Roth IRAs

First of all, there's the Roth IRA. Contributions to a Roth IRA aren't tax-deductible, but principal and earnings are never again subject to tax if certain rules are met. Married couples qualify for a Roth IRA if joint income is $150,000 or less ($95,000 or less for singles). If you've been unable to make a deductible IRA contribution because your income was too high, a Roth IRA could be the vehicle you've been waiting for.

Conversion to a Roth

If might make sense for you to convert your existing IRA to a Roth IRA. A conversion lets you enjoy the long-term benefits of a Roth IRA. To be eligible for a penalty-free conversion, your adjusted gross income must be $100,000 or less (married or single), and you must pay regular income tax on the amount transferred from your existing IRA.

Other IRA Rules

Whether or not you qualify for a Roth, today's tax laws make the traditional IRA worth reconsidering.

If you are not covered by an employer's plan, a traditional IRA contribution is deductible no matter how much you earn. Your nonworking spouse may also make a fully deductible contribution of up to $2,000.

If you are single and covered by a pension plan at work, your deductible IRA starts to phase out when your income for 2000 reaches $32,000, becoming fully nondeductible at $42,000.

If you are married and covered by an employer plan, the 2000 phase-out range for tax-deductible IRA contributions is $52,000 to $62,000 of income.

One spouse's company coverage doesn’t make the other spouse ineligible for a deductible IRA until joint income reaches the phase-out range of $150,000 to $160,000.

You may avoid penalties (but not necessarily income tax) on premature withdrawals from your regular or Roth IRAs if you use the withdrawals for certain purposes -- for example, to pay qualified higher education expenses or to buy a first-time home.