made up to $150,000 and made a full Roth IRA contribution. If you were married and your modified adjusted gross income was over $160,000, no contribution would have been possible. For incomes falling between these numbers, a partial contribution determined by a formula could have been made.

Also note the income limits are now indexed; they will be higher in 2007 and beyond.

4. I have an existing traditional IRA and I want to roll it over to a Roth IRA. Is this possible?

It depends on four things: What year it is, how much money you make, your marital status and the type of income tax return you file. If you are talking about a tax year before 2010 and your adjusted gross income exceeds $100,000 or you are married and file a separate return, you can’t convert your traditional IRA to a Roth. Period.

After 2009, these limitations don't apply and you are good to go. Moreover, you can spread the income tax due on the rollover over tax years 2011 and 2012.

5. I am 55 and have had my Roth IRA for 3 years. I just went on disability and need to withdraw a good portion of it. Is the withdrawal taxable? And since I am not 59 1/2 do I have to pay the 10% penalty tax?

Your Roth IRA consists of two elements: your contributions and earnings. You can take out any amount up to your total contributions tax free.

In order for any earnings withdrawal to be tax free, the distribution has to be a “qualified distribution”. To be qualified, the distribution needs to be made after five taxable years starting with the first Roth contribution.

Then assuming this five year rule is satisfied, you can take out money tax free if you are over age 59 1/2, disabled, or to buy a first home for yourself, your spouse, children or grandchildren ($10,000 maximum). The rules go on to say if you die and your spouse elects to treat your Roth IRA as their own, any distributions would be qualified.

Distributions before age 59 1/2 are subject to a 10% premature penalty tax. However, this tax only applies if the distribution is includable in income. If you take out your contributions, these are not taxed.

In your case, you qualify for one of the exceptions: disability. So there is no 10% penalty tax.

These examples are based on my interpretation of the rules and should not be relied upon as tax advice. The complexities of distributions from any qualified plan or IRA underscore the necessity to consult with a qualified tax professional prior to making any withdrawal.

Robert D. Cavanaugh, CLU is a 36 year financial and estate planning veteran and author of the free newsletter, “The Estate Preservation Advisor”. To subscribe and get the free video, “How to Sell Your Life Insurance Policy for More Than the Cash Value”, go to theestatepreservationadvisor.com/freevideo.htm

Here are some more accountant articles...