John G

MBozek, I agree with all of your points. There is a tendancy for folks to look on the other side of the fence and see greener grass. If it isn't real estate, its options, ADRs, hedge funds, etc. Almost every time this has come up, the original author has given no clues that they really know much about the area or have the assets to take higher risks is specialty investments. The above investments are just not suitable for the average household. If you disagree, apply this test. Can you stand up now without notes and give a quality talk for 30 minutes about any of these investments? You don't need that level of knowledge to participate in mutual funds. I don't want tax payers who read messages here to be mislead. Stick with basic investing... stocks, bonds, cds, mutual funds, index funds, etc. You can get reasonable results from these types of investments without getting hit with high fees or exposing your assets to abnormal risks. The three big keys to investing are: diversification, taking on reasonable risks (equities favored over IOUs if you have decades to go) and time. A good investor pays little attention to day to day flucuations in stock prices but focused on years/decades. Time is need to get compounding to work for you. The average person can not cut corners and expect great results. Cutting corners usually means betting on long shots. Looking to esoteric investments that you might not fully understand is no solution. If you are in your 20s, 30s or 40s you have a lot of time to build your retirement assets. Have confidence in a reasonable plan and over time you will be pleased.

Why not continue at Etrade? They absolutely have IRAs and Roths. You made a negative comment about - "did not due well" at Etrade. That sounds more like a problem with investing in a tough market, rather than a custodian issue. I don't think it makes much sense to "trade" stocks with a 10k account, you can't have a reasonablly diverse portfolio and commission (even discount commissions) will eat up too large a percent. I am reading the tea leaves, post some clarifications if I am drawing the wrong conclusions. I would suggest that most of the discount brokerages are very similar... likely the same low level of errors, roughly the same mutual funds, and approximately same commissions. Yep, now that kids are gone, you need to focus on building up a retirement war chest. The $4,500 applies to you if you are over the age of 50. If you are married, filling jointly, your spouse can also contribute $4,500 if your total earned income is sufficient. (Be aware that the rules are very different if you are married filling seperately) It sounds like you should be using mutual funds for your investments. You have more than 15 years of investing since you don't spend all of your retirement funds in the first year. Post again if you need some guidelines on finding suitable funds.

You may be going down a very bad path. I saw nothing in your post that suggested that getting into real estate investing makes sense. The RE market is extremely frothy in about a dozen areas, including the NYC area. When folks are buying an flipping homes completely on spec, you should be very concerned that the greater fool theory may apply. I think it is very likely that interest rates will click higher two more times this year and those kinds of increases will eventually reduce the pool of potential buyers and perhaps change the amount of money buyers are willing to spend. But enough about real estate theory. There are other problems with your post: 1. You can't do a 2004 conversion anymore. Time expired the end of December. 2. I don't know what a good number for set up costs should be, but if you are concerned about $4k then you should not even be thinking about this. 3. One of the benefits of real estate investing is the tax writeoffs. Buying real estate related to a tax shelter completely changes things. You also give up the long term capital gains option and I suspect to render ineffective the real estate swap. 4. You do not want to pay the taxes for a Roth conversion by drawing funds out prematurely from the IRA. This severely degrades the conversion math. 5. Number 4 suggests that you do not have significant resources outside of your Roth. Where are your reserves? You normally can draw down from a Roth - using it as your reserve. But.... real estate assets are illiquid. 6. There are many dangers to any kind of complicated Roth. If you make any kind of mistake, you may suffer mightily. The extreme negative result is the loss of your Roth tax exempt status and being hit for Taxes and penalties. So my question to you is: "Why real estate?" Do you feel you have some kind of edge in real estate? If you just like the concept of real estate investing, there are funds, REITS and LLCs open to you. I have been expanding in this direction for the past two years... but would never do real estate deals in my Roth or IRA.

I forgot to mention that beneficiary designations can be changed. It usually just requires a one page form.

