ElGuapo

Generally speaking, I like the idea of rolling over to IRA and then converting to Roth for someone your age. You'd do the rollover to traditional IRA first with the custodian of your choice (not a taxable event), then you'd have the new custodian convert it to Roth. The fair market value of the conversion gets treated as taxable income for the year in which it was converted, so your marginal tax rate would apply. Things I'd be considering: *tax bracket What stage are you at in your career? If your marginal tax bracket is still 15%, it's a no brainer (IMHO) to convert at least enough to bring your AGI up to the limit of that tax bracket. I don't know what the number is off the top of my head, but someone here will know. *cost Are you getting a good deal with the current 401(k) or could you do better at a large no-load mutual fund company? This may require a little digging to find out how expensive the investment choices are with your old 401(k). Was it a large corporation or small? What kind of balance is left there? *investment knowledge Are you comfortable going it alone with a fund company? Most 401(k)s have limited choices, but that also means damage control. My guess is if you were smart enough to come to this site and ask you could work with a fund company to get some appropriate funds in place. *maximizing contributions Are you also fully funding a Roth IRA annually? If you are (a) contributing enough to your current 401(k) to get the full employer match and (b) also putting the max annual contribution into a Roth, then you could look at converting as a way to get even more money put away for retirement. In other words, think of the taxes you pay on conversion as a contribution toward your retirement fund that you wouldn't have been allowed to make otherwise. *access to funds Once your converted assets have been in the Roth 5 years you'll be allowed to withdraw that amount tax and penalty free--not that you'd want to, but it's nice to know you can. There are probably more considerations, but I have to get back to the Shaq-Kobe showdown.

I'll let John respond as to exactly what he meant, but he's basically right, the growth rate really doesn't come into the equation. Whatever the growth turns out to be, whether it doubles, triples, whatever, paying taxes before or later is the same (all else being equal). It's a fundamental property of multiplication which I probably knew the name of at some point. That is, take 1 x 0.75 (paying tax before) and you get 0.75 to invest. If it doubles you have 1.50 which you take out tax free (Roth). Take 1 (pay no tax until withdrawal), let it double to 2, then x 0.75 at withdrawal (traditional IRA), you're left with 1.50.

The deadline for converting is the end of the year, which is why so many people convert and then later recharacterize (like you did) if circumstances change.

Hilarious! Nothing wrong with wanting personalized help, but in the investment world you have to be cautious for two reasons: first, it's going to cost more, and second, the rep may not know much themselves beyond the products they sell. A quick look at Primerica's website was enlightening. The whole focus seemed to be on getting people to sign up as salespeople, almost like a Mary Kay thing. This quote from their website is priceless: "People from all types of work backgrounds are in high demand." In my humble opinion, offering sound investment advice might be easier for someone with an investment background. Probably a good idea. Forced savings is a great thing, and a 401(k) is usually the next best thing to a Roth for long-term money. The short answer is yes, mutual funds are stocks. At least, mutual funds are by far the most common (and most appropriate) way for regular people to invest in the stock market. A "mutual" fund is just a way of pooling your money with other people's and giving it to a manager to pick stocks for you. It gives you economy, diversification, and professional management. Not to confuse things, but there are also bond mutual funds and even money market mutual funds. All of these are available for your Roth IRA. (John G recommended an index mutual fund, and that is a great place to start if you can force yourself to leave it alone through the market ups and down.) Thanks! There are a lot of very competent people on this board, so stop by often. I'm a CERTIFIED FINANCIAL PLANNER, which is a good credential to look for if you're thinking about hiring someone to help you. Even then, the CFP doesn't by itself mean you're getting sound financial advice, but it at least tells you you're working with someone who's committed to the industry and not likely to start selling makeup accessories next year. The best thing you can do is what you've already started, and that is educating yourself. Oh, and how's the teaching going?

