John G

I've been gone for a few years....due to typical life distractions. My posts aim towards investment questions, trying to simplify some issues for common layperson situations, and suggesting some of the minefields to avoid. To all the general readers of this message board. If you have a IRA, Roth or any other account with designated beneficiaries you should get into the practice one a year to confirm that your wishes are recorded for first and second choice beneficiaries. It takes maybe 3 minutes online to check. Do it at year end, when you start your taxes, of on your birthday. Do it every year because as accounting system software gets changed, financial firms merge, and accounts get moved the custodial designation can get lost in the shuffle. Even more important, as years pass, family structures change. Tip: You might be able to build in a "toggle" to each account which may allow a surviving spouse to make a decision on death how assets should pass. For example: spouse if primary beneficiary and three children are equal secondary beneficiaries. Upon your death, wife has the option to accept all or part of the assets. Any assets not claimed would be distributed to the children. Example: Wife started a Roth long ago, invested wisely, and now has a million dollar account. Husband is the primary, three children are equal secondary beneficiaries. Upon her death, the husband as primary beneficiary accepts $400,000 but declines to take the 600K. Those funds now pass to three children as 200K each. This might be used as an inheritance planning tool. Remember - check those beneficiary designations !

We have layperson readers of this message board. Let me try to clarify some points. IF you do a direct custodian movement of funds, such as IRA to IRA, or Roth to Roth, and you never touch the funds, you have no restrictions. Example 1: Custodian for account A can send money to B and C. Example 2: Custodian A can send funds to B, and separately Custodian C can send funds to D. These are the most common type of movement of funds from one custodial IRA/Roth to another, the one per year does not apply. If you don't touch the funds, then the one and done restriction does not apply. IF you have the funds sent to you. Then you have a 60 day window to redeposit funds into the same IRA or a different IRA of the same class. IF you are moving from IRA to Roth, then you fall under the conversion rules. This is not a rollover or distribution but a conversion. This somewhat oversimplifies the rules, but probably covers 90% of the common transactions.

To simplify the answer: Don't use an IRA or Roth for the 60 day loan. If you fail to complete the transaction or even the custodian fails to get it done, you lose your tax advantage. In a modern era of HELOCs, signature lines and credit cards, there are lots of short term sources of funds. Add to that borrowing from a parent or relative. There are certain financial distress exceptions for IRAs, but the simplest concept is don't borrow from your IRA or Roth. Don't get cute with a 60 day loan.

Its Tax Season (I was born on tax day!) and I think it helpful to open up a new topic about KIDS and investing while lots of folks are thinking about funding their own IRAs. Any child or grandchild can have a Roth IRA if they have earned income - from working at McDonalds, a newspaper route, baby sitting, lawn mowing, snow shoveling, being a model in photos, etc. Note, interest, allowances, inheritances, etc. are not considered "earned income". If you are a small business owner, you could employ your kids to sweep up the store, hand out flyers, do filing, etc. and their income could be counted. Contributions do not have to come from the child! Any parent, grandparent, uncle or family friend can donate funds for the child's account. Can a minor have an IRA - sure. Some potential custodians do not want to deal with people younger than 18, but many like Charles Schwab will open an account for a minor. You don't need mega bucks to start. Some minimums for a single lump are around $1,000. But many custodians will open an account for less if there is a monthly stream of deposits. You can accumulate cash in a Roth until you have enough to buy shares of a mutual fund or ETF. Pick a few options and let the minor make the decision! WHY DO THIS? 1. Start your child on an investment education. Saving for the future. Tax issues. Investing in a better tomorrow by owning stocks of growing companies. What is a mutual fund? What the are benefits of ETFs! (ask that one of the average adult) The mathematics of compound growth - doubling assets and the rule of 72. Etc. Give a minor a huge leg up on their contemporaries. What they will learn in the first few years will exceed what some 30 somethings are only now starting to learn by reading Kiplinger of Money magazine. 2. The value of a tax shelter works best if it is started early. 3. You set an example for them. Talk about money matters. Its not just about a retirement nest egg. It is also about financial comfort and freedom. 4. You might stat them out at a specific level but then offer them a match. I now have 8 notches in my Colt. I started my kids when they were teenagers. I then did matches with nieces who were just exiting college. Now I am working on other family members. Its pretty cool when a tuba player and a theater major in their 20s can actually talk about diversification and the differences between stocks and CDs. If you have done this...perhaps you can add a couple of paragraphs about how you did it and the childs response.

Does it make sense to open a Roth IRA for kids?

