (which specifically deals with retirement and financial questions) might be of specific interest to some folks considering Roth conversions. Contribution Methods Sway Roth Withdrawal Rules May 31, 2008; WSJournal Encore section Q: We couldn't contribute to our Roth IRA this year because of the income limits. I noted that we could contribute to a nondeductible IRA and then later convert it to a Roth, assuming we are under the $100,000 income limit or wait until 2010. My question: Since we already have the Roth accounts open, am I right in assuming there is no five-year waiting period to make penalty-free withdrawals? Also, am I right in assuming that you can convert a nondeductible IRA into an existing Roth IRA? --B. from Virginia. The way the five-year waiting period works depends on the way you're putting money into a Roth individual retirement account. There's one set of rules for making penalty-free withdrawals if you are contributing to a Roth IRA, and another set for Roth IRA conversions. Roth IRAs are attractive because they have no withdrawal requirements for the account's owner, along with no tax on future earnings on their assets, unlike traditional IRAs. As you note, there are income limits for making Roth IRA contributions. For 2008, your income must fall below $101,000 for an individual or $159,000 for couples filing jointly. If your income exceeds those limits, though, you may still be able to make a partial contribution (described in Publication 590 at www.irs.gov1). There are no income limits for contributions to a nondeductible, traditional IRA, which you could convert to a Roth later. (One note: If you have pretax money in any IRA, you would owe some income tax on the conversion. Publication 590 explains how to do the math.) This year and next, you can convert a traditional IRA to a Roth if your modified adjusted gross income is no more than $100,000 a year, either for an individual or married couple filing jointly. Modified adjusted gross income is essentially all of your income except for that from any Roth IRA conversions and a few other exceptions. Publication 590 includes a work sheet explaining how to calculate this amount, along with more about what does and doesn't count toward modified adjusted gross income. Starting in 2010, there are no income limits for Roth conversions. And in 2010 only, you can spread the income and accompanying tax from a Roth conversion across 2011 and 2012. Once you've socked away money in a Roth IRA, either through a regular contribution or by converting other IRA assets, when can you take the money out without a penalty? You can withdraw your original contributions at any time with no penalty -- an advantage that a lot of people don't realize. But there is a five-year waiting period for withdrawals of any earnings. The five-year clock for earnings on regular contributions starts the year you open your first Roth IRA, and it doesn't reset each time you make a contribution. You also have to turn 59 years old to avoid a 10% penalty for early withdrawals on any earnings, along with income tax. There's a separate five-year clock for assets you convert to a Roth account from other retirement accounts, says Ed Slott, an IRA consultant in Rockville Centre, N.Y. You have to hold those specific assets in a Roth for five years or until you turn 59½, whichever comes first, to make penalty-free withdrawals. Why the separate five-year waiting period? The federal government wants to make sure Roth conversions aren't used as a penalty-free way to raid traditional IRAs early, Mr. Slott says.

It depends on whether her retirement portfolio includes enough non-tax deferred investments (money that isn't in a traditional IRA or 401k) to pay of the principal. If so, it's probaby a reasonable thing t do. But if her regular savings fall more than a little short of 100K, that means she'll have to withdraw enough from the non-Roth 401k or IRA to pay off not only the mortgage balance, but also the income tax owing on the withdrawal., thereby depleting her principal by a lot more than 100K. Even worse, if the withdrawal is sizable, it would no doubt put her into a higher tax bracket for the year the withdrawal is made, So she'll wind up paying a lot more income taxes than she would otherwise, even further depleting her principal. Not good. I'd say wait untill the mortgage balance is low enough that she can comfortably pay it from her regular savings.

It is absolutely appalling the number of Americans who have little saved for their retirement. It's as if they naively believe that they'll live off Social Security and/or the appreciated value of their home. It scares me when I read the various studies published in the financial columns. It's something we've always stressed to our kids. Whenever they received money for birthdays or holidays we always told them we'd match it dollar for dollar if they'd put it in the bank. How interesting to watch what each decided - the eldest usually spent it quickly, the middle son saved most of it and DD usually gave it to me to put into her savings account. Back when banks offered decent interest they invested their savings into CD's. As they got older we opened Investment accounts for them and as soon as they started getting paychecks we opened Roth IRA's. They are all in their 30's now and have accumulated some nice sums. Fortunately 2 of them have employers who will also match a percentage of their deposits into 401K's. DD works in the arts and knows she'll probably never have an 401K at work so she concentrates on funding the maximum into her Roth IRA every year. She has a low threshold for risk so she has about 40% in the Vanguard Fund and lets her financial advisor invests the rest in various stocks and other markets. DH has always told the kids that when they get paid they should pay themselves first. Which means they should always set aside a % of their pay for their savings.