I don't know the technical answers about military pay, but I would imagine that if he was back here for a part of the year that you may hit the magically 8K for 2005. If you do any kind of part-time work, you may partially or completely qualify. I was surprised by the prior post about overseas duty pay not qualifying. I would not have excluded military families.... if I wrote the IRS code.

Actually, since you are beginner in terms of investor knowledge, and your total assets are modest, I DO NOT recommend that you buy individual stocks. You can't efficiently buy stocks when your assets are below 30-50K. It is also hard to own a range of stocks. Most investors talk in terms of a portfolio of stocks and it is commonly thought that you are too narrowly investing with fewer than 8 stocks. In the middle of the 20th century, mutual funds were created to solve this type of problem. Instead of buying a few stocks, you buy shares in a company that owns anywhere from 20 to 5000 stocks. (Twenty would be a "focused" fund that attempts to put all money on a small number of good ideas. The other end of the spectrum are mostly "total market" funds that might own shares in every fund on an exchange.) Mutual funds initially we designed to be sold with a commission, aka "load". After a few years, the "no load" or commision free fund was created. About 30 years ago John Bogle and Vanguard created Index funds. These are run by computers instead of stock pickers. The fund owns every stock on whatever list on which they are based. Because there are no "suits", no long distance conference call, not company visits and analyst bonuses the index funds have very low annual expenses. Recently, the "life cycle" funds were evented - to automatically change the mix of stocks/bonds as you age. [a pretty lame idea in my book, but then I am not a beginner investor] The mutual fund industry, like most thriving industries, keeps inventing new products. There are about 10,000 mutual funds - - but initially you only need one. PS: Mutual funds can also own bonds and preferred stocks. I was recommending that you choose a broad based stock mutual fund - one that is no load.

Terminology check! You don't rollover from any kind of IRA to a Roth, you do a "conversion". The amount converted does not factor into MAGI. Please read IRS Publication 590 carefully. If you have any doubts about what you are doing, check with your accountant or tax advisor. I assume that you are talking about 2004 transactions. You can not be absolutely certain about your MAGI until you basically do your tax return and make sure that all of those 1099s fragments are known.

You fund a Roth with cash. You can not transfer stocks into a Roth. Yes, earned income does not include dividends or interest. You can contribute $4k if your earned income is at least that high. Note: $4,500 for others who are over age 50. "Custodian" is the term for the financial institution where you deposit your funds. It is a fiduciary term. The Custodian "holds" the assets... stocks, bonds, mutual funds, etc. The custodian does not normally make your investment decisions, although that would be true for some actively managed brokerage accounts.

Addendum: Roth investing is very similar to any other kind of investing. However, you don't have to be concerned about long vs short term capital gains. Interest, dividends and cap gains are all treated the same. You keep records based upon what you need for tracking since transactions in a Roth are not reported. Keys: diversify, make sound picks, keep expenses and fees low, add parsley and onions and wait a few decades. Time is very much an investors friend. Time as in years and decades. Don't sweat the weekly or monthly changes. When everyone is complaining about a bear market or depressed prices, have the courage to stay with your plan and be a buyer. (You want to buy low and sell high. Some rookies get that backwards because they easily panic when their understanding is sketchy.)

Yep, Roth is just a tupperware, you can let others decide on the contents (not recommended by me) or take charge of your financial choices. Those choices are covered extensively in Consumer Reports (March issue each year), Kiplinger Financial, Money Magazine, etc. Every public library will have general books on investing... and perhaps some specifically on retirement investing. In very brief - - your choices include: mutual funds, index funds, bonds, stocks, CDs, preferred stocks, and some options. Yes, there are some more obscure choices, these are the most common and easiest to understand. Since you are young and have DECADES of investing before you retire and a few decades of investing AFTER you retire, I suggest that you go 100% equities (aka stocks) or very very heavy towards equities. For folks just getting started, buying NO LOAD mutual funds is easier then buying individual stocks and gives your a lot of diversification. Index funds are a class of mutual funds that operate off a list like the S&P500 or Wilshire 5000 and have extremely low annual expenses. Scottrade is one of many brokerages. Brokerages come in full service, semi-discount, and heavy discount. They vary in services. Some are internet based. Some have branch offices. Don't worry too much about the choice. {You can also choose a mutual fund family to be your custodian} Scottrade will do for a brokerage. If you can do some of your own thinking and read some of the financial mags I mentioned above, you can probably make some basic choices on your own. Early on, focus on learning more about investments. ASK each custodian your are considering to send you their "beginner" kit. Some of these materials are excellant. Post again if you have other questions.

