John G

The key to answering your questions is knowing what the "I" represents in IRA. All IRA accounts are individual accounts. You can not add another persons name to your account. You can not transfer money from someone else's tax shelter into yours. As long as you qualify, you spouse can establish an IRA in her name.

If you are thinking of converting a large amount, note that you may jump a tax bracket if you convert everthing in one year. That would make the conversion less attractive. You may convert a fraction of your IRA account over a few years in which you are eligible to "manage" the tax burden. You may also want to do the conversion in a year when you have some control over other variables (like stock sales, one time retirement payments, medical expenses, etc.) that make the most sense. If a large amount of money is involved, I susgest that you consult an accountant.

If you are married, have earned income of more than $6,000, and otherwise meet the overall income limitations.... then both you and your wife can contribute $3,000 this year to either a Roth or regular IRA (but not both). If you are old enough to qualify for the "make up" provisions, then the max amount is $3,500. Your earned income enables your wife to qualify.

Good, it is always hard to know if you hit the mark. Think of the next few years as a period when you are going to learn a lot about finances and investing. Actual account performance would be nice, but making good decisions over the next few decades is more important. You may want to subscribe to Kiplinger Financial as a good overall read for someone at the start of their career. The March issue of Consumer Reports does a decent job of explain retirement plans and identifying decent mutual funds. Good luck with you choices. Post again if you have other questions... such as you don't understand some of the jargon.

Welcome to the world of forward thinking adults. This year you paid $437 tuition for a short course entitled "markets don't always to up". I guess that is just in-state tuition for a 1 credit course! Your 25% down draft is not uncommon as 2002 was a terrible year for most people. Lesson 1 was markets go up and down. But the useful information you seek is that on average in the US, markets go up 7 to 9 years in each decade. The good years not only outnumber the bad perhaps 5:1, the good years are more positive then the bad years are down. I teach about investing in JA classes and usually have my high school seniors look at the last 80 years from a chart on of the brokers produced. Over the long haul (think multiple decades) you should expect a return of between 8% and 14% for investments. The eight percent is heavily weighted towards low risk bonds. The 14% is about the long term average for 100% growth stocks. A portfolio of more conservative stocks (including electric utilities, railroads, mining, and real estate trusts) would probably average closer to 10%. You can demonstrate this by looking at the performance of mutual funds with these types of holdings that have existed for more than 4 decades. Its not perfect data, but representative of long term performance. The US economy has a natural tendency (per Adam Smith's insight when our nation was created) to be efficient, reward hard work, reward useful innovations/inventions, and grow... and over the long haul this is reflected in the stock market which backs companies... rather than the bond market which is based upon IOUs and risk of default. Should you plunk $3,000 into a Roth this year? First some questions: (1) Do you have cash reserves to fall back upon if you lose your job or have some other financial/health set back? (2) Can you forget about tapping into this money for the next 20 years? (3) Do you have a modest level of discipline to invest the funds? (4) Do you have minimal (preferably zero) high interest rate debt from things like credit cards? (ignor student loans and mortgages) and (5) You have other income that can be earmarked to other possible purchases like the downpayment on a new home? If you have answered yes to all of these, then I would recommend that you plunk some extra cash into a Roth. In what should you invest? The wise guy's answer is "the future", which is what stock market investing is all about. I expect the future to be better than today. There have always been terrorists and assassins.... I am talking about real progress for the common person: medical advances, electronics, transportation, manufacturing, and communications. A practical answer is a widely based no load stock mutual fund or no load index fund. Can I tell you the contribution for this year won't go down? No. There are no guarantees in investing. But if you sit on the sidelines every year you will miss the chance to grow a significant nest egg. I helped my neice start a Roth about 6 years ago. I gave her 1000 and she added another 1000. At the end of that first year, her stock mutual fund was up 28%. The next year it was up 32%..... and I did not realize that she thought this was normal performance. Well after six great years and three dog years, she is a little wiser and still on plan because she is averaging just over 10% annual. If you stick to a regular investment plan using Roth IRAs and contribute the $3,000 each year you are capable of building a nest egg of more than one million dollars. No smoke, no mirrors, just a great tax shelter for the average taxpayer called Roth.

You qualify by calendar year. If you qualify this year, it does not matter if two years later your income goes up. However, if you fund a Roth in the earlier part of the year and at year end you realize that you no longer qualify because of a raise, bonus or some other unexpect income... then you see your custodian and "unwind" the contribution. The qualification is done separately for each year. You can qualify, lose qualification, then qualify again over a series of years depending upon your income.

