John G

You ask a good question. Here is the problem. No one can tell you when the market will go up and when it will go down. No one can tell you when it is about to change direction. Millions have tried, but the "market" has always been filled with uncertainty. We know things happen in cycles (like employment, interest rates, even weather patterns of drought and rain) but that does not mean they are easy to predict. A personal example.... in making perhaps 2,000 trades over the past 20 years I have never caught the exact high or low on a single stock. Catching the exact turning point is more rare than a hole-in-one in golf. I have one of those, and fully recognize how much luck was involved with a 4 iron. So... if you can't tell when the market will go up and when it will go down... then you shouldn't invest? Wrong conclusion. Here is why. Our free market system, capitalism and entreprenurial emphasis is a huge powerful force for growth and improvement. In the last century, our economy has survived two world wars, hundreds of famines, the dust bowl, a couple of regional wars and a great depression. We have thrived in spite of flawed politicians, a "chad" election, McCarthyism, Aides, political assignations, race riots, small pox, worldwide flu and a wide range of dumb public policies. I think we can make a strong case that we will survive some third world terrorists, even if they have biological weapons and a couple of dirt nukes. We offer a great combination of personal/religous freedom and economic opportunity. I haven't seen any rag tag boats filled with Americans trying to escape to the Bahamas. The long term performance of the stock market is very good. Up years out number down by anywhere from 4x to 6x depending upon the data you use. (I like to use the performance of a couple of mutual funds that have existed for 65+ and 50+ years as a reasonable surogate.) Back to back negative years do occur, and twice in the past century we have had 3 down years in a row (the second one is going on right now). But... the good years not only outnumber the bad ones, they outweigh the bad years (that is they are more up then the down are down). So, over the long haul (15+ years) the stock market has outperformed more conservative investments like CDs and bonds. Think of it as stocks are "on sale" right now. Somewhere in the future that market will rebound. You will not get a letter in the mail telling you in advance. In fact, your only likely to know many months after the fact that we have entered into another bull phase. I personally do not see a lot of downside risk right now in the stock market. In fact, I am a buyer looking for good values for the next 5 years. But, that is me. Buy low, sell high. A down market does not make me mad but tells me to look around for good companies that are getting bashed along with the Enrons and Kmarts which deserve to go out of business. If you have trouble sleeping with money in the stock market right now, you still have another alternative. Fund your Roth or other tax sheltered plan, but put the money into a money market account or other short term interest paying option. One last point, don't worry about what "other people are doing". The last thing you want to do is following the herd. The herd is invariably wrong as they all want to jump in after the market has gone up a lot and want to bailout after the market is down... which is a lot worse then putting in a contribution each year and ignoring what happens.

Under the heading "Other options" Money is on sale right now. On possible option to avoid the under 59 1/2 problem would be to look at home equity or perhaps refinancing. You might be able to take out some funds using a refinance cash out to bridge the gap to when you can take normal IRA distributions. There were some 10 and 5 year home equity loans advertised in Colorado today with a 2.9% rate. That is probably a short term teaser, but it is certainly something to consider. I think the 10% penalty (if it applies) would certainly make some of the very low cost loan options look awfully attractive.

From my older copy of IRS Pub 590: "Contributions can be made to your IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. " Therefore you can make contributions for year 2002 until Tuesday April 15. (From a practical perspective, you want to avoid the last minute rush in April.) There is nothing to report and you do not need to file an ammended return! There is no such thing as a joint Roth. The "I" in IRA stands for individual. If you qualify by income and filing married jointly, then you can each open up a Roth (separate accounts) and deposit separate checks. You don't need to use the same custodian or make the same investments. Be sure the check designates that the tax year is for 2002. After your first statement arrives, confirm that everything was done correctly... like the correct designation of year. You can also contribute for 2003 at this time if you wish. If you are over the age of 50, you maximum is $3500 due to the "make up" provisions.

You can start as many Roths or IRAs as you want. The laws only set the max amount that you can contribute in total to all accounts in one year. From a practical perspective, you don't want to track too many different accounts... but go ahead and open a second Roth with a different custodian. At some point you may want to consolidate your IRAs using a direct custodian to custodian transfer. Any custodian can assist you in doing this... you just fill out some forms and let the custodian go get your other funds. Note, some custodians will charge a fee to close out an account and some mutual funds have back end loads of fees. Good luck with your investments.

