Here's how the Roth IRA, sometimes referred to As a back-ended IRA, works. Starting in 1998, contributions of up to $2,000 a year (minus any contributions made to a regular IRA) are made with after-tax dollars. The Roth IRA owner can pull the contributions out at any time, free of tax. The account's earnings also are free of tax as long as they meet one of the following new withdrawal rules:

• The withdrawals are made at least five years after the money was contributed and the IRA owner is at least 59½ years old.
  
• The money has been in the account at least five years and is withdrawn to buy a first home (up to a $10,000 limit).
  
• The withdrawals are made due to the owner's death or disability.
  
•  Earnings withdrawn before age 59½ to pay for higher education will be taxed as ordinary income. However, they won't be subjected to the 10% early withdrawl penalty as long as the money has been in the acccount as least 5 years.

There are income restrictions to using Roth IRAs. If you are married and filing jointly, the maximum amount you can contribute begins to phase out at $150,000 ($95,000 as a single) and you can't contribute at all once you reach $160,000 ($110,000 single). On the other hand, unlike a regular IRA, you can contribute to a Roth IRA even if you work for an employer with a qualified retirement plan. Also, you're not required to start withdrawing funds at age 70½. You can shelter earnings in the IRA until your death, at which point the minimum distribution rules for regular IRAs would kick into effect for your heirs.

So does it make sense for you to open a Roth IRA or stick with a regular deductible IRA? Here are some factors to think about.

Your tax rate remains the same. Calculations by the Congressional Joint Committee on Taxation found that if your tax bracket is the same at the time of contribution and withdrawal, you'll end up with identical sums of money, after taxes, with either type of IRA. This assumes everything else is equal (earnings, time the money is in the account, etc.). The Roth IRA would have the added advantage of no required minimum withdrawals beginning at age 70½.

Tax rates differ between now and retirement. If you think you will be in a lower tax bracket when you retire, generally you're better off contributing to a deductible IRA because the deductions will be made at the higher rate. If you expect your tax rates to increase by the time you retire (either because your income rises or because Congress raises the tax rates), you'll be better off using the Roth IRA.

Higher income taxpayers. Roth IRAs may be more attractive to higher income taxpayers who expect to be making withdrawals at the same time they're receiving Social Security benefits. That's because taxpayers with high incomes during retirement often must pay taxes on their Social Security benefits. But tax-free withdrawals from a Roth IRA, unlike withdrawals from a regular IRA, won't count toward the Modified adjusted gross income" calculation used to determine whether Social Security benefits will be taxed.

Should you roll over your regular IRA into a Roth IRA? The new act allows you to pull funds out of a regular IRA and put them into a Roth IRA penalty free, even if you are younger than 59 % and as long as your adjusted gross income is less than $100,000. However, the withdrawals will face regular income tax, though you can spread the taxes on the withdrawal out over four years if you convert during 1998. Again, several important factors must be taken into account in order to make the best choice.

The factors cited earlier regarding the decision to open a Roth IRA and contribute taxable funds also apply to the decision whether to convert a regular IRA. However, there are added factors regarding the conversion. First is how will you pay the taxes? Will you need to use some of the money you withdraw from the IRA to pay the bill, or will you have other sources? Are those sources already invested in a capital asset, such as stock, or property producing income that would be taxed at ordinary income tax rates? In general, money drawn from a capital asset, and especially from an income-producing asset, to pay the taxes will make the conversion worthwhile. Using money from the IRA withdrawal makes it less appealing. Even with the ability to spread taxes out over a four-year period on the IRA withdrawal, you could find yourself in a higher income tax bracket.

However, before deciding, it's best to let a professional financial planner run the numbers to determine what is the best scenario for your particular situation.

October -30-1997