wow, great description of your situation. you've given us a lot to go on. The key difference between your husband's Roth with Primerica and yours, which you would probably start with Fidelity or Vanguard, is that you won't have a pushy financial lady, just an 800 number to call when you need help. That can be good and bad, but I think it's mostly good. Some people really like to have a face to associate with their account, and sometimes an in-person rep is really good at holding your hand through thick and thin. Then again, many are narrowly focused sales people without any real understanding of the broader financial picture, and talking with them can do more harm than good. Lots of people wonder if a Roth IRA is "a good investment," when in actuality it's not an investment at all, it's just an account type that gets special tax treatment, regardless of what you invest in inside the Roth. Once you settle on Fidelity or Vanguard, you will indeed have to choose one of their mutual funds to invest your contributions in, and they will help you with that when you call them. Without a company match, there are only two reasons I would consider the company 401(k): (1) if you and your husband are each putting $3,000 into Roths each January and still have long-term money left over to invest, or (2) if you know yourself well enough to say that forced savings through payroll deduction is the only way you will ever really save. You need two things: an emergency fund and money for the down payment. I'd recommend keeping this separate from your checking account money, and tell yourself that emergency money really is for emergencies, not impulse buying or vacations. A money market fund, like the ING Direct account you mention, is a good place for this, but Fidelity and Vanguard both offer money market funds as well, so you might as well do it all in one place. (This will be a separate account from the Roth, however.) Suze Orman's book will probably help, as long as you don't let her convince you that all of your financial problems would be solved if you just divorced your worthless husband. Another favorite that is surprisingly good is Eric Tyson's Personal Finance for Dummies. Best of luck, and let us know what you decide to do.

where to start . . . first, the trickiest thing to understand when you're opening a Roth IRA is that the term Roth IRA describes an account type/registration, not an actual investment. when you read about Roths earning 8-10% a year, that's no different than any other mutual fund earning 8-10% a year, people just did it in an account registered as a Roth IRA. In other words, you first choose what investment company you'd like to open a Roth with, and then you choose what investment to fund the Roth with. Now if we're talking about a bank, there's probably one choice--a CD-type investment that maintains stable principle but has low yields. But now that you know there are better choices out there, I'd stay away from the bank scene. You need to contact a no-load mutual fund company and open the Roth account with them.

just an aside, you know what's interesting is when e*trade or fidelity or other discount brokers offer big promotions for transfering an account, they often exclude ira assets from the offer. i can't say for sure what the logic is, because i believe John G is right about these being coveted assets, but maybe the thinking is that everybody has big money in a rollover ira, but only the truly high net worth people have $50,000 in a taxable account as well.

The underlying reasons are margin limitations and risk exposure beyond the account's value. If you were allowed to sell naked calls, you could lose more money than you have in the account, and more than you could replace through annual contributions. You're right, though, that the determination of what is allowed is not consistently made by B/Ds, so for instance you might have one that disallows selling puts altogether while another allows cash-covered puts. This is a good indication of how conservative a firm you are dealing with. As to your first question about suitability, if your circumstances and experience are such that options trading is appropriate for you, then I guess an IRA is as good a place as any to do it. Most of the sensible things you might use options for (hedging, income, insurance), the IRA will allow. If, on the other hand, you just walked out of a seminar and are ready to get rich no matter which way the market goes, I'd suggest you have your fun paper trading and put your real money in a nice mutual fund.

Did the Roth come from annual contributions or was it converted from a traditional IRA? You can pull out the total amount you've contributed (not converted) without tax or penalty. Should you? Probably not. My reason for saying so is part math but more human. From a tax and retirement planning standpoint, you always want to shelter as much money as you can from tax, so this is certainly a step backward in that regard. But my real concern is the precedent you're setting for yourself, and whether it will really solve the problem. Would you be willing to share more about your situation? For instance, what are the amounts in the Roth and the total debt? What do you attribute the current situation to? Is it credit card debt? A car loan? Anything else about your situation that you think might be relevant, or alternatives you have considered? For instance, it sounds like you're familiar with mutual funds, does this mean you have other investments outside of the Roth? That depends, do you have checks? I'm teasing, I doubt your financial institution would allow checkwriting unless you were over age 59 1/2.