A common issue. You can find multiple threads using the search feature and key words like "Roth IRA Tax Loss". Here are some refs: http://www.benefitslink.com/mbmirror/12927.html http://www.benefitslink.com/mbmirror/8252.html http://www.benefitslink.com/mbmirror/17047.html Note, the imbedded reference to the Motley Fool article - it is worth a read.

I think you need to take your question to a tax preparer or accountant. You may not be able to accurately explain all the details involved in the transactions you mentioned. I am surprised that you had withholding on a Roth conversion. If you actually converted regular IRA assets to a Roth, then yes you should have paid taxes last year. Exactly how much would depend upon the details. It sounds like you will need to file a revised 2001 return. You also need to talk with a tax specialist about the withdrawal for a home purchase. For the general reader.... don't do these types of transactions without consulting a tax specialist'. The average person does not understand all of the rules and just reading IRS pub 590 may not clear that up either. The cost of making a mistake is far more than buying an hour of professional advice. (Take the caps lock off)

You raise a good question. First question for you is are you sure that you qualify right now for a Roth or deductable IRA based upon your current income and filing status? If you currently live in a state with no income tax (like FL, NH, WY, etc.) or a low income tax state, then the deductability means less -- just thought I would throw that in since people often forget state taxes. If you expect to live in retirement in a state with no income taxes (if any are left by then) then lean towards taking the deduction now. Since you are only 29, I doubt you have any idea about where you will live in retirement. You said you are in the 39% bracket right now. That sounds like a fine income... professionals, execs, or high level manager? My guess is that over the next 20-25 years you will amass significant assets. Perhaps you will add an inheritance to the mix eventually. Add SSN and pension income. Then there is the accumulation of home equity that often gets converted in retirement to additional income. On the government side, you could see higher taxes either from the IRS or states. It is unlikely that your crystal ball is beautifully clear, but I think you could make the case that down the road your income (without kids or mortgage interest deductions) will keep you in a fairly high bracket. In my experience folks with high incomes as workers often have substantial incomes in retirement and don't see a huge drop in marginal tax rate. You need to think about your circumstances try to judge where things might be going. The government reneging on Roth tax free status is, in my opinion a very slight possiblity, but some will make decisions based upon this. I would assume that all existing Roths would be grandfathered. Roths give you more flexibility in deciding when to take money out. They also have some positive inheritance features. From the various articles and spreadsheet models I have looked at, a hybrid approach often gives you the best result. No one can tell you the "right" answer. If you ask people to rewind the clock 10 years and explain how much of what has happened in their lives (relocation, promotions, new jobs, death in family, personal health, children, etc.) they could have predicted, the answer is often less than half. Roths have only been around for 5 years (government example) and the WTC was still standing 5 years ago too. My point is that you are making decisions about a future that is hard to predict. Also remember that there are 403b, 401k, Keogh, SEP IRA and pension/profit sharing plans that may be a better mechanism for you to amass wealth. Good luck.

Per your additional facts - you have no problem. A Roth rollover is not the same as a contribution - sort of apples vs limestone. You will find a lot of information at this site, but you may also want to pick up a copy of IRS publication 590 which covers Roths and IRAs.

You might have a problem.... the facts are not completely clear. If the IRA contribution was also made in 2001 and then the IRA transfered to a Roth in 2001, then you do indeed have a problem because you put in $2000+2000 into all IRAs in a year when $2000 was a max. If the IRA contribution was made prior to 2001, then the transfer would not impact your 2001 contribution as long as your meet all other eligibility requirements. The IRA limitation is defined by tax payer and reflects the combination of Roth and standard. The max is not defined by custodian or account. You only made a mistake if you doubled up in one year, and both contributions were designated for the same tax year. Your custodian statements should indicate how the funds were booked. If you made a mistake, you can work with your custodian or your tax preparer to fix the problem.

Thanks Mbozek, I am aware that some federal regualtions (perhaps the PT rules) effect the participation by an IRA accountholder (non-employee) of a bank that issues stock in an initial or secondary offering. In this case, it is dealings of the custodian that are at issue. There are all sorts of hoops that the taxpayer must jump through to allow an account (originally at the bank in question) to be used to buy shares. It is not at all a problem if the IRA assets are held by an outside custodian.

