Editor's Note: Tracy Byrnes will be answering questions throughout the tax season to help guide you through your return. Please send her an email to ask a tax-related question. She will pick a few each week to answer for all of our readers.


I left my previous employer in November 2004. At that time, I rolled my company-sponsored401(k) to an IRA at my new place of employment. Can I now convert the IRA to the Roth 401(k)? --D.B.

Tracy Byrnes: A Roth 401(k) plan can accept rollovers only from another Roth 401(k) plan, says Richard O' Donnell, tax analyst at RIA, a provider of tax information and software to tax professionals. So you can't convert your IRA to a Roth 401(k).

A distribution from a Roth 401(k) plan can be rolled over into another Roth 401(k) plan or a Roth IRA, says O'Donnell. But you can't go from regular IRA to a Roth 401(k).

But I still love these new Roth 401(k)s -- especially for folks with higher incomes. As a refresher, it's a new retirement-savings vehicle that combines the features of the traditional 401(k) with those of the Roth IRA.

Contributions to the Roth 401(k) are made with after-tax dollars and the account grows tax-free -- just like a regular Roth. The big difference here: There are no income limitations for Roth 401(k)s like there are with regular Roths. So you can make as much money as you want and still contribute to it. (Remember, you can no longer contribute to a Roth IRA once your married filing joint income hits $160,000.)

Even better, the contribution limits follow the 401(k) rules. That means you can contribute up to $15,000 for 2006, or $20,000 for those 50 or older by the end of the year. The Roth IRA contributions are limited to $4,000 a year, or $5,000 for those 50 or older in 2006.

Just be aware that the $15,000 limit applies to both your regular 401(k) and your Roth 401(k) -- so you have to decide how you're going to divvy up the money.

My wife is a stay-at-home mum. But we are both foster parents and provide for children underthe state shelter program for children. Payments are made to us to cover expenses for the keep of the children. No tax is due on this money and my wife shows no earnings on our joint annual tax return. I earn around $60,000 per annum. Does my wife qualify to contribute into a Roth IRA? -- A. M.

As long as you file a joint tax return, you'll work off your combined income. In that instance, your wife doesn't need any earnings to make a contribution.

The tax rules say that you, the wage earner, can make a Roth IRA contribution for yourself and your stay-at-home spouse can also make one, despite her lack of income, says RIA's O' Donnell.

Thus she can contribute up to $4,000 a year, or $5,000 if she's 50 or older in 2006.

So go for it. And thanks for taking care of those kids!

I currently have a SEP-IRA. What are the advantages and disadvantages of a SEP-IRA vs. asolo 401(k)? Also, can I have more than just one type of these? -- G. K.

We did a story on this stuff in the past, but here's the gist of it.

If you're self-employed and work alone or with a few employees, a SEP-IRA, or SimplifiedEmployee Pension, could work. You can contribute up to 20% of your net earnings to a maximum of$42,000. So that could mean a potential $42,000 deduction on your business tax return, if you hadthe money.

There are no real administrative responsibilities here, but you'll get hit with a 10% penaltyif you try to withdraw the money before age 59 and a half.

A solo 401(k) plan resembles corporate America's 401(k), except you can contribute moremoney. Your total contribution to a solo 401(k), aka self-employed 401(k), can't exceed $44,000for 2005 ($49,000 for people age 50 and over). That's a big difference from the corporate folks,whose max for 2006 is $15,000 ($20,000 for the 50-and-up crowd).

There are no setup or annual maintenance fees for a solo 401(k), but once your plan's assetsexceed $100,000, you'll have to file a Form 5500, Annual Return/Report of Employee Benefit Plan,with the IRS. And just like any other 401(k), you can't withdraw the money before reaching 59 1/2 without a penalty.

If you're just getting your company off the ground, an IRA may be a good place to start. And you can always roll an IRA into a solo 401(k) down the road when your business starts to boom.

Tracy Byrnes is an award-winning writer specializing in tax and accounting issues. As a freelancer, she has written columns for wsj.com and the New York Post and her work has appeared in SmartMoney and on CBS MarketWatch. Prior to freelancing, she spent four years as a senior writer for TheStreet.com. Before that, she was an accountant with Ernst & Young. She has a B.A. in English and economics from Lehigh University and an M.B.A. in accounting from Rutgers University. Byrnes appreciates your feedback; click here to send her an email.

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