What to do . . . basically it works like this--nobody likes to sell a stock that's down because at some level it's an affirmation that you screwed up. This is true even in a taxable account where there's a tax incentive to sell. In your Roth, the gain or loss you have in each stock has no significance whatsoever, so the best thing you could do is ignore it. This is probably hard advice to take, but I think you should forget everything about what you paid for each stock--because there is no rule out there that says because a stock has once traded at $19 a share it will soon (or ever) get back to that level. (I should point out here that I don't follow Amgen, Home Depot, Micron, or Sun personally, so don't take this as a vote for or against any of them.) What I am suggesting is that you do your best to look forward and ask yourself Would I buy this stock today? If not, and if the transaction costs are low enough, it's time to dump that stock in favor of a broad-based mutual fund. Write it off to education expense, just like the rest of us did. As for your last question about what fund to buy, who is your Roth account set up with? Most discount brokerages have a vast number of funds available. Be sure to pick a no-load fund that covers the broad market--names like "Index," "Growth and Income," or an asset allocation fund are probably what you'd start with.

Same context, I just wondered if it might help gmandmj to shed a little more light on what they mean by "cashed out." Obviously, if this money was transfered to an inherited IRA we have a very different scenario. Unlikely, I realize, based on the original post, but I'm sure you've found people don't always use the same terms you and I would use to describe a transaction. I guess I was just hoping that these "financial planners" weren't as misguided as it seems they were, but maybe I'm giving them too much credit. Did these people have any credentials?

Are they maybe using the term "IRA" loosely and actually referring to a BDA (beneficiary distribution account)?

Regular annual contributions (not conversions from a traditional IRA) can always be withdrawn tax- and penalty-free. If your distribution meets the rules for a qualified first-time home purchase, you could even take out the earnings and pay only the tax (no penalty), but obviously that would be a last resort. For detailed rules on the subject see Publication 590, beginning on page 59.

Right, the trust may be irrevocable, but these assets are not yet in the trust. IRA owner may change bene unless for some reason he/she also made an irrevocable beneficiary election.

To make a Roth contribution, the individual whose name is on the account must qualify, regardless of whether the dollars used came directly from their income or from a gift. Only a spouse can meet eligibility based on your earned income. You could certainly make a gift to family members with the expectation that they will use the money to fund a Roth, provided they have enough earned income and are otherwise eligible to contribute. Any chance you and I are related?

Sorry, no, the $3,000 is a combined limit between Roths and traditionals, so you've already hit the limit--at least for yourself. If you have a spouse that's a different story.

First, sounds like you're trying to decide mathematically which is better, Roth or traditional. Unfortunately, if it were that simple everyone would do the same thing. Turns out that if your tax bracket remains the same and you had $2,000 of taxable income to invest, mathematically they're identical. You could put the whole $2,000 in a traditional, owe no tax, say your investment multiplies 10x to $20,000, then you pay 25% on withdrawal, what are you left with? ($15,000) Now look at the Roth. You've got $2,000, but you have to pay 25% tax on it, so you pay now and put the remaining $1,500 in the account, it grows 10x to $15,000, then you withdraw tax free--what are you left with? ($15,000) So basically, I'd forget all the math stuff because it won't help you make this decision. Instead focus on things like Do you need the deduction now? Do you expect your tax situation to change? Are you trying to maximize your contributions? How important is it to you to have penalty-free access to your contribution amounts? Your accountant or IRA custodian can help you talk through those decisions and make the right choice. As for the last part of the question, that's called a conversion, not a rollover, and it won't get you any "extra" tax savings, because you'll pay tax on the amount you convert, so it's essentially the same decision you're making with the new money--pay now or pay later. Hope this helps.