Questions like this have come up about 5 times in the past year. I hope the tax pros will rise to the challenge and clearly define what is allowed, what is clearly not allowed, and the gray areas. As a non-accountant, I have a problem with the proposal. The owners of the company could artificially pump up the value of the stock or distributions in a way that would not be normal. Let me exagerate: define a business with one penny per share stock, allow execs to buy stock from IRA/Roths, subsequently goose the dividends to thousands of dollars and elevate stock valuation in non-market transactions. As an investor, I would like a piece of this action but it sounds like I wouldn't even be likely to hear about it much less participate! It seems to me that this is an end run around the annual limitations Congress expected for Roths. One could argue that eligibility to have a Roth might be bogus under such an arrangement. For example, why not reduce you salary by 50k and then boost the dividends by that amount. So someone who might make 140k can qualify, and get a huge tax free bonus in their Roth. If they took full salary, they would not qualify for a Roth and would be paying taxes. Sounds like a too obvious scheme for dodging taxes to this citizen. I know some custodians have major heartburn over non-market transactions. One reason is that they are obligated to set a market valuation at year end. Under the above arrangement, there would be no meaningful market valuation to use.

PS: If you select an option that only works if you lock in for 6 years, then you can be stuck if the funds performs poorly and you want out. Two years ago I helped a retired women who got into some "recommended" tech funds and fortunately realized they were way to risky. I don't like long lock ins. Maybe that was OK 20 years ago, but in our society and economy things move fast change to much in six years. I prize flexibility on investments.

"I have an advisor to help diversify my assets across a broad range of funds. I do pay him a yearly fee, so I don't think commissions play a big role." I am not a big fan of Am Exp or loaded funds. Frankly, they are expensive and their performance at best average. A gets you up front, B gets you with a high annual fee. Kaching. (If your assets were at Vanguard, you would probably do better because there total cost stucture is extremely low.) But... let me address the statement about diversification. Mutual Funds were created in part to offer diversification and to allow an investor with modest assets to own a range of stocks. In the past two decades, a number of narrowly defined niche funds have been developed.... sector/regional/specialty funds like telecom, biogenetic, Japan, small cap growth, etc. Although these funds have many holdings, they tend to be clustered in one area of the market and are therefore not really diverse. If you avoid narrowly cast funds and stick with broadly defined funds you are more diversified. Especially if your funds are balanced rather than following the "hot" area. There is a second problem with achieving diversity in funds. In the 1990s, a lot of funds started to chase hot areas like tech funds and were heavily weighted in those areas... and those that were suffered more after the bubble burst. Having more funds does not mean you are more diversified if all your funds are overweighted in the same areas. Index funds are by definition run by formula and therefore are less subject to fad investing. If the unlying basis (total stock, S&P500) is diverse, then you are getting that diversity. They are also very cheap to run... no analysts, no field trips, no expense accounts, etc. Vanguard is the undisputed King of index funds with some annual expenses below 0.2% and no front or back loads. You don't say what AMEXP annual expense numbers are for their index funds, but it should be below 1/4 of a percent. I suspect that AMEXP created them to retain investors who figured index funds were a good way to go. Lets compare A class stock picking fund to an index fund. I will assume that the annual expenses will be about the same. The stock picking fund would have to earn about 1% more than the index fund over a decade to catch up with the index fund performance since it has a 4.75% handicap "at the gate". If you just want diversification in stocks, you don't need a financial advisor to pore over the components of mutual fund portfolios. Just go with one or two very broadly based index funds. Your advisor is steering you to a front load set of funds. I would imagine that his compensation is either directly or indirectly related to the commissions/fees that your account rings up. Ask him. If you really want unvarnished financial advice, pay for an outside advisor who is not holding your money or selling you anything. Are you a little suspicious about why your advisor did not give you some postive comments about the value of using low cost index funds? Could it be the commissions? You ask pick A or B. My advice is pick neither. Based upon what you have said, I would go with one or two index funds and skip the loads, high annual fees and financial advisor.

Rbeck, I just read the entire thread and here is my take on it. The former employee may have submitted documents for a rollover, but it looks like the movement of the entire plan occured before they got to your request. Surely, you must understand that planning to shift providers was probably weeks/months in development. This is, at worse, an administrative error and depending upon what the plan says about rollovers it may have been entirely correct. If this is the most onerous event in the former employee's life this past year he is indeed a lucky guy. You have a huge burr in your saddle over this issue, and the anger you have vented here is a major waste of time. You have made no case of financial loss. Failure to act in a timely way when there are remedies to fix something means you have no legal issues. I agree with the prior comments of "no harm". This doesn't mean no inconvenience, just no financial harm. I have some questions for the former employee. Did this person call to determine the status of his request? Did he talk with his former employer? Has the new provider agreed to process the request? Does the new provider have the paperwork on file from the original request? A simple way to minimize the aggreviation is to follow up on instructions. Mistakes and processing delays while not common are far from rare at brokers, banks, mutual funds, insurance companies, etc.. Do you want jail time for the clerks? Direct your energy to solving this problem rather than complaining.

