ElGuapo

Hi, apologies in advance if this is off topic. I'm a former Mormon (aka Latter-day Saint or LDS), did the whole two-year mission thing, etc. If you're not familiar with the structure of the LDS church, they have a lay ministry of unpaid local leaders. But the hierarchy includes roughly 100 "general authorities" who serve full-time and do not have other occupations. These are unsalaried positions, but they do receive a living allowance, apparently to cover things like food, clothing, housing, travel, etc. I'm not privy to the amounts or how exactly this is done. My question is why call it a living expense instead of a salary? Is there some tax benefit to doing this? Maybe it just sounds better to the membership? Any insight or suggestions will be appreciated. Guap

I'm with you there. Hope I didn't imply that. Right, hence my comment to trader that "this isn't exactly a forum for complex trading strategies." My only point in posting was that the responses to trader's idea here ranged from confusion about terms at best to accusations about get-rich-quick schemes. Until John's latest, no one had addressed the idea itself (beyond a knee-jerk response to option trading in general), and trader's strategy is relevant to this board in its purpose of moving money from trad IRA to Roth. No. You're thinking of a straddle in general. He's talking about two deep-in-the-money positions. Done in a single account, this would be absolutely senseless because it's a zero-sum game (gain $1 on put = lose $1 on call). He's doing it not for profit but solely in hopes that the Roth will gain what the traditional loses. Anyway, the bottom line I think we can agree on here: this is an expensive trading strategy. Separate accounts means separate commissions and spreads, plus time value is ticking away with no real potential gains to offset it.

Well I for one thought it was an interesting idea. If the response so far has been a bit hostile, trader, it's only because there's some history on this board of touting "schemes," and this isn't exactly a forum for complex trading strategies. Also, I don't think your idea has anything to do with the wash sale rule (though I understand you thought it did) so this should really be a separate thread--your idea is about avoiding tax on a Roth conversion. I'll be honest, John, I don't see how your multiple problems are relevant to trader's proposal. He's talking about two long positions, not unlimited risk. My Fidelity accounts consider these a "level 2" (out of 5) option trade, certainly allowed in retirement accounts. And yes, you have to qualify for that trading level, but it appears that trader has. Now would the idea actually work? It certainly could on paper. But what I think trader's wondering--and what I wonder too--is would he run afoul of any PT or other rules? Something along the lines of a risk-free trade? There's also a real question, as John alluded to, about whether it would be cost-effective over time. You're basically agreeing to pay some hefty commissions with little potential for profit, all in the hopes of avoiding tax on converting the traditional IRA to Roth.

Sorry, no words of wisdom on income limitations for REITs, MLPs, and ??? I'll get you started here at least. There are no clear rules about what assets work best in what account types. If you have an investment that throws off taxable interest or dividends, that'd be a good reason to put it in a traditional or Roth. But also your highest risk/highest expected return stuff is best put in a tax shelter. Any lower-risk stuff that doesn't generate taxable gains and is being held long-term probably makes the most sense in a taxable account.

Thanks for the link, very interesting reading. Not to mince words, but I guess the point is it's not a "wash sale" (which just delays the recognition of the loss) but actually a disallowed loss because it may be construed as an indirect sale to a related party. Hence the comment that "the result can be worse than if the wash sale rule applied." Brings up a whole new set of questions, though, that this article didn't get into. Specifically, is it even safe then to buy replacement shares in the IRA after 31 days? I would hope so, given that IRA contributions must be cash. I mean, what if I owned shares with an unrecognized loss and I simply needed that money to make my annual contribution but didn't want to change investments?

I would not open an E*TRADE account to buy an index fund. You can't beat the cost structure of going directly to a Vanguard or Fidelity if that's all you plan to invest in. Then again, maybe you have bigger plans for stock investing in the future? And seriously, I wouldn't bat an eye at Vanguard's $10/year maintenance fee. If it gives you some incentive to get your balance higher, great, but on a $4,000 Roth contribution this would be a quarter of a percent--the market may have moved that much in the time it takes you to read this reply. After another year's contribution you'd be above the minimum. Hope this helps, ty

I don't see how the wash sale rules would apply. Kinda feels like you're getting away with something here though, huh? But the IRA is really a different animal from a taxable investment in your name. You couldn't adjust the cost basis for the IRA shares because that term has no meaning within an IRA. I'm no CPA, though, so just speculating while we wait for a more authoritative reply.

Yes, that's the one. Well, you can, but then you've "commingled it" and it loses its rollover (R/O) status, which frankly would not likely matter to you. In fact, you might ask the Vanguard rep about converting this small account right into your Roth so it's all in one place. That's a taxable event though so make sure you understand what it does to your taxes before you do it. Best, ty

I don't think Katherine was questioning whether the bene designation on the Roth accounts would be challenged. The question is how the remaining probate assets would be distributed. Would sylvee's share of other assets be proportionately reduced because she got the Roths? That's the question to ask an estate attorney. Of course John's solution is really the best--make sure the parents have a valid will!