If I understand your problem correctly... Your recharacterizing a Roth to an IRA had to do with eligibility. Essentially, you never had a Roth after this is done. To convert to a Roth this year, you need to meet the current year eligibility requirements. You never want to pay the cost of conversion out of your IRA. If you must do this, then perhaps you should not be making the conversion. Instead, pay the conversion taxes out of your taxable bank or brokerage account. You don't have to play the taxes at the time of conversion, but you may need to make estimated tax payments to cover the annual federal tax bill (and state income tax bill if any).

Taking a 60 day loan from your IRA or Roth is generally not a good idea. First, you disrupt your investments. Most of your funds should be invested. Second, you lose two months worth of tax sheltered growth/income. Third, you may stumble in getting the funds re-deposited, you forget, funds don't come to you on schedule, another "problem" comes up, custodian does not post the deposit in time, etc. And Fourth reason - there are so many alternative ways to get access to funds for just 60 days. A signature line of credit, getting a vendor to accept delayed payment (such as a roofing contractor), using a home equity loan, margin borrowing, etc.

If the custodian made the transfer, but did not designate the new account as a Roth, I think there is a narrow window of opportunity for the custodian to correct the problem. While an after the fact fix might not be legal, I have seen "errors" get corrected way into the next year. I do note that the person who requested the conversion had a responsibility to track the completion. While they do not have the primary responsibility, the account holder has some level of negligence. Can the person make the conversion in 2015? If yes, than they may only be damaged to the extent their tax rate has increased. I would ask the custodian to cover this cost as part of "errors and ommissions". Most custodians have a low level of mistakes. You don't mention who the custodian was in this example. You may want to consider a direct custodian to custodian transfer of your account after the problem is addressed.

The ideal situation is to fund your IRA/Roth at the beginning of the calendar year. If folks have the funds available, you would want to contribute to your Roth or IRA on Jan 1, 2014 for the 2014 tax year. Why? Because you money is sheltered for the full tax year. So for example, tax payers with enough cash on hand should consider contributing for both 2014 and 2015 now! If you can't make this a habit, perhaps you should try the next best thing, setting up an automatic deposit system for each month or calendar quarter. I advise people to stuff their Roths and IRAs to the max when ever you can, up to the statutory limit. In a major emergency, you can always pull out contributions later in the year. What you can't do is fund your retirement accounts after April 15. And, its too late to fund a retirement plan after you stop working. Duh! Well, if you have five years to go, find a way to max your contibutions in those years. Funds added to your Roth/IRA might still be in your personal tax shelter two decades later.

All of the above....plus.... The whole purpose of having a Roth or IRA is to accumulate wealth in a tax shelter. Everytime you take money out, you are giving up that opportunity, even if it is only for 60 days. It can also make a hash over your investment choices. In/out suggests that you have a lot of cash in the account, or you are liquidating positions, then buying again. That means extra transaction fees. If you are running a business, perhaps your suppliers may help with your finance issues. For example, you might buy inventory with an agreement to pay in 60 days. A generally reliable business might be able to get a supplier to agree if the issue is brought up before the purchase. I once had a friend who borrow from the IRS! He knew he was going to owe over 250K in taxes. He had a great deal coming down the pike and decided to do the deal rather than send in two quarterly estimated payments. The deal netted him over a 50% gain. The taxes and penalty were a lot less. I know that the accountants who post here would not recommend this gunslinger approach and cavalier treatment of taxes, but it sure worked for this guy in this rare circumstance.

I am not sure I buy into "this is fine". My first problem is with the terminology. If you are taking cash out of an IRA, it is a distribution. I think calling this a rollover is confusing. A distribution can be redeposited in 60 days which cancells out the distribution. The "I" in IRA stands for individual and you are correct that your options and your wifes options are separate. Other problems include failure to get the mechanical money movement done on schedule. A custodian might muck up the documentation. I just would not recommend going this route because of Murphy factors. It sounds like your cash funds are tight and the lack of liquidity can cause a tremendous number of problems. Sickness, acidents, spousal disputes...I can think of a lot of things that can go wrong. You may want to consider a home equity loan or signature loan as an alternative. Money is on sale in 2014. Interest rates are very low.