Money already contributed to the Roth qualified under your circumstances in a prior year and has nothing to do with your current status (which is good!). You can still switch custodians, make investment choices, etc. Just ignor you current failure to qualify and operate your Roth normally. But, you can't contribute right now. But... 1. Marry someone who doesn't throw you over the top. 2. Defer income to the following year (like bonuses). 3. Hope Congress expands the program. 4. VERY IMPORTANT - consider other options you do have like 401k, 403b, pension profitsharing, ESOP, etc. If you are employed, look to max out on anythig your company offers especially if they match any contributions from you. If you own your own business you have many more choices. If you start a business on the side, some of these may come into play. You may want to talk to your accountant or tax advisor about these. 5. EQUALLY IMPORTANT - you can also invest the old fashioned way by opening a brokerage account or starting a taxable mutual fund. With long term capital gains at 15%, you can invest with little governmental skim. If you buy and hold a long long time, you defer the taxes until you finally sell (except for dividends) which if pretty good. If your MAGI drops down again, you can contribute. Eligibility to CONTRIBUTE is done on a year by year basis. Eligibility to own a Roth continues from all the times when you qualified, one qualified you are not disqualified regardless of subsequent income or assets. Congratulations on moving up.

Let me add a few points to Barry's good comments..... You have the option to elect primary and secondary beneficiaries. This presents an opportunity to build in a "switch" into your estate plans. The primary beneficiary can decline to receive the assets which then "toggles" the assets to the secondary beneficiaries. Example: A couple in their 50s with two grown children designate the other spouse as primary beneficiary. In each case the two grown children are listed as 50/50% secondary beneficiaries. Ten years later one spouse dies. The surviving spouse may elect to take the assets.... or perhaps because they don't expect to need the funds or to reduce the size of the estate at the second death, might decline to receive the assets. The funds then revert to the two children. The "switch" is left in the hands of the surviving spouse. I believe that the surviving spouse can decline all or part of the assets, but I have never heard of a partial case. Taxpayers should periodically check that their IRA/Roths have beneficiaries designated. ESPECIALLY, after your transfer custodians or if your custodian is acquired/merges with another firm. [This marks my 1,000th message at the Roth/IRA message board. I have enjoyed the opportunity to talk about general investment issues, wealth building and "planning". We are plunging into a great debate about the future of social security. This message board hopefully encourages folks to control their financial affairs and use the vast array of investment vehicles (stocks, bonds, mutual funds, etc.) to assure a positive future. Those that start early and stick to their plan may never look at social security as their primary retirement income.]