Just a tangent here, lrc, feel free to ignore. I don't think it's drift in this case. I think it's a gimmick, as you well said, John. There are funds out there that try to eliminate downside risk while offering "market-like" returns in the good years. They do it by investing in short-term discount notes that will mature at the original NAV, then they roll the dice with the discount amount. One clue is that this fund seems to only allow purchases on a certain date each year, presumably the day they're buying the notes. From my limited experience with these things, I understood that they use leveraged instruments like futures or index options to augment the good years. This fund doesn't seem to do that, so who knows what they were trying to accomplish? The returns would always look more or less like a conservative bond fund (with outrageous expenses).

I think you mistook two V's for a W there, Demosthenes. Very much like the other fund, VVPAX is a two-star "Conservative Allocation" fund with a 5.75% front end sales charge and ongoing annual expenses of 1.67%. It looks, lrc, like the advisor had you pegged as a very conservative type of investor. Assuming that is (or was) indeed the case, they probably did as well for you as any commissioned salesperson could have. At least these funds were diversified (not individual stocks), with allocations across stocks and bonds. Still, the expenses are hard to justify. Far better to spend a little time as Demosthenes suggests and educate yourself about your options, then choose broadly diversified no-load funds that match your risk tolerance. Keep reading old threads on this site and you'll find a ton of good info on getting started down the right road.

Yup, just be sure to designate it as a prior-year contribution so the custodian gets it right.

This is less of an answer and more of an add-on question, but I wonder if it wouldn't be better to pay the penalty based on the first rule of distributing over the life expectancy from the year of death?

he just wants you to transfer it over traditional-to-traditional and then you can immediately convert it to roth from there. the alternative would be to convert it to roth with met life and then transfer the account roth-to-roth. the way he suggested is probably the more logical of the two.

Your first priority would be to put enough into the 401(k) to get the full employer match. From there you may have all kinds of different financial priorities--putting aside an emergency fund, saving for a down payment, wedding, college, paying off credit cards, or any number of other things. That said, your best option for saving money after that 401(k) will be a Roth IRA, and the IRS only allows you to put $4,000 a year into it. (Your spouse can do another $4,000 a year if you're married.) So if there's room for it in your budget to start building up your Roth, the sooner the better.

Right. I've heard of people using this 60-day rollover provision as a way to borrow their IRA money and then put it back with the same custodian. Not a direct violation of the rule but certainly not what it was intended for. Anyone know if the IRS has taken a stand about this? I can't imagine them looking favorably on it if it's clear there was no intention of moving the money to another custodian.

Custodians will always send a 1099-R for IRA and Roth IRA withdrawals. That by itself doesn't mean it's taxable. Are you using tax-preparation software, or is someone helping you?

You sure can. You have until your tax filing deadline (Apr 15) to make what they call a "prior-year contribution" for 2004. The best thing to do would be to get that money and this year's "current-year contribution" in right away--the sooner it starts growing tax-free the better. This is assuming, of course, that you are eligible to contribute for both years.

That's funny about the advisor. It's a really common misunderstanding. I bet if I polled the team of brokers I used to work with half of them would say there's a penalty for withdrawing Roth contributions. My guess is this wasn't really an "advisor" at all, but a salesperson for certain products. Hope you switched to a direct no-load type of investment--as you can see there's often not much to be gained by working with a face-to-face contact anyway.

And for what it's worth I think you'd do well to forget about the maintenance fee and not let it bother you. I think Vanguard takes it out quarterly $2.50 at a time. And after a few years of adding to the fund you'll no longer be paying it. In the meantime maybe stick to one fund instead of three so you only have one annual maintenance fee--but then Vanguard probably already explained that to you. Congratulations on opening the account.

Can you say more about what you're trying to accomplish with the conversion? You mention taking the money out and paying the penalty, which is a very different thing from converting to Roth--which will cost you money out of pocket, in taxes at least. If you were hoping to convert to Roth and then withdraw as a means of avoiding the 10% penalty, that doesn't work. (The IRS thought of it too.) They put a 5-year limit on Roth conversions before they can be withdrawn without penalty.

You may also find these old threads helpful. Options Trading in IRA Inidividual Stocks/Stock Options from ROTH IRA account

angie, the good news is you're clearly on the right track. if you're deciding between these two funds at Vanguard and Fidelity, you've already weeded out the 99% of stuff out there that's inappropriate for you right now. if you do continue studying mutual funds and saving more money to invest, within a few years you'll develop your own preferences and start branching out from these all-in-one types of funds. i probably own 15 or so funds right now that i've carefully chosen to complement each other, but the first mutual fund i ever owned? Fidelity Freedom 2030! bottom line, you can't go wrong with either of these. Vanguard's expenses will always be lower because of their passive management approach (known as indexing); Fidelity's will be as low as you'll find in the actively managed arena, and both are very well respected.

One question right off the bat. Vanguard is a very different entity from Ameritrade and SiebertNet. Vanguard is a mutual fund company, not a discount brokerage. Are you considering doing some actual stock trading? Most people don't do this, they just use mutual funds. Can you say briefly what you've heard that you like about these custodians?

I don't think any such assumption exists in making this statement. Take a look at this previous thread where I offered (hopefully) a clearer explanation of the same topic. Anyway, the point is a good one that taxes should be paid from nonretirement money.