Issues for a college student: 1. Can I fund an IRA now? - paying for education and having a cash reserve come first. However, you may find a grandparent, mom/dad, or other relative who will help you fund an IRA. With two kids in college right now, I am quickly learning that college students come with a wide range of jobs and cash resources. If you have "excess" funds than an IRA is a great idea. By starting early, you get max benefit out of the tax sheltering of funds. 2. Who should be my custodian? - this depends very much on what kind of person you are and what kind of local access you have to financial firms. Internet savy folks have a wide array of choices, others may value the face to face approach. Things to consider: what kind of investments you plan to make, convenience and service, and annual fees. If you are going the mutual fund route then direct placement with a mutual fund or fund family is an option. Many brokerages also offer access to mutual funds (like Etrade, Schwab, etc.) and they often have better online access. There are probably thousands of choices... but you need just one custodian for the next few years. Keep the arrangement simple, you can consider other options after you have run a few years and built a decent size account. 3. Time is valuable, so I can't screw around doing research right now. - Good reason to stick initially with mutual funds, especially index funds with broad holdings (diversification) and low annual expenses (like Vanguard index funds). Generally, I would recommend NO LOAD funds... funds that do not charge an up front or backend commission. 4. Are you eligible? - be sure that you have "earned income" which ussually means a paycheck and W2. As a college student, you should not have problems with the max income limits. 5. IRAs are not the only investment option. - If you are about to graduate and take a job (age 21?), you will be exposed to many more tax shelter / retirement savings options like 401k and 403b. If you live below your income, you can amass an amazing amount of money in these accounts. Think seven figures after the next 40 years. It is possible. 6. Watching investments can be like watching paint dry. Things happen over a very long period. If you get a 10% return each year, then your assets will double in about 7 years. Good luck, post again if you have other questions.

You may want to look into pension/profit sharing plans under which you have some latitude in defining participation. On the Roth, you wife qualifies if you have the earned income. Putting you wife on the payroll (no doubt she does some things of value for the corporation) is not needed and will have an impact on SSN, unemployment insurance, etc. You should talk to you accountant or tax advisor about your options. Some small businesses find it desireable to adopt a prototype plan as a cost effective way of avoiding unique legal fees to set up a plan.

The Roth IRA was establish a few years ago by Congress as an alternative the standard IRA. Both were created as an incentive for individuals to make personal contributions for their retirement. Think "tax shelter". First requirement to participate is that you must have "earned income" which for most people means a paycheck although certain kinds of self employment income can also qualify. The current maximum annual contribution is $3000 per year if your earned income is that much, otherwise it is capped at your earned income. Your parents, uncle or grandparents can make the contribution, it does not have to be your money. Second, there are restrictions based upon tax filing status and income level. I assume you do not make over six figures and that you file a "single" tax return so this should not be a problem. Note, you do not need to put in the max amount. One option could be to put in a fixed amount each month, such as $100. Next issue is finding a custodian who will keep your assets. The common choices include: brokerages, mutual funds and banks. I would recommend that someone just getting started choose a mutual fund or fund family. Something to ask about is the annual fees (if any) that your custodian might charge. Anything above $20 per year should be avoided.... and zero is most cool. You can find a list of mutual funds in the March issue of Consumer Reports. Vanguard, T Rowe, Janus are some of the NO LOAD funds (no front end or back end commissions charged) that you can find on the www. I further recommend that you choose a broad based stock fund, such as an S&P index fund which will give you market performance. I do not recommend individual stock picking or trading for someone getting started. An index fund requires very little "maintenance" by you... just check you periodic statements. Talk to three different custodians. Ask them for their "just getting started" materials, which are often very good. Why mutual funds? Because you get "diversification" which means you don't put all your eggs in the same basket. Why the stock market? Over many decades you should expect assets to appreciate the most in stocks (also called equities). The last three years have been ugly, but that is a very unussual string of negative years. IRA investments for a 19 year old should be thought of in decades. Contributions to a ROTH are not deductable. However, many years from now you can withdraw tax free. If you put the max amount in each year for the next 40 years... then you can retire at age 60 with a nest egg that will probably exceed 1 million dollars. Marry someone who also thinks about their future and you will have twice that amount. You don't have to be a doctor, lawyer or MBA.... Congress created this great tax shelter for everyone. The tax sheltered compound growth of you assets is a key value of the Roth. Two final notes: You did not say if you are just working or going to college or both. Remember that IRA money is locked up for a long time and that there are penalties for taking money out early. Be sure that you have some "emergency" money set aside in case the worm turns against you. Education is another big investment for the future and I hope you are pushing in that area as well. Post again if you need more info or have questions.