I have a question for you. Why? You did not mention amounts, the magnitude of loss and why you want to take the money out. If your reason is that you want to take a tax loss, then the issue gets much more complicated and often it just doesn't work out. This topic has come up a lot on this message board. You can search under Roth Tax Loss and see a number of threads. Here are some you should read, especially the read the Motley Fool article. http://www.benefitslink.com/mbmirror/12458.html http://www.fool.com/taxes/2002/taxes020222.htm

This is a curious question. I wonder if someone is just trying to pitch an annuity to you and using the "financial straights" arguement. First, who is currently your custodian? Second, in what are your Roth assets currently invest? Are there any transfer of asset restrictions in the papers you signed when you began this investment? Who told your that firm XX is in financial straights? Normally, you can go to any Roth/IRA custodian (Schwab, Fidelity, T Rowe Price, Vanguard, etc.) and fill out forms instructing them to get your funds transfered from your current broker, mutual fund or bank. This can get a little more complicated if your Roth assets are in a "propietary" style mutual fund (it might have to be sold) or if you signed forms with account closure fees. Please post some clarifications and we can give you better advice. Changing your Roth custodian is not a big issue... but I suspect that there are other hidden issues behind your question that are important.

Roth investments that only earn interest may be poorly placed, especially if you are tying up the money at todays very low rates. To give you a better answer requires some information on: your age, your investment knowledge, how many years before you retire, marital status, approx income tax bracket, your retirement goals, if you have any other retirement options besides SSN, time you want to spend on making investment decisions and your attitudes about risk / reward. There is a real range of answers and one style of investing doesn't work for everyone. No matter where you start, you always have the option to transfering your assets to another custodian at some future time.

"normal" - lay persons concept, as in distributions in retirement are normal, other kinds of distributions would be "unusual" The original post did not suggest any desire to take funds out, so I responded relative to "normal" circumstances. The question was if they were taxable "if they were within a Roth" - the answer within a Roth is clearly no. Consulting a tax professional or accountant is always desireable because the posting part may not be explaining the problem correctly or may have unusual circumstances that make a difference.

A cautionary tale for anyone who thought it they might use the 60 day option to get access to IRA funds ! Just because you might be able to do something like this does not imply it is a good idea. Any failure to complete the transaction gets very nasty treatment. I have no opinion about how the IRS will rule. I do have an opinion about a high net worth individual relying on a broker's advice for such a transaction. I would not trust them to be knowledgable. Where was the accountant? Mine would have instantly cautioned against the transaction as risky and would have known the size of the window in days. One thing that weighs against this taxpayer is that he apparently did a transaction like this before and should have been more knowledgeable about the rules.

Dividends, interest, short term capital gains and long term capital gains - there are no distinctions in either a Roth or a regular IRA. The transactions that occur during the year has no impact on your tax return. There is no tax impact when you take normal distributions in retirement from your Roth.

Gregg of Miami was the first to email the correct answer. Using the Rule of 72 at 10%, he subtracted 7 years to get 1/2 of $3 million goal, then another 7 years to get 1/2 of 1/2 (25% of the goal).... or 64-14 = 50 It is a back of the envelope methodology and this answer (which, in the spirit of the question, is close enough) came in early on Jan 22. Why ask the question? Because middle aged workers often will complain that they are nowhere near prepared for retirement at age 50. If they are at 25% at that point and plan to retire at 64 they are on track. And they probably will be getting the kicker of their mortgage getting paid off during that 14 year period. The $2 bill is on the way Gregg. Accountants... the object was to get a reader to email not to blurt out the answer at this message board! Raise your hand next time!

Thanks Pax, good idea for another link. Credit problems, lack of savings and general money management is very appropriate for 30 somethings. I try and have a little fun with my replies, I apologise to those who have read them before as I tend to repeat myself. Brevity! I'm working on it. So far no one has emailed on the question - so the huge prize of a $2 bill is still up for grabs.

For 401Kman.... a small correction "Roth IRAs for you and your spouse grow retirement funds for you. 529 Education plans accumulate college funds for the twins.....Both accumulate funds on a tax-deferred basis and provided tax-deferred growth..." Roth is more than tax deferred, if the current rules hold and you keep the funds to retirement they are tax free. Transaction withing a Roth are not taxes. Distributions are not taxed if you hold till retirement eligibility. Deferred implies later taxation.