Nine months have gone by and no one has posted on this topic. Now there's a sign. If you look at other "real estate" posts on this message board, you will see that I frequently ask the question WHY? There are thousands of stocks, thousands of bonds, thousands of mutual funds, now over 1,000 ETFs, and probably over 1,000 REITs (real estate trusts). Some of these focus on real estate - within REITs there are ones for offices, retail, industrial, assisted living and all sort of sub specialties. So why screw around with a high cost self directed IRA/Roth pretending to be an expert on real estate? For the bulk of the folks that read this website, you just don't need to go there. One the checkbook IRA, according to the folks pushing this.... Now Broad produces and sends you a customized binder. At the same time the designated custodian opens an account for your self directed IRA, and makes a request for transfer of funds. Once capitalization occurs, the custodian sends you a capitalization check. You take that check to your favorite bank and open a checking account in the name of the LLC. Your self directed IRA is good to go. Start investing! Wow, we get a binder! (sorry but the opportunity to make a snarky comment overcame me) I sure would like to know how item 2 - custodian sends you a capitalization check works and why this is not considered a distribution. If the check comes to you and you touch it? Why would it not be sent t the bank? The phrase "self directed IRA is good to go" diminishes the huge issues with self-dealing, prohibited transactions, etc. Do you think the IRS might be curious that the $100 fee for mowing the lawn did not go to a relative? I can't even imagine how hard it would be to document that all transactions were done at arms length and that no hanky panky and no illegal transactions were completed. Ten months - not a single post from someone who is familiar with this system, or has used it. I recommend that beginning investors don't even think about real estate with an IRA/Roth. Focus you energies on making sound investment choices. Don't chase last years winners. Isn't that a hard enough assignment? If you don't know what an ETF or a REIT is, then you have basic investing eduction to work on, not real estate dreams. [ Last years winners: one of the big winners last year in the stock market were BioTech/Health companies, not so this year. In a recent Barron's article, a professional when commenting on the mistakes that investors made said that their research shows that more than a 1.5% reduction in performance can be attributed to chasing historic performance and trying to time the market. ]

Let me summarize: 1. Custodians have a IRA/Roth plan or agreement that usually has a amendment clause. Lots of amendments are driven by changes in IRS or banking rules. Some may be driven by State rules. 2. Custodians routinely mail out their plan or agreements to all participants. (These rarely lay out the changes. There is a lot of small print) Amendments generally are automaticly implemented.. 3. Most customers never read these re-statements of the plan or agreement. 4. Much of the responsibility is on the shoulders of the customer, including eligible deposits, taking minimum distributions, and beneficiary designations. The issue of designation of beneficiary is not a rare topic. It has been covered in almost every financial magazine, newspaper, the financial talking heads, on this website, etc. I have seen some mailing of IRA custodians where they specifically mention that no benefiaries have been designated. I don't think that routine practice, but some accounts do generate mailing. I have also seen some of the IRA/Roth accounts where at least once a year the beneficiaries are listed on a statement. This situation might be considered "unfair", but I don't think you can blame the custodian.

I'm not a lawyer. My first non-lawyer advice is look for the envelopes or file folders that are associated with the Wells IRA. Wells may be incorrect about the beneficiary designation. You may have signed papers where the beneficiary is designated. Wells is an amalgum of many banks. Your fathers account could have started out with a different bank. Bank computer systems also get merged and updated, so a beneficiary designation may have been deleted at some point. I think it is worth looking through your papers. Absent any clarifying documents, the ownership will probably be settled by state law, not Wells "default". You should get legal advice on this issue. NOTE TO ALL OTHERS: Do you know what your IRA and/or ROTH beneficiary designation says? You should check this annually.

You may want to consider consolidating the fragments into one larger rollover IRA. This might simplify your monitoring and investment decisions.

You can withdraw contributions made in excess of the allowed when you are ready to file your taxes and know your circumstances. Your custodian would add any earnings or growth to the contribution to determine what amount must be returned.

One option you do have is that you can take money out of a Roth or IRA and return in before the time limit is up. The old limit was 60 days and I think that is still correct. So, if you expect to have some money coming in in the next two months, you could take funds from an IRA/Roth and than pay all or part of it back. I don't normally recommend this because if you fail to hit the deadline, or anything goes wrong, the funds can't get back in unless you can make contributions. You might look into a home equity, signature line or other short term borrowing option. Your dentist might accept a monthly schedule of payments.

While I agree that the custodian made a mistake, you definitely also had some responsibility for confirming that transactions were posted correctly. I think the custodian should correct the error, but I would not be surprised if they say that too much time had passed. If after a second letter to the custodian does not generate a correction, then I think I would write off the realtively minor cost as "tuition" in the school of life. WARNING TO OTHERS: Check you monthly statements and annual reports on Roth and IRAs. You want to catch errors quickly. Do not assume that everything is correct and was done in a timely fashion. The "A" in IRA does not stand for "AUTOPILOT". The "I" stands or Individual - and you, the customer, has a vital roll in confirming that everything gets done.