Barry, If the daughter is currently not funding an IRA due to lack of funds, it would seem to me that taking a forced distribution and redepositing the funds into a Roth has the advantage of sheltering the income that might be derived from the distributed funds and defering to a future date taking the principle. Since the daughter is 53, there could be many years before she may need the funds. Am I missing something?

I am raising the question of potential "abuse" opened by the absence of regulations in this area. I use the term "abuse" in a common lay persons sense. What you have specified constitutes in my mind a loophole that may allow a tax payer to artificially boost a tax sheltered account. I can't conceive that Congress by choice created this option but rather it is an overlooked circumstance. They certainly did not want folks to convert regular IRAs to Roth's without paying taxes and only if they met income tests. They limited the maximum annual contribution to a Roth. They restricted married filing separately... etc. My point is not based upon the details of IRS code. From a public policy perspective, I don't see it in the best interest of country to allow self-dealing. It is outside of the normal marketplace and invites abuse.

Ok, perhaps I was not clear. If I could buy stock in my own company from an IRA and was in the position to set dividend policy and set stock buyback policy of that company.... then I could easily define a scenario where I had just $10,000 in the IRA at the year begining and at year end have artificially pumped up the IRA assets to say $100,000 if there was enough money in the corporation. I don't think the IRS wanted to leave a Mack truck loophole. That is why I am surprised that anything less than an arms length transaction is allowed. There is a difference between a corporation having retained earnings of $100 and issuing a dividend of $100. You may be assuming that retained earnings may be the driving force that would establish a stock price. That is not true in the stock market as a whole and is certainly not the relationship in most narrowly held and infrequently traded stocks. If it was, then all price/book ratios would be the same. They are not, not even if you restrict your analysis to a single industry like software or banking. My point if you allow anything remotely like self dealing involving stock prices and dividend policies, in the absence of an active marketplace for setting valuation, you leave the door open to some very questionable practices to artificially boost the assets in the tax sheltered account.

A lot of custodians would have a problem with that approach because at the end of the year they must attach a valuation to the holdings. The situation you proposed would not allow any normal kind of market valuation. I see the situation you proposed as ripe for abuse. Suppose the corporation sold the stock for $1 per share and then turned around an issued a $100 per share dividend? Or, perhaps the company would subsequently announce a buyback program and offer $100 for each original $1 share. If I understand your answer above, Mbozek, would you not leave open a huge door for abusive self-dealing?

I would think that these kind of self-dealing transactions are prohibited because you could, if allowed, artificially boost the tax sheltered assets by manipulating the corporate circumstances. For example, if the IRA can buy stock in a closely held Sub S corp then the door is open for the corporation owners to boost the stock price by not taking payroll and increasing cash assets of the firm. Let's see, this reduces the double hit of SSN taxes and boosts tax sheltered values. You can see why some tax payers might love this option. The easiest way to reduce the shenanigans is to eliminate any of these transactions.

"I understand that I should look for a broker that doesn't charge an annual fee (or charges a low fee). What company can I go to start open an account or get more information?" The three biggest choices for a Roth account "custodian" are: brokers (online, discount, traditional, etc), mutual funds (or fund families) or banks. There are literally thousands of choices and you need to decide on what services and features are important to you. The annual fee (if any) is one part of this choice, but you should also consider convenience, services and types of investing you plan to make. "What is the index fund?" An index fund normally refers to a specific type of mutual fund that invests in stocks that are members of a specific list such as the S&P500 large companies. When I open a Roth IRA, how does my money grow? am I investing my money in different stock options and who decides where the money goes? " You money grows when you either loan it out (think CDs, bonds or money market accounts) or invest in equities (aka stocks) where you take a ownership interest in a firm and expect them to grow in size, have profits and at some point pay dividends. Your money, which is also known as "capital", is valuable and invested wisely brings you a return. Many people make their own decisions on investments which requires a little reading and exploring choices. However, some folks want others to make this decision and this second group either chooses a traditional broker (they get paid by fees and commissions) OR a mutual fund. How is this different from a mutual fund? A mutual fund is a company that pools the "capital" or "assets" of many and then deploys these funds to buy stocks, bonds, or other investments. A participant in a mutual fund owns a small fraction of the total "portfolio" or collection of assets the fund has purchased. Mutual funds come in dozens of different types. And index fund is one specific type. Each fund will define the type of investments they make. You should understand that funds can be broadly classed into two big catagories. "No Load" funds have no initial or close-out fees. "Loaded" funds are sold by a sales staff and either have a front end fee of 3-7% or a similiar fee when they sell them. I read something online about money market. What is that?" A money market is another specific type of mutual fund. Most of these buy relatively short term "paper" or IOUs from governments, industry, banks, etc. The main distinction between a money market and a bond fund (which also holds IOUs from the same sources) is that money market arrangements are very short term, often just a few weeks, while bond fund holdings can be 5-30 years. Welcome to the club of future thinking investors. Make sure that the funds you setting aside in a Roth are not something you need in the next few years. While the Roth is a great investment, your first priority at the age of 22 should be to nail down that solid education. Education is another type of investment. Good luck with your studies. Post again if you have other questions.

