Say you put in $2,000 a year in a Roth for five years. You have bought stock, doubled your money and your account is worth $20,000 ($10,000 in contributions, $10,000 in profit). In the sixth year, what can you withdraw without penalty? -- Ted Black

Ted,

Thanks for this question -- it's always good to recap the Roth IRA rules.

To start, you can withdraw your contributions, tax- and penalty-free, at any time. Your earnings, on the other hand, may be subject to ordinary income tax and penalties if they are in the Roth for less than five years or you are under age 59 1/2.

But the fabulous part about the Roth is that the year the account is established is when you start counting your five years, says Maggie Doedtman, a senior tax research and training specialist at

H&R Block

in Kansas City, Mo. If you made your first contribution for 1999 on April 15, 2000, you can start your five-year count from Jan. 1, 1999.

If the account is five years old and you're younger than 59 1/2 and you withdraw earnings, you'll owe ordinary income tax and the 10% early withdrawal penalty on that money unless you're withdrawing for higher-education costs. If that's the case, you skirt the penalty but still owe the tax on any earnings. But if you withdraw for a first-time home purchase, disability or death, you avoid both the penalty and the tax.

If the account is open for five years and you're at least 59 1/2, then everything is yours, tax- and penalty-free.

If you are over 59 1/2 and haven't had the account for five years, then you will only owe tax on your earnings. You will not owe the 10% penalty.

Returning to the Vacation Home

In your article Throw Another Shrimp on the Barbie -- It's Deductible! about "taking a vacation from your vacation home," you state that to qualify for deducting expenses, you must stay in the home for more than two weeks or 10% of the rental period, whichever is greater. Are you sure that you didn't mean less than two weeks or 10%? If I don't use it at all in a given year, I can still deduct the expenses against the rental income. Your statement gave me the impression that unless I personally used it more than a minimum amount of time, I could not deduct the expenses. -- Keith Woods

Keith,

You were not the only one to ask this question, so I thought it was worth revisiting.

For tax purposes, there's a distinction between renting out a vacation home and having an actual rental property. The difference: You must spend time in your vacation home. You can't spend time in a rental property.

To qualify as a vacation home for tax purposes, your home must meet the following residence test.

The test says that your vacation home is considered a residence during a tax year if your personal use exceeds 14 days or 10% of the days the property is rented to others at a fair rental. Check out

Section 280A(d)(1) for more details.

If you meet that test and rent your vacation home, you can deduct rent-related expenses up to the amount of your rental income. That means you cannot claim a loss on the rental. (See this previous

column for more details.)

But if you do not spend that specified amount of time in your vacation home, it's considered a rental property for tax purposes, says Bob Trinz, editor at

RIA

, an information provider to tax professionals.

As rental property, the rules become much more onerous. Even if you actively participated in managing your rental property, it's considered a "passive activity" for tax purposes as long as it's rented for at least seven days a year and you personally don't use it more than 14 days a year.

If you generate a loss from a passive activity, you can offset that loss only against passive-activity income. You can't offset passive losses against your compensation, capital gains, interest or dividends. If you don't have any passive income, you can carry those losses forward until you do have some. You also can deduct your losses when you sell off your interest in the activity.

For more on the passive loss rules, check out this previous

Tax Forum.

Rehashing the Revocable Trust

To say that there are no estate tax savings from establishing a trust is not true. For a couple with significant assets, setting up a revocable trust with a bypass trust and a marital trust can save significant estate tax while still allowing the surviving spouse income from the bypass trust and principal for specified reasons. This applies to many people. If federal estate tax were eliminated, then the revocable trusts would not provide any tax savings, of course. -- Martha Bjorkman

Martha,

I agree with you that both

bypass and marital trusts provide estate tax benefits. But I must reiterate my original point: Revocable trusts do not.

"It's not the revocable trust that saves the estate tax," reminds Laura Peebles, director of estates, gifts and trusts at

Deloitte & Touche

in Washington. "It's what you put in the trust that does."

A revocable trust is a lot like your will -- a big umbrella. The main difference between the trust and your will is that the trust allows you more control over your assets and helps you to avoid pesky probate fees at your death.

But you can put any provisions you want in a revocable trust. So set up a bypass trust or a marital trust or whatever suits your estate tax needs.

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TSC Tax Forum aims to provide general tax information. It cannot and does not attempt to provide individual tax advice. All readers are urged to consult with an accountant as needed about their individual circumstances.