As part of the passage of the Taxpayer Relief Act of 1997, Congress established a new type of individual retirement account, the Roth IRA. The traditional IRA has long been a popular way for an individual to save for retirement by contributing up to $2,000 of compensation per year to the IRA and deducting that amount from income. The contributions are taxed upon later distribution. The primary differences between a Roth IRA and the traditional IRA are that contributions to a Roth IRA are not deducted from income, but qualified distributions from a Roth IRA are not taxed as income. Unlike the case with a traditional IRA, contributions to a Roth IRA can be made after the owner has reached age 70 1/2. As is true with a traditional IRA, the assets of a Roth IRA grow tax free while they are held in the trust.

A recent IRS advisory, known as an "interim guidance," has placed a limit on a maneuver that had provided taxpayers with flexibility in regard to converting a traditional IRA into a Roth IRA. Such a conversion, known as a rollover contribution to the Roth IRA, results in the tax liability that must normally be faced upon a distribution from a traditional IRA. The IRS, however, has allowed taxpayers to "unconvert" to the traditional IRA in order to lessen the tax impact where the value of the fund declined after the initial conversion to a Roth IRA.

For instance, if the fund were worth $100,000 at the time of conversion to the Roth IRA, the tax would be paid on that amount. If the fund decreased in value to $80,000 following the conversion, however, the unconversion to a traditional IRA would erase the tax liability on the $100,000, and such liability would be on the lesser value, $80,000, upon a subsequent reconversion to a Roth IRA. No limit was placed on the number of unconversions/reconversions.

Under the new guideline, however, a taxpayer will be allowed only one unconversion/reconversion to a Roth IRA in 1999. If the taxpayer's initial conversion to a Roth IRA occurred in 1999, he will still be allowed an unconversion/reconversion this year. The problem is that, with only one more opportunity for an unconversion/reconversion, it becomes difficult for the taxpayer to know when such action would be most beneficial. The luxury of unlimited unconversions/reconversions thus becomes a guessing game.