Were you thinking of the Roth education IRA? Recent legislation created a college savings IRA for children. While it is not likely to allow many families to set aside a large enough pool of funds, it has some advantages.

As you have explained this fee structure.... all I can say is that it is a huge rip-off. Perhaps you should send a copy to Consumer Reports as they like to shine the light on this kind of abusive arrangement. I join Barry is saying this is highly unussual and would go so far as to suggest that the proposal borders on fraud. I guess this firm has a narrow sense of what constitutes "fiduciary duties". What company has proposed this? Please post a web site reference or a name. You should understand that many mutual fund families and brokerages impose NO annual fee on IRAs. Those that do will often waive the fee for long time customers and those with significant assets. In addition, some custodians will waive the fees for anyone setting up an automatic deposit program like the monthly approach you mentioned. You can often request a waiver of the annual fee and it is often granted just to get your business. You should just walk away from anyone wanting to charge more that $25 per year. Frankly, zero sounds just about right to me. The idea of charging 50% of a $3k deposit is robbery. I sure hope no one is falling for this idea. Could this be an insurance company? There is no reputable company that can with a straight face make an arguement that their level of service is worth such a fee. You can find a list of mutual funds in the March issue of every year in Consumer Reports. Since you appear to be new to investing, I would like to suggest that you start with a basic index fund. For example, Vanguard has a fund that tracks the S&P500 and has low overhead. It is also NO LOAD, which means there are no front end or back end commissions charged. I believe they have a small annual fee. You can find them on the web. Schwab, Etrade, Fidelity, Scottsdale, are examples of various brokerages that you might consider. The reason for choosing a broad based mutual fund like the index fund I discribed is that they hold a very diverse group of stocks. Stocks tend to outperform other investments when you are talking holding periods of 20+ years. We just have had two down years, which is relatively rare. If you want additional advice on investment choice, you will need to post some basic info like your age, marital status, likely retirement year, current tax rate, etc. I am willing to give you more details about getting started, just post your questions.

You can only buy or hold a restricted list of option types in an IRA and only if your custodian allows options in the IRA (some do not even though IRS regs would not prohibit). For example, most custodians will allow you to sell covered calls for stock you currently hold (and must hold until the option expires). Many will allow you to own an option to buy a publicly traded stock, since your max at risk amount is exactly the initial price you pay. What you can not own in an IRA is any option that exposes the account to unlimited liability. The reason for this is that you just can't pump additional funds into an IRA if the option hurts you. Option trading is a significant notch above normal investing in terms of the knowledge required and the tracking of the investment. You should also understand that the transaction costs of options are a significantly larger percent of the trade. From the questions that you posted, I would surmise that you are not an extremely sophisticated investor. I may be wrong, but if this is true I would not recommend plunging into options within an IRA. For example, if you can not define the term "straddle" or do not know the option expiration date, then you should probably not be involved in options trading. I am not implying that options are bad, just that they are more sophisticated investments were novices are unlikely to be successful. Some investors have a "grass is greener on the other side of the fence" complex when it comes to options. If you are having trouble making money with standard investments, there is little chance that you can make money in options.

