Early in 1999 I opened a Roth acount with a broker in the amount $1100. Funds were invested in mututal funds. Later that same year I forwarded funds in the amount of $900 to the same broker, to meet my allowable $2000 limit. After the funds were received and deposited in a money market, but before any equity purchase, I realized (too late) that the broker had a $1000 minimum for any equity investment. Now I was stuck with $900 in a low earnings money market. I called the broker asking what to do and they advised me to write a letter explaining and asking for the funds back. I did and they returned the funds. I subsequently opened a Roth count in the amount of $900 at a different broker with lower investment minimums. Just recently I received a 1099 on the $900 at the first broker, showing a distribution. My concern is not a tax issue, as the earnings were only $1.13, but how will the IRS view all these deposits?

Are my total Roth contributions for 1998 $2000 or $2900 (higher than allowed)? How does the IRS view contributions and withdrawls from the same aco**** in the same tax year?

Thanks for your advice.

dan

You don't have a problem. The 5498 will notify the IRS about what happened. IF not you'll write them a letter.

Put the $901.13 on line 15a with $1.13 on line 15b. You owe 10% additional tax on the $1.13.



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Barry Picker, CPA/PFS, CFP
New York, NY

This situation is a good example of why a direct custodian to custodian transfer can be desireable. If you had gone to a low min broker and requested a transfer form, you could have moved the $900 and interest to the new account without touching the funds and without the nuiscance tax/accounting issues. Go direct transfer when ever possible.

Second point: Investing in equities with $900? This is going to be difficult. You can only own 9 shares of microsoft or maybe 6 shares of Cisco. How do you get any diversification? Even with a discount broker, you commission costs are going to be high relative to the annual expense % of many mutual funds. Your time and effort will be higher for researching individual stocks.... although building up your investment knowledge is for many folks a positive value.

Since there are about as many mutual funds as there are stocks, you certainly have lots of choices if you initially go that route.