You did not provide much background, but I will take the plunge. Your question is like asking two questions: How much money do I need in the future? And, do I have more than I need for spending right now? There are many factors at play - your health, age, career prospects, salary growth, future education plans, marital status, tax brackets, .... etc. The first question gets at big issues such as how long you expect to live and what your lifestyle might be like when you retire. Unless you have a very very bizarre medical history you are likely to live longer than your grandparents because you have survived childhood and teenage risks and because medical advances will likely extend you life. You probably have no frame of reference for retirement lifestyle, but the trend is for more recent retirees to be much more active than those that retired 30 years ago. Having money and choices is better than not so I would error on the side of more retirement savings..... but that is me, you might have different values. {I want to travel to Machu Pichu, Great Wall of China, Alaska, etc.} The spending question is also very personal. I think it is great to have money left over each month to invest for the future. I like to live below my income, in part, because it gives you a margin of error if you get some bad breaks. I prefer to have the financial resources to make my own choices (or my kids choices) than to leave it up to someone elses decision (like a scholarship committee). Some folks like to burn money now and solve future problems in the future. If you have more money than you currently need to spend, then I would recommend these four areas for the extra: 1. Any company sponsored retirement plan if it has a matching component. 2. Roth IRA, if you qualify, up to the $4,000 annual max. 3. Retire quickly any high interest rate debt like credit cards. Do not accelerate any debt retirement related to low interest college loans, mortgages, or car loans. (Car loans normally have interest payments loaded up front and therefore early repayment has minimal value) 4. Buy a home or condo if you lifestyle is compatable and you expect to stay at your current location for 3+ years. One of the advantages of home ownership is the leveraging of your downpayment. While homeownership is not always a great wealth building opportunity, for most folks it is one of the major ways they increase their net worth. Back to that 401k math. If you start contributing $2,500 each year starting at age 27 and earn 10% on average (representative of slight growth bias to a general stock mutual fund) then you will have about $1 million when you turn 67. Some of the value of that 1M will be eroded away (by inflation) due to the rising cost of goods and services - assuming 3% annual your million would have a buying power of about $300,000 today. If you add 5K each year, all those numbers double.... $2M and the buying power of $600k today. You might want to spend an hour fooling around with a spreadsheet to look at other scenarios. And old rule of thumb is to attempt to save 10% of your annual salary. That is a very simplistic approach because it does not guarentee you will meet your goals. BUT, anyone saving 10% is way better off than someone who thinks that 1% and social security will take care of them.

Some clarifications: Gburns - what you said may be a little misleading. In his scenario he might have two different custodians, with two different account numbers, two different investments and perhaps different beneficiaries. I would call that two Roths. I would only call it one Roth if he made multiple investment choices but with a single custodian holding all the assets. JG - the firm that has your funds is generally called the "custodian" Appleby + JG - yes, you can have multiple mutual funds under a brokerage (often with different mutual fund families) or within a mutual fund family (like T Rowe, Vanguard, Scudder, etc.). {Note, Fidelity and some other "names" are both a brokerage and a mutual fund family.} But... I think JG may have been thinking of different investments with different custodians - and the answer is clearly YES. JG - yes, also to mixing stocks with mutual funds at various fund families, brokerages, banks in any combination of investments and custodians who choose. To all - the IRS does not care about what investments you choose (as long as they are allowed), how you split up the assets, or what custodian(s) you elect. The IRS is concerned about the rules concerning maximum contributions, withdrawals, taxable events, and income/filing status qualifications.

You may have multiple Roths or IRAs. As far as I know, there are no limits at all, no IRS rules on the numbers of IRAs. However, you must qualify each year to open or contribute to an IRA or ROTH. You can't double count the $3,000 (now $4,000) by having multiple accounts. All contributions to one year are summed, regardless of how many accounts. Examples: Like your suggestion, each year you can send your contributions to a new custodian and open another account. But, you can also split the $4,000 for the current year into two, three, four or more pieces with each going to a different custodian. Clearly, there are practical limitations on the number of custodians and funds which are related to annual fees, tracking, your time, etc. Remember, many brokerages give you access to a wide range of mutual funds, so you might be better off with funds at a brokerage in one IRA/Roth but with investments in different funds.

