John G

I believe these rules still hold: "... Those with AGIs in excess of $110,000 for single tax filers, and $160,000 for joint tax filers, are prohibited from contributing to a Roth IRA. Those with AGIs in excess of $95,000, if a single tax filer, or $150,000, if a joint tax filer, can only contribute a proportionate amount. For example, a single tax filer with an AGI of $102,500 is only entitled to contribute $1,000 to a Roth IRA. Both the AGI conversion and contribution limits do not include gross income resulting from conversions." from ROTHIRA.COM Note, the married filing jointly has a higher limit. If you are under 150k you can do a full Roth. If you are close, you might want to consider selling any stock loser or getting a company to push a bonus into 2003 to qualify this year. If either you or your wife run a business, you have multiple other options for tax sheltered investing and should talk with your accountant. You should also evaluate any corporate plans like 401ks that you or your future wife may have access. Marry in 2003, and you may both be eligible for this year.

Barry, Noting the point you make above.... do you think it would be possible to relocate the IRA if the custodian insisted on "take it all stance" or is that something that you would have to do before the death?

Archimage has posted wrong info above. Working from the facts first posted: The first issue that eliminates your mother from any contribution to an IRA is that you did not describe anything that could be considered "earned income". EI must be related either to the mother or her spouse. Capital gains, gifts, scholarships, fellowship/grants, dividends, interest do NOT qualify as earned income. To keep it short "any amount properly shown in box 1 of Form W-2", quoted straight out of Pub 590, qualifies as earned income. No W-2, very UNLIKELY you can qualify for an IRA. Traditional IRAs also have a 70 1/2 year age limit. Note, your mother can fund the IRAs via gift of other members of the family. For example, she might want to fully fund a ROTH IRA for a grandchild that works.... the worthy teenager scenario. If you mom is unlikely to consume all her assets during her lifetime, this option has some other attractive estate planning aspects. Again, the key is meeting all of the eligibility requirements. This would also be true for you and your spouse. Note, you mom would NOT get any tax deduction from this, a ROTH would probably make more sense.

Limitations on contributions apply to the person, not to the account. Therefore, you can't put aside more money by having more accounts. (you probably knew that! but it has come up before on this message board) I agree with above answer.... but IRC should read IRS. Generally, you don't want to get crazy with IRA fragments becuase you start having problems tracking your money and performance. While you may find some mutual fund that is not available though the major brokers, every major brokerage sure gives you availability to more funds that you could ever completely study. Fragment IRAs can also mean more annual fees and if you are buying individual stocks, inefficient purchases due to small block size.

Add also a mutual fund to the list, or mutual fund family. Choice of a custodian will be influenced by what is convenient for you, the type of investing you plan to undertake and the fees that the custodian charges. If you find you do not like your initial choice, you have the option of transfering your account to another custodian.

This article does a good job of providing the overview. It is about 10 pages long, about 50% graphs. http://www.ici.org/pdf/fm-v10n2.pdf

For the general reader, arguments against hedge funds: Some hedge funds can expose you to risk beyond your initial pledge and therefore would be inappropriate to any IRA since you can not just add more money. It is a very rare person who is sophisticated enough and with deep enough resources to even think of this.... and I would imagine they would not be thinking about IRA accounts. Performance fees are very high. Results erratic. Initial amount to participate is often 50k and UP. For all the general investors on this message board, do not be looking a hedge funds. Been there, done that. Don't get caught up in the "glamour", some of these folks are not very up front about their performance statistics. The SEC and other regulatory bodies do not focus on protecting taxpayers involved in hedge funds. They are expected to be savy investors and are more or less left to their own defenses. What is that latin phrase? caveate emptor?

This topic comes up a lot on this board. It looks like there are some Texas wildcat investors out there, which is a shame since you don't need to bet on long shorts to have great success with a Roth. See the below link: http://benefitslink.com/boards/index.php?showtopic=12458

1. I think that more than 50% of all IRAs and Roths do not have a fee now. 2. A common practice is to either ding the IRA/ROTH or to allow you to write a check to pay directly for the fee. It seems to me that you would hardly want to pay for a Roth fee from an IRA if you could pay directly with a check. Lets get a specific brokerage name and citation. Perhaps the original post got the from/to facts confused.

Many but not all custodians will set up a program to take a bite from your checking account. The few times I have seen this it was for a specific monthly amount, not a percent. On Schwab: accross the family we probably have about 12 accounts with them and perhaps 25% of all assets, a history of perhaps 10 years. They have their pluses and minuses. On the plus side: decent web site, decent executions of stock trades, reasonable range of mutual fund access, readable monthly statements, better than avg at answering the phone and offices in most major cities which is helful in getting paperwork done and if you travel. Minus side: general trading commissions are higher than the lowest internet firms (but executions can easily blow out this difference), web site can get very slow at times. Neutral: seem avg in number of mistakes which accross the board is relatively low. I guess they are a blend/hybrid firm with some of the electronic features but still have a decent human behind the counter and on the phone presence. Don't expect them to make decisions for you, its not their style.