Sounds like a great strategy for future years, if your situation is likely to be the same. But no, there is no grace period for treating withdrawals (or conversions--I'll explain) as being done in a prior year. In other words, you would have needed to take that money out by December 31. Going forward, the question I would ask is Do you need the money now for income? If not, and assuming your income level doesn't disqualify you, a better plan might be to convert these distributions to a Roth instead. That way you've forever settled the tax bill on that money, probably at no real cost to you, and it still has the opportunity to grow and help you down the road. Just ask your IRA custodian for a Roth conversion request form, and this time do it before year end!

yes, if you're good at it. But remember the flipside is also true--I can't tell you how many clients a year or two ago were calling me wanting to recognize losses in their Roths. Remember, no capital gains also means no capital losses. If you're sorta undecided between Roth and traditional IRAs, and if you were serious about doing some truly speculative investing, you might even consider opening a traditional, see what happens for a year or two, and then if you did lose money you could convert it to a Roth later at the lower value. Then again, speculating about what direction your account may go in the near term seems like a silly thing to base the traditional/Roth decision on. And yes, in answer to your last question, if you open a brokerage Roth account with someone like Fidelity or Schwab you should be able to invest in all those things, though I hope you see the wisdom in keeping the majority of your money in well-allocated mutual funds and just play around with what you can afford to lose.

Oh yeah, good point about the credit. So it's possible this contribution will reduce the total tax bill for the year, if AGI is below $25,000 for single or $50,000 for joint. That credit really hasn't gotten the attention it deserves, probably because the big investment firms aren't targeting these people as clients. Aninnag, if you think you might qualify, you can read more about it on irs.gov, Form 8880.

Someone correct me if I'm wrong, but I believe the answer to your question here is "Neither." Your tax preparation software will ask you about Roth contributions because it wants to keep track from year to year, but I don't believe it's reported anywhere on the 1040, and it certainly doesn't affect the actual tax bill. As to the "some separate form" question, you will get a Form 5498 from the custodian that shows your contribution and the year for which it was done, but I don't know that the IRS even receives a copy of this form. (Do they, anyone?) Either way, this is just something for your own records and not something you would have needed to attach to your 1040.

I'm surprised John G hasn't jumped in here yet. Vanguard is a great place to open an IRA and they will allow you to start with $1,000 in most of their funds. Of course you could only choose one fund, so make sure it's a broad-based choice like the 500 Index Fund, or an asset allocation fund which is even more diversified. Several other mutual fund companies will let you start small if you sign up for monthly deposits (see TIAA-CREF.org or Fidelity.com, for instance), so you do have some options.

I don't know if you can link to it directly, but you can use Fidelity's calculator by going to fidelity.com, click "Planning & Retirement," choose "Planning Center" from the yellow submenu, look toward the bottom of the page for a link to "Calculators, Planners, and Worksheets," choose "Retirement" next, and (finally!) you'll see a link to "Minimum Required Distribution Calculator (MRD)." As to the rest of your question, the fact that he's been taking distributions in previous years doesn't help or hurt, except that the money he's already taken out this year will count toward his first RMD. (I'm assuming from your question that he's turning 70 1/2 in 2004.) The calculator will take care of the rest. Good luck!

Of course the client can eventually get out of the SEPP w/o penalty, just have to keep it up till they are 59 1/2 AND have done SEPP for five years.

Thanks for the comments, everyone. Mary C's description of consumer driven plans is exactly what Definity does, except for this year (the implementation year) they gave us an extra $500 of PCA--so it's $1,500 PCA then $500 out of pocket and then traditional insurance (90/10 I think). Our total bill was only about $1,900, so my responsibility is only $400 if PCA dollars are used first. Make sense? So, yes, there are still ten months to figure out how to use the money, but that seems stupid since we've already had a qualifying expense and don't want to go buy a new pair of glasses and a year's supply of aspirin. And doesn't that defeat the purpose of a consumer driven plan? That's interesting to hear mikeak's company has a different arrangement with Definity (flex dollars first). Definity's rep actually mentioned that they have another employer group with that arrangement. I would think they should all work that way, otherwise out-of-pocket expenses become much too hard to predict. I bet at year end we have a lot of people who've gotten in the habit of doing flex spending upset to find they wasted their money.