Mbozek - - an alternative view of Roths You are correct that Roth conversions can be a "wash" when you factor in the opportunity cost related to taxes paid on the conversion. A conversion looks better if the tax rate in the year of conversion is low. And, a conversion may be a terrible choice if you are paying max rates in the conversion year. State income taxes (at conversion or in retirement) are also a factor. Also to be considered are possible changes to Roth rules - both favorable and unfavorable. Anyone who assumes that all conversion are a slam dunk win needs to get a second opinion from a tax professional, accountant, etc. It would be extremely foolish to make any significant asset change without getting professional advice. I am amazed that someone with 250k in assets would rely on do-it-yourself conversions. All that said.... consider this example. A well educated couple in their late 30s rollover various corporate plans into IRAs and then using "depressed income" strategy manage to convert 200k to Roths. Since then, they have deployed these assets in a number of successful niche investments that gave an average return of 30%. The Roth assets are now around 1.2 million. They do not expect these rates of return in the future and now plan on building their Roth assets for another 25 years with a 10-12% annual return. My HP12c suggests that they should have between 13 to 20 million in this account. This is not a fantasy, but a real scenario - I know two couples that have followed this path. The high initial annual returns were based upon very astute understanding of some subsectors of the stock market on a small asset base. Both couples anticipated being able to put their best ideas in their Roths and saw a distinct tax advantage for paying for the conversions. If they had stayed with the IRA path, they would likely be paying max tax rates on very high distributions. While we can't prove this strategy is a winner (it loses if we switch to a consumption tax), it sure looks good at this point.

To Muckmail: You convert during a calendar year for that calendar year. The 2004 window ended last December. Do not expect to get accurate tax advice from you banker or broker. Start with IRS publication 590 and consult with your accountant or tax advisor before considering a conversion. There are four big reasons for the "confusion" in answers you can receive. First, tax payers often don't use the precise terms, mixing Roth with IRA, talking about contributions instead of conversions, etc. Second, many of the "clerks" you will meet at mutual funds, brokerages and banks are not very highly trained and will often not know the tax code details. Third, answers may be accurate but come out in jargon/code whose fine points may not be understood by the person who asked the question. Fourth, the "devil's in the details" and often an incomplete explaination may leave out factors (like tax filing status, age of tax payer, citizenship, etc.) that may be very important. The combination of these four factors can be lethal. Post your questions in this forum and you get feedback that is often triple checked for accuracy and completeness by other authors. BUT, for all big transactions/conversions/distributions.... get the local advice of a tax professional or accountant to confirm the proceedures, timing and applicability to your specific circumstances.

Perhaps I should not have speculated on why the 60 day rule was added. It does not matter why as long as you follow the rule of redepositing into a like IRA/Roth somewhere, either the same custodian or other. TY - "intent" or "uses" are not part of the IRS code on the 60 day removal/redeposit option. In a era of zero interest credit cards, signature lines of credit, ready reserve checking, home equity loans, etc. it is hard to imagine a huge demand for a short term loan. One thing we have seen on this message board a few times is problems when folks intended to redeposit the funds in 60 days.... they forgot, the custodian on the back-end failed to complete the transaction, checks that did not clear, bad tax advice (from employees warned by supervisors against giving tax advice), misunderstandings of the 60 day rule, problems coming up with the full amount, withholding issues, and general Murphy's law and all of the correlaries. The 60 day option is NOT recommended. Keep you life simple and stay away from this Roth/IRA option.

Fined by whom? The bank or the IRS? Are you sure that your account is a Roth and not a standard IRA? If it is a Roth, the advice you are getting here is correct. No IRS penalties or fees as long as the withdrawal is from a contributory account and does not exceed the total original contributions. If you actually don't have a Roth, the bank may have coded your account improperly. It is easy for us to say they are wrong.... but perhaps IRA and Roth are being used to casually. IRA's can have early withdrawal penalties. Roths are different and may not. IRS Pub 590 is also available at all major IRS offices and my mail. It is the key document on IRAs. Sure, you can do a custodian to custodian transfer. Here's how. Find a new custodian. Fill out a transfer of assets application and attach a copy of your last monthly statement. The new custodian does the rest. Very easy. Your job is just to periodically check to make sure it gets done. Probably takes less than 10 business days unless snail mail is involved. Understand that your bank custodian may charge you a fee for terminating (transfering) the account. Sometimes the new custodian will reimburse you for those fees up to a fixed amount. Ask. This termination fee may be what they are talking about. If this is your normal bank, and you continue to get "bull" from them, you might want to speak to a supervisor. Your custodian should not be deliberately misleading you. More likely, they are poorly trained clerks who should not better. Note a custodian to custodian transfer does not count as a withdrawal. A withdrawal followed in LESS than 60 DAYS with a redeposit into a like IRA or Roth also does not contribute taxes.

