November 10, 1997

Q. I am 32 and married. I will earn $35,600 this year and $38,000 in 1998. I have an IRA with Harbor Funds, of which $2,700 is in Value, $500 in Capital Appreciation, and $500 in International II. I also have a $3,000 IRA account invested in Vanguard Index Growth. Finally, because I have no access to a retirement plan at work, I have a variable annuity at Scudder, with $2,000 in Growth and Income, $1,000 in International, and $1,000 in Global Discovery. Next year I want to start a Roth IRA, and am considering rolling over the current IRAs into Roth accounts as well. I can also make a $2,000 contribution to the variable annuity accounts next year, and still have $5,000 left to invest elsewhere. Please evaluate the diversity of my portfolio and my plans for the Roth IRA.

P.W., Ellsworth, Maine

A. I have no argument with your fund selection. At some point I would add a small-cap offering to the mix, but at age 32 you have a lot of time working for you.

The question about rolling the entire portfolio into Roth IRAs next year is tougher. This means, of course, that you'll face a tax bill on the entire $6,700 rollover.

(However, a provision that will be effective only for tax year 1998 allows people rolling a traditional IRA into a Roth IRA to pay the tax over a four-year period.)

In addition, if you put your 1998 IRA contributions into a Roth IRA, you will sacrifice the tax deduction, although what you'll get in return is considerable -- tax-free withdrawals in your retirement years, the ability to continue making contributions after age 70 1/2, and no schedule of mandatory withdrawals after 70 1/2.

Is the tradeoff worth it? Let me answer with a couple of questions.

Do you believe that in retirement you'll be in a higher tax bracket than you now are? Do you believe that tax rates in general will be significantly higher some 30-odd years from now?

If the answers are yes, you probably would do well to roll over the current IRAs into Roth IRAs and to use Roths for your future IRA savings.