I always want to ask the question...Why? The pool of potential investments include stocks, stock options, warrants, bonds, perferred stocks, ETFs, REITs, mutual funds, index funds, etc. What is the compelling need to buy land? The arguement against real estate includes: potential penalties if found that the transaction is inappropriate, lack of flexibility, difficulty with use and ongoing payments that are needed for things like property taxes (or maintenance if you are talking about anything beyond land), lack of diversification, illiquidity, etc. This is not a good area for self-help investment decisions. If you don't have outside cash to invest in land or real estate, then I don't think you should even spend a minute thinking about real estate or land as an individual with a Roth or IRA.

Kman: the answer to your question is "it all depends". Citizenship, geographic location, income and networth are some of the factors that may shape if an investor can participate in a specific investment. There may be more like criminal record! From an SEC perspective, many investments are considered unsuitable for the average investor. Examples of these can include certain limited partnerships and unlisted stocks. Often the screening criteria involves the rules for "sophisticated investor" or "qualified investor". If you have never heard of these and are not familiar with the terms, then odds are you would not meet the standard. The theory here is that very high net worth individuals and high income individuals don't need standard everyday protection about investment choices. These folks can hire an investment advisor or lawyer...or more than one of each! Also, if they lose a quarter million, the wife and kids are not going to be out on the street and lacking food. The whole risk / reward balance is completely different from standard investing. I've seen great real estate partnerships with outstanding property and 97% occupancy crater due to external events ~ such as Lehman owning mezzanine loan coming due when that Lehman went belly up and the investment banking system was frozen up. That deal became essentially worthless in two months. On the other hand, I have seen many of these niche opportunities end up with IRRs in the 28 to 43% range, even after hefty "promotes" (the rake taken by the general partner) Here are some unusual investment that are not offered to the public: Example 1: A company in the US, regulated by the US, doing business in the US is however owned by an Indonesian family. Due to troubles at home, this family decides to do a quick sale via a boutique investment house. Because of the desire for an abbreviated process, the investment house elects to do an IPO where only sophisticated investors can participate. The stock will not be listed for a few years and will perhaps not even trade. In under three months, the investment house pulls off the deal and 400 individuals and institutional investors own the spun off company. Two years later, the company gets listed on the NASDAQ. {I was one of the participants in this investment. The shares were purchased inside a regular IRA, then transferred to a Roth IRA on a market dip. There were zero issues about SEC or IRS restrictions. It turned out to be a good investment.} Example 2: While at Bane capital, Mitt Romney develops a plan to buy three Asian manufacturers and integrate the product lines. This "deal" might be presented to high net worth individuals in the form of a limited partnership. The investment would not be advertized to the public and the investor package might specifically say the deal was not subjest to specific securities laws, with multiple pages of disclaimers about suitability of the investment, and what is at risk. [Note this is closer to the world of venture capital rather than typical investments.] Example 3: An associate of mine from consulting many years ago has jumped between financial posts, ending up at a hedge fund. He is an outstanding stock analyst who once said "I am surrounded by people who know how to babysit peoples money, but there are not many who actually know how to make money". {I agree} His fledgling hedge fund begins with a mix of sophisticated investors and institutional money. After a year, he approaches Fidelity Investment and is cleared for allowing Fidelity customers to participate. My wife elects to place a part of her IRA funds with this hedge fund with the position reported to Fidelity much like an outside mutual fund. Fidelity does not advertise or even list this investment option, but Fidelity investors who meet stringent criteria can place brokerage, IRA or other funds with the new firm via a letter of instructions. There is no trading, no monthly in/out transactions. The hedge fund runs on a multi-year basis. About 1/3 of the assets are short positions. A significant part includes preferred stock, warrants and options. Summary ~ The rules and restrictions that govern an investment choice stem not just from the plan, but also include SEC or IRS regulations, custodian/brokerage requirements, and sometimes rules imposed by the group offering the investment. Lawyers and accountants may not agree on the applicability of these investments, so you sometimes have to do research to convince your own team that an option is allowed. Many of the rules are based on legislation and approved regulations. However, in my experience, some of the brokerage limitations are more driven by their internal marketing posture and perhaps administrative convenience. In years past, Fidelity and Schwab have both lost and gained customers based upon what they would allow in a retirement plan. They often did not agree on if a specific investment was allowed or not. Since these kinds of investments are pretty rare, the tax payer is often communicating with the back office at the brokerage Hdq rather than the local staff. They guy at the counter is unlikely to be knowledgeable about these special investments. There are lots of MBAs who are not trained in these instruments.