Three responses: 1. If you are talking about contributory Roths, there is no criteria associated with contributions. You can withdraw contributions at any time without penalty. Conversion assets have different rules. Note that EARNINGS may be taxed and have a penalty depending upon your age and if you can qualify for certain purposes like home buying. 2. Money is on sale. You can get credit cards for short term expenditures that often will not charge any interest for 3-12 months. Home equity loans, signature loans, tax return advances, borrowing from a relative, etc. are some of the short term options. Get creative - for example... your parents probably have money in bank accounts earning 1.8 to 2.5%. Make them a better deal and be the good son/daughter. 3. While I do not recommend this, you can take money out of a Roth or IRA and redeposit it within 60 days. The catch is that if you fail to get the money back in on time you trigger all the penalties and taxes. I believe this was intended to be a mechanism for taking a check when you relocate, but since all custodians can do a custodian to custodian transfer virtually no one uses this option.

Do examine the 1099 to understand what boxes are checked and do contact your previous custodian to get a correction if necessary. I will offer an alternative solution to trying to get a former custodian to correct a 1099 - - - Write a short letter explaining that your ROTH was opened in years XX and $4,000 was contributed. Since less than this was withdrawn, no tax is due. Attach this letter to your return. Do not include the 1099 distribution. While this may trigger a question from the IRS, you will be able to point out that your letter explained the circumstances. In my experience, for this dollar amount, that will probably end the issue. You started your Roth in a rough time when investments did not due well. Some folks saw there Roths get cut in half. I hope you are not discouraged about the whole concept of Roths and investing. Roths are an outstanding tax shelter for long term investing. Unfortunately, many novices were drawn to Roths when they were first created in 1998 and some now think the whole thing was some kind of "con job" on the working guy. Not true! The problem is that novice investors often think in weeks/months rather than year/decades. Over the long haul, investing beats savings because investing links your assets to a growing economy. We don't look like Pilgrims, carry blunderbusts, or seek to dunk witches. CDs and savings are IOUs. Folks that want "safety" never get the same returns as people that accept short term risks. Why? Because you don't need to offer higher returns when you can pitch "safety". Are you one of the disolutioned new Roth investors? I wonder.

Barry Picker is, of course, correct. Contributions can be withdrawn at any time for any reason. Conversions are different and do have a five year wait period. But....... You really should think twice, make that three times, before withdrawing funds from a Roth. Money is on sale right now. You can get very low cost loans, signature lines of credit, zero interest 3-12 month credit cards, home equity loans, refinances, etc. because money is in recent historic terms very cheap right now. Taking money out of a Roth diminishes the long term benefit of this tax shelter. You may not be able to contritute in future years because of income/tax filing status or because Congress changes the rules.

Prior message was spot on. Be sure if you are contributing for two years that the custodian properly designated the year when the contribution is made. Best to write two checks and make sure on your check it states the year. Also, your limit this year is $3,500 if you are over the age of 50. Your limit next year bumps up to $4,000.

Advisor? Sure sounded like someone that missed basic training classes on Roths. You made a wise decision to drop her. Way to many folks that work the counters at brokerages and banks have minimal training - do not count on them for advice on regulations, taxes or investments. It is helpful to have a second or confirming source on info.... IRS Publication 590 on Roths/IRAs is not exactly stimulating reading, but it is a useful source. Note to all: Roths, regular IRAs, and conversion Roths all have different rules associated with early withdrawals.

Your question is best answered by giving Vanguard a call. Get to know you custodian. They can offer support in a number of areas.