JAMES PATRICK

You do not have to report a Roth contribution on your tax return.

What I do not understand is why anyone would want to contribute to an Ed IRA. You would lose Hope credit if used, contributions to other types of accounts (529,Roth) are much more advantageous.

When can an individual withdraw from a 401K and not be subject to the 10% penalty. A woman was terminated from her job last year and took all the funds to live on. She was 55 last year. How are the 401K rules different from the IRA rules or are they basically the same? Any suggestions on where to find this info on the web so I can read up on them. Thanks for any help.

MARY ANN, YOU ARE ABSOLUTELY RIGHT. They would only be required to pay taxes on any earnings that were withdrawn, taxes as you point out should have been paid on at least 50% of the conversion money by now (if the 4 year spread was selected) with the next installment due on 4/16/2001 and final one on 4/15/2002. THANKS FOR THE GOOD CATCH.

The GOOD news is they can take the money without the dreaded 10% penalty. The BAD news is that if the conversion money is not in the Roth account for 5 years they have to pay regular taxes on the conversion and any earnings from the Roth.

SUSAN, I have no idea what a Target Benefit plan is, much less a frozen one. However, the settlement of the NASDAQ litigation could be considered as a return of an overcharge when you bought or sold shares in various companies listed on the exchange. This would have increased your gain on stocks sold at a profit and decreased losses on stocks sold at a loss. If you still own any oy these stocks you could consider it as a partial refund of the purchase price. Hope that helps somewhat!

You are right on the 10% penalty being waived for 1st time home buyer. The point I was trying to make is that it does nothing for you to put money in a Roth and take it out 3 or 4 months later to buy a house. Assuming you have the money sitting in a savings account now it would be the same if you left it there as it would by putting it in a Roth. You would pay taxes on the earnings and would be no better off. As for the Traditional IRA there is no time you can withdraw the earnings tax free as with a Qualified withdrawal from a Roth, that is one of the benefits of a Roth which makes it such a GREAT DEAL.

Doing what you suggest for 3 or 4 months makes NO sense. Any earnings on the Roth will be taxable and subject to 10% penalty, although it would not amount to more than a few dollars. If your plan was for 5 or 6 years than it would be a GREAT IDEA.

I have received checks for IRA and taxable accounts. For the IRA I spoke to the FC at Merrill and they have a special code to deposit it back into the account without becoming a contribution for 2000 or 2001. Technically if you can identify the trade(s) you should amend your taxes.It can get complicated if you happened to have a loss that year(s) and the money doesn't make your Shedule D positive. However, for $25 and the other small checks that I have received it will go on line 21 Other Income --- litigation.

To contribute to a Roth IRA you MUST have taxable compensation. What you may have read somewhere is that you can contribute to a Roth after you are 70.5 years which you cannot do for a traditional IRA. But that individual would also have to have taxable compensation.

From your post I assume both you and your wife participated in 401 plans during 2000. Accordingly, neither one of you would be eligible to contribute to a deductible IRA for 2000. You both could contribute $2,000 to a Roth IRA, provided your modified AGI is less than $150,000. If your modified AGI is $160,000 or over, you could only contribute to a traditional IRA, $2,000 each.

Doug, As I said earlier, if you are currently saving money from your earnings, dividends, etc. contributing to a Roth is an easy decision. If you leave the account alone for 5 years you will NEVER pay taxes on it. If you need the money in an emergency you only pay taxes on the earnings which would put you in the same situation you are in now. What quantative?

Under new rules for contributions after 12/31/99 you must determine the net income (loss) attributable to a contribution on the actual earnings and losses of the IRA during the time it held the contribution. The formula that is suggested by a major tax prep company: Net Income(loss) = contribution w/d * (adj closing balance- adj opening balance) / adj opening balance. you can choose by $ amount not by specific assets acquired by those dollars. These calculations should be known by the Brokerage but may not. I understand that the particulars are in Notice 2000-39, although I must admit ignorance on how to obtain this info. Perhaps BARRY PICKER or MARY KAY FOSS would know as they appear to very knowledgeable about these matters.

Will you eligible to contribute to a Roth in the near future? Do you and your spouse have pension plans? Does either one of you have non-deductible IRA's at present?Depending on your answers it may be best (least paperwork) to close out everything or to recharacterize.

Provided that you and your wife's AGI is less than $150,000 you can each contribute $2,000 to your own account. You have until the due date of your 2000 return, no extensions, which is April 16?,2001. The $2,000 limit is for ALL IRA's not just Roth.

Roth accounts require a 5 year period before all earnings can be withwdarn tax free. So I believe you and your wife should set one up for each of you right now. If you retire before 65, and before taking pension and social security,you could convert your IRA's to a Roth and depending on other income have it taxed at possibly 15% rather than at higher rates when pension and social security get thrown into the mix. By each contributing $2000 each before you retire you will be funding an account that will be basically tax free for your lifetimes. If you are saving anything right now you are paying taxes on it (savings accounts,dividends,etc) which you wouldn't if it was in a Roth.

For the year 2000 contribution you can recharacterize to a traditional IRA, or you can have her withdraw the $2000 contribution plus earnings on it before 12/31. She would include the earnings in her income and probably pay the 10% penalty on the earnings. Why are you leaving the 1999 excess contributions in there?

You mention that you have other losses in you Roth from prior years, do you have ONE account or different accounts? If all of this is in one account I don't believe you can "pick and choose" what to withdraw as you seem to indicate you would like to. When did you realize you could not contribute to a 1999 Roth?

If the conversion was made in 1998, your client still has to report $7500 for year 2000 and $7500 for year 2001. There is no present way to take losses in a Roth as you have described this situation. I have heard that some changes are being considered to change that but I have my doubts. Your earnings in a Roth under the scenario that you don't withdraw until after 59 1/2 and 5 years in the Roth would never be taxable, so why would the IRS be willing to split your losses while not taxing your gains?

First I think you may have a problem with the conversion if it was not made in 1998. Only conversions made in 1998 were eligible for the 4 year spread of the income. Conversions since then must have all income reported in the tax year that the conversion was deemed to have been made in. Recharacterizations for 1998 conversions expired on Dec 31,1999; for 1999 they expired on Oct 16,2000 and for 2000 conversions, the last day to recharacterize is Oct 15,2001. PUB 590 has details

The information you were given is correct. Let's say he converted $4000 in 1998. He must report $1,000 on his return for 1998 , 1999, 2000 and 2001. If he withdraws $500 this year he must report the $1,000 that he would have reported plus he must report the $500 for a total of $1,500 for year 2000. Of course that means he only reports $500 in 2001.

Mary Ann, I personally would recommend against an education IRA because of the loss of Hope, Lifetime Learning,etc. In New York we have a State Plan that allows tax deduction on income taxes of $5,000 for a single and $10,000 for a MFJ which is invested by TIIA-CREF for a minimal fee. I know some other states have similar plans which are far superior to ED IRA's.

Paul is correct, 1st time homeowner is an exception to the 10% penalty rule.

Thanks Barry, I thought it I was losing it, actually the good catch was yours, in comparing last year's Pub to this year and realizing how they made the error.

If her Father was born before 1936 she may be able to do a 10 year averaging on the lump sum distribution.