If you are doing this work as a volunteer for a not-for-profit organization, you may want to see if your local bar association can refer you to a lawyer who may be consulted. Due to a recent death in the family, I found myself in the roles of custodian, trustee, and executor. I spent many hours googling, reading books and talking with lawyers (hired three in different states for different functions, interviewed eight). I thought I started from a pretty good baseline of knowledge and discovered I needed to know a lot more. One additional complication - the states of VT, PA, FL, and CO all come into play. I learned that PA is perhaps the most complicate state in which to die! And five copies of a will do not make one original...never lose the original will! Good luck with your work.

Interesting problem. B of A has been nickling and diming on fees for a couple of years to make up for lower profits in other areas. They were careless in how they handled this. I have frequently seen banks and brokerages send a second check after a bulk transfer, and sometimes this is only a few dollars. This often comes up when the assets are transferred and either a dividend or interest deposit occurs later. Its no big deal, and if the direct transfer occurs a second time, your future 12 month IRS rights for additional transfers is not affected. If you have a well documented situation and BofA actually put money into your account, you can probably simple deposit the $50 and treat it as a rollover. If you are not planning to do any further transfers, that should not present a problem. A letter of explaination to the IRS might be needed at some future date. I don't see anyone going nuclear over $50 when it looks like this happened due to events beyond your control. The $50 sure looks like a fee. The IRS might be annoyed about the transaction, but this is not the first time they have seen this happen and putting a few hours into generating letters is not going to provide real value for the government. This is not the "legal" procedure, but just a suggestion of a practical one. If there were thousands of dollars involved, you need to dot the I's and cross the T's. Something to also consider: many brokerages will make you whole for these account closure fees. For example, you send $10K to Schwab from a bank Roth. Schwab has in previous years paid up to $125 for any account closure fees. I don't have a list of which brokerages do this.

Early contribution means less outside taxable income and a longer investment period. However, putting all the money in early is separate from making allocation decisions. For example, you open an account at Schwab/Etrade/Fidelity/etc. with $5,000 that can initially be kept in cash - you are not forced to make bonds vs stock decisions on day 1. Since you can always remove Roth contributions, you still retain a lot of flexibility if you fund early in the year with a single lump. Some investment houses give you breaks on fees if you make monthly contributions, but almost everyone has moved to zero fees for Roths with over $5,000 so that is probably not a factor. Dollar cost averaging is an investment method where you replace a single lump investment with periodic investments (such as monthly). When markets have slumped, you end up purchasing more shares. It has a built in "buy low" bias which helps some folks who are prone to overreact to market swings, getting nervous and selling when the market drops. DCA vs initial lump is a tough call as there are circumstances when one is slightly superior to the other. What you want to avoid is a paralysis based upon trying to make a perfect investment decisions. If this is a problem for you, then choose either the DCA or lump and get it done this month. Then sit back, relax, and let "time" be your friend.

This has been an interesting thread. I'm not sure what is the purpose of this complicated scheme? What is the charity trying to get out of it besides a donation? What does the IRA holder expect to achieve? I think the prior authors have talked about related parties, RMDs, prohibited transactions and some of the other pitfalls. I would also raise the issue of failure to execute the plan. What happens if this runs out 10+ years and the mgmt team at the Charity has been 100% replaced? Second point - you can't readily work out all the possible scenarios that might occur between now and some unknown date in the future. Ten years from now...what are the tax rates, inheritance taxes, allowed charity deductions? You could readily get stuck in a complex agreement that subsequently goes bad because of changes in public policy and taxes. I would be doubly concerned if the local charity came up with this idea by themselves.

I guess I would leave the door open that a transaction had been requested and somehow was fouled up. Its odd that no reason was given. If no documentation is forthcoming, or if somehow this was a verbal understanding, then I have a huge problem with a whole year passing and the IRA owner not being deligent in ensuring that the transaction had been posted. Transactions of this kind are not something that is completed in a 48 hour turnaround. The IRA owner should have requested the transaction months before year end. I don't understand the significance of why the January 1 back dating. Is there a lawsuit or divorce pending and this is an attempt to get out of the partnership interest? If it is a real estate partnership, I wonder if someone is trying to manipulate the ownership so they can get a tax write off or other advantage. The easy answer to this inquiry is NO.