Not every potential custodian will accept accounts for children under 18 because of problems they perceive with custodial arrangements for minors. That seems to be more of a custodian specific issue rather than an IRS issue since the federal regs make no distinction for young age as long as the "earned income" requirements are met. In brief, the EI requirements are met by anyone getting a paycheck and many others with other types of income from mowing lawns, babysitting, modeling, etc. Who to see? Well, last time I checked, Etrade said no while Schwab said yes. Generally you can pick a mutual fund, bank, internet broker, or traditional broker. Make a few calls to companies that suit your needs. You may find it easier to start with firms with which you already have accounts. Perhaps other readers of this thread can add a list of YES custodians. I would suggest that since this account will be a tax shelter for many decades that you look toward stocks (aka equities) rather than interest bearing CDs or bonds. A very broad based mutual fund like one that tracks the overall market would work very well. Look for a home with either zero or under $15/year annual fees and low imbedded expenses. A good place to start is with Vanguard funds. You can often get a firm to waive the annual fees on IRA accounts by just asking, especially if you have other business with the firm or the IRA assets are large. You might choose to start with a custodian that is convenient and then transfer the funds a few years down the road. A child IRA is a tool for letting your child get started learning about investments. Nothing bad about learning early on that markets move both up and down. Good luck with this project.

No one can accurately answer your question. My take on the likelihood of drastic changes to tax Roths is that the probability is extremely low. There are now millions of people with Roth IRA accounts and that number continues to grow. If Congress were to reneg on taxes, they would alienate a very large number of voters who already have paid taxes on the contributions and/or conversions. Trying to tax anyone twice on the same amount would be a gross violation of the fragile trust between the government and the people. Would you want to run for Congress after making that change? Folks that think ahead to invest for their future are already more likely to vote than the average citizen. A tax law change would bring them out in droves on a basic "fairness" issue. If such a tax change occured, more than just a few cases of tea would get tossed about. The Jeffersonian view would be towards revolution. As the number of Roth account holders grow, the safety of the existing accounts grows. Congress could much more easily decide to phase out the Roth, leaving all existing accounts grandfathered. So far, the trend has been in the other direction, an expansion of the max amount that can be set aside each year. Coca Cola learned a big lesson when they pulled a surprise in changing the formula for Coke. And all that fuss was about a carbonated beverage. I doubt Congress would ever try a direct assult on the tax status of Roths. Tax payers take money a lot more seriously then soda formulas.

Two major problems with your plan. First, it is not possible to know when you reach a stock market bottom, or for the matter a top. Second, you can't game the system multiple times in one year. Get a copy of Pub 590 from the IRS and read the recharacterization section very carefully. Getting a custodian to do the paperwork correctly just once is a challenge. This falls into the catagory of "clever" schemes that should clearly seem to good to be true.... like opening dozens of IRAs with each one having $2,000. That doesn't work either.

You should consider talking to your banker about a "bridge loan". You could also potentially borrow against an insurance policy, the home equity in the first home, etc. Another possibility is talk with your real estate agent. This is not a rare issue, but happens with enough frequency that various options have been developed. You might also inquire if the owner of the next house will do a delayed sale... you commit to buy at a specific future date for a specific fee. You can also design an option to buy at a specific price within lets say 120 days and give the owners a non-refundable fee. This is a very frequent tactic used by investors trying to assemble a patchwork of urban land for a larger development project. {my first landlord had an arrangement like this, the developers paid him every 6 months $2000 to keep their option open and four years later owned the entire block} You also have the option for finding a relative or business associate that is willing to front the money for a short period of time at a good rate of return.... compared to the 2% they might be getting for cash right now. Corporate execs that get stock options often use similar techniques to execute the options without actually putting up the full value of the stock. We are not talking Tony Soprano style loan sharks here, just practical short term "bridge loans". Your circumstances and credit worthyness would be a factor. The transaction costs are not cheap. Good luck. Do not do the short term IRA borrow if you only "think" you can repay in 60 days. Too many things can go wrong and missing the deadline would be painful.

No.

"In any event making a gift of $3000 to a dependent child with $3000 in comp to fund a Roth IRA is still a shrewd economic move. " Worth of saying in red and repeating. I totally agree. I teach economics and basic investing as a JA volunteer at the high school level, and devote one hour to Roth IRAs as part of "How really to become a millionaire". Each kid contacts one mutual fund for an IRA starter kit to explore. At the end of the workshop, I suggest that each Senior consider asking a grandparent, uncle, aunt, etc. to help them get started with an Roth IRA and perhaps match their contribution. Over the past three years, there have been about two dozen kids who have come back astonished with the positive responses they got. What a great way welcome a student into the world of adults.

Mbozek, if the citation by MGB above is correct (I still have not found it) then your use of the word "child" can be misleading. Not under 18, not a student if over 18 eliminates a large number of folks. Which leaves "adult children", if you excuse the oxymoron. For those who meet all the qualifications, you have done a great job in demonstrating there is a great incentive.