I'd like to set up an IRA. (I don't currently have one.)  Do my
financial circumstances permit me to set up a Roth IRA, or do I have
to set up a regular one?

I understand that the income limit for setting up a Roth is somewhere
in the neighborhood of $160K/year. Our situation is sort of like this,
with some rounding: our collective gross income for the 2003 tax year
was less than this cap (about $150K).  For 2004, the sum of our base
salaries is expected to be somewhere around $150K, but if you add in
bonuses, the total gross income is expected to be above the $160K
limit.   Can we set up a Roth IRA now, based on last year's tax data,
even though we expect that this year's income will exceed the limit?

Assuming I expect our gross income to be a monotonically increasing
function in future years, is it even a good idea to set up a Roth and
contribute one year's maximum to it, knowing that in future years I'd
probably have to contribute to a regular IRA instead?

Dear baugher:

First, in order to make a 2003 Roth IRA contribution using your 2003
tax data, you must make your contribution by April 15, 2004. 
Otherwise, you have forever lost the opportunity to do so.

Second, Roth eligibility is determined by your "modified adjusted
gross income," not your gross income as you might think of it.  You
can find your adjusted gross income on your Form 1040.  IRS
Publication 590 will assist you in modifying it if necessary to
determine your eligibility.

Third, if you are eligible, your spouse is also most likely eligible
to make a Roth IRA contribution, even if he or she does not work.  See
IRS Publication 590 for details.

So, assuming you contribute $3000 now (make sure you don't over
contribute if your modified adjusted gross income is between $150,000
and $160,000), you can calculate the future value of your Roth IRA by
multiplying it by one plus the expected rate of return and raising it
to the nth power, where n is the number of years you will leave the
account unaffected by withdrawals.

An example:

"Let's say you're 30 and your friends have asked you to join them on a
two-week trek in Tibet that will set you back $3,000. Yes, that trip
sounds amazing, but let's understand the impact of forking over the
$3,000. If it had instead been invested in a solid low-cost mutual
fund such as the Vanguard Total Market Index fund within your ROTH
IRA, and your investment earns the long-term average return of about
10 percent a year, you're looking at having $84,300 by the time you
hit 65."

http://biz.yahoo.com/pfg/e04retire/art031.html "Are You Flushing $1
million Down the Toilet?"  By Suze Orman, Yahoo Finance

The formula applied to this example looks like this: $3000 (1+0.10)^35 = $84,307.31

If both you and your spouse made $3000 contributions, even if only one
time, you could conceivably have somewhere in the neighborhood of
$168,000 tax-free at retirement if you have 35 years before you need
it.  You can apply the formula I gave you to calculate the amount that
you might expect for your particular circumstances.   There are many
other advantages to Roth IRAs as well.  Please consult IRS Publication
590 for details.

Sincerely,

Wonko

Source Information:


"To contribute to a Roth IRA, you must have compensation (e.g., wages,
salary, tips, professional fees, bonuses). Your modified adjusted
gross income must be less than:
$160,000 ? Married Filing Jointly"

"Modified adjusted gross income - For most taxpayers, modified
adjusted gross income will be their adjusted gross income (AGI) as
figured on their federal income tax return."
http://www.irs.gov/individuals/page/0,,id%3D14158,00.html "Education Tax Credit"

"In general, if your only IRA is a Roth IRA, the maximum 2003
contribution limit is the lesser of your taxable compensation or
$3,000 ($3,500 for those age 50 or over). The maximum contribution
limit phases out if your modified adjusted gross income is within
these limits:
$150,000-$160,000 ? Married Filing Jointly" 

"Contributions to Spousal Roth IRA:
You can make contributions to a Roth IRA for your spouse provided you
meet the income requirements.

When to Make Contributions?
Contributions to a Roth IRA can be made at any time during the year or
by the due date of your return for that year (not including
extensions).

For complete information and definitions of terms, get Publication
590, ?Individual Retirement Arrangements.? "

http://www.irs.gov/newsroom/article/0,,id=106947,00.html "Roth IRA
Contributions Tax Tip 2004-25, February 6, 2004

http://www.irs.gov/pub/irs-pdf/p590.pdf "Publication 590, Individual
Retirement Arrangements (PDF 449K)"