This is the more interesting question. Lets assume that you put the 12k in for 2002 and 2003 right now, then begin to contribute $6,000 (total for two adults) each year until you are age 66. 8% grows to 1.0 million 10% becomes 1.6 M 12% assets swell to 2.6 M It is probably hard to commit to this plan right now, but it is very worthwhile. A couple of promotions and raises down the road it may get a little easier. Partial contributions are of course better than none. Yes, those are inflated dollars above, but in a Roth they come out tax free. Think of the Roth IRA as Plan A for becoming a millionaire. You can be a house painter or a cook and still use Plan A to build wealth. Now if you only had started your Roth 7 years ago! Check your bank, broker and mutual fund has the similar examples of IRA math. I teach IRA math to high school seniors every year as part of Junior Achievement. The most interesting response I ever got was "if this is so good, how come I never heard about it?" Probably a few adults would say the same thing. At least with these students they are learning about investing more than a decade ahead of most folks with college degrees. Most of these kids are just amazed about how a systematic plan of investing builds amazing wealth and they are just 18! No gimics, no MLM, no high risk gambling, nothing illegal and you don't need to win the lotto. Just backing the US economy for the long haul. Thank you Senator Roth of Delaware. Your own state did not return you to Washington, but you left a great legacy. I put a two dollar bill on the board and ask this question for my high school students. Mr and Mrs X have committed to consistently putting $6,000 in their Roth IRAs. Their wise accountant, Ms. Q tells them they can retire at age 64 with $3 million dollars by achieving a 10% annual return. At what age will Mr and Mrs X have achieved 25% of their retirement goal? Just for fun... I will mail a two dollar bill to the first person who answers the question and can explain their logic! Email me using the address in my profile. Let me know if it is OK to post your name and answer. I try to make learning about investing fun. I will be gone to New Mexico for a bridge tournament for a few days. Fun is important.

Ok, this is something lots of readers need to understand. When you are talking about long term tax sheltered accounts, you should be thinking in terms of total annual return. George W's dividend proposal is essentially meaningless for IRA accounts. Over the long haul, you should be thinking in terms of capital gains , that is the growth in the asset value because of the improved performance of the company. Bonds are ok, but they are basically IOU and give predictable performance but that predictability comes at a lower return than equities (aka stocks). Over very long periods, stocks typically perform much better than other assets classes like cash, CDs and bonds. Total annual return is the combination of dividends (if any) and capital gains. Portfolio: the combination of various investments (bonds, CDs, cash, stocks, etc.) that encompass your assets. Typical portfolio performance? If you looked at just the last three years, you would think it was crazy to invest any money at all. Three years in a row stunk. Most people saw their assets go down 20% 50% and maybe more. {most, but not all... one buddy is up about 35% over the past three years an outstanding performance, folks with large amounts in bonds saw the value of bonds rise substantially} BUT, over the long haul, the stock market is up more often than down and biggest up years generally beat the worse years by a wide margin. Why? The answer is complicated but has something to do with the great incentives in capitalism to build, solve problems, and make efficiency improvements. I advise people to use three long term average annual returns in their planning: 8% 10% and 12%. Eight percent represents a balanced portfolio with perhaps 30% bonds, 30% growth stocks, 30% blue chip and dividend paying stocks, and 10% cash. The 10% represents a portfolio that is 40% growth stocks, 40% blue chip, 20% bonds or cash. The higher 12% would map over to 70% growth stocks, 20% blue chip and 10% bond. Very rough sample portfolios. Your mix would be a function of things like your investment knowledge, risk tolerance, how long you plan to invest and how close you are to retirement. 8-10-12% Rule of 72 - this is a back of the envelope method for estimating how your assets will grow. Divide 72 by the annual percentage rate to determine how many years before your tax sheltered assets double. This can be applied to any fixed amount and on a restaurant napkin you can estimate the asset growth. 72/10 = 7.2 years to double [8% = 9 years, 12% = 6 years] Starting now, age 31. Twelve thousand dollars (two IRAs x 3000 x 2 years) invested at 10% grows to 24k at 38, 48k at age 45, 96k at age 52, 192k at age 59 and $384,000 around age 66. At the lower 8% rate, you grow 12k to $190 at age 66. At the higher annual rate you would have $768,000 all from that initial $12,000 done now. What a country. Of course, those figures are in the future and will have less purchasing power that todays dollars because of inflation. Stay tuned!