The first issue you face is if you have "earned income". You mention LTD which sounds like you currently do not work. You can qualify for a ROTH/IRA if your spouse works. Earned income does not include interest, dividends, gifts, or capital gains. Perhaps the accountants can confirm if LTD counts... I am assuming it would not. Lets get the qualification issue settled before we move on to the other issues.

You fund Roth contributions with "after-tax" dollars and get no deduction. No front end deduction, but the back end is great... no taxes on normal distributions. A roth is the tax shelter for the average Joe. After you establish a Roth, you have no interim taxes on interest, dividends, or capital gains. Zero. You talk about savings accounts and interest. These are ultra conservative approaches to investing. For most people opening a Roth, they have decades of tax sheltered growth before they draw upon the account in retirement. With a long hold period, you should look into stock mutual funds. Stocks (equities) have always outperformed interest bearing investments in any period that exceeds 20 years. Grab a copy of the March or April issues of Kiplinger Finance, Money, or even Consumer Reports which cover retirement accounts like Roths during the tax season. Most public libraries will subscribe to these mags. You will have trouble building a significant nest egg if your annual interest rate is slightly over the rate of inflation. Folks that are just getting started are sometimes uncomfortable with stock/mutual fund investments. The solution is to become more knowledgable about these topics and the above mags are a start.

Welcome aboard! You are wise to devote some time to understanding investing... getting started at an early age gives you a big leg up in terms of learning soon and compounding longer. ROTH IRA 101: This is a mechanism set up by act of Congress to give citizens with "earned income" a tax shelter for retirement. Prior to this year, you could contribute 2,000 for a Roth if you had atleast that much in earned income and otherwise qualified. Now, in 2002, that amount has been bumped up to $3,000 for someone your age. So, if you have any combination of jobs that gives you earned income (do not count dividends and interest) then you qualify. Next step: You need to select a custodian who will handle your assets. Custodians can include brokerages, banks, mutual funds, etc. If you are not yet 18, you may need to hunt around to find a company that will accept Roth's for children. Schwab does, Etrade does not. Talk with atleast three potential custodians. Ask them about the investment options, annual fees (if any) and get them to sent you a "getting started" package. Since you are investing for a long time, think in terms of equities (aka stocks) rather than CDs or bonds. For someone just getting started, I think a broad based mutual fund or perhaps an index fund will work just fine. You can find them listed in Kiplinger Financial mag, which is a great read for a young investor. It is hard to invest in individual stocks wisely with a small amount of money because of transactions costs, time consumed and difficulty maintaining a diverse portfolio. If you invest 3,000 each year for the next 38 years in an account that on average goes up 10% a year your Roth will reach the 1M mark. Upon retirement you can withdraw the assets tax free. And if you marry someone as forward thinking as yourself you can 2x that amount! Post again if you have more questions. If you don't have enough to get started, ask an uncle/aunt/grandparent to match your started amount. Good luck.

You can actually do the full 5k anytime before April 15, even on the same day. But, as noted above: be sure the custodian understands the designations. Best way to do this is (1) use two separate checks and put the contribution year on the check, and (2) double check your monthly statement to make sure the funds were deposited and properly designated. Year designation mistakes are pretty common in the overlap period.

Abunai, You can't get a simple answer to your question. Why? Well partly because you seem to be making a false comparison. I don't understand why in your example your Roth could not have the exactly same investment option as your taxable account. You have a very wide range of investment options with a Roth. Even if you made an apples to apples scenario, it would be impossible to accurately respond. Why? Because you need to know the number of years you will invest, tax rate now, tax rate in the future, and a host of other info. You might want to develop a spreadsheet to run some scenarios or investigate the Roth calculators on the web at various brokerages and mutual funds. They vary in sophistication. I have a second question for you. Why would you have long term investments tied up in very low yield CDs or money market accounts. If you have a long time horizon, you should be investing in equities. You can take contributions (not earnings or appreciation) out of a Roth early without penalty... but why would you want to erode your tax shelter? Just because the IRS/Congress allows an option does not mean it would be sensible for you. There are also some penalty free withdrawal options for buying a home or paying for education. Again, this may not be the best idea and you may have other options after a few years.

Donnabr22: Your question is a great example for other readers of this board. If you write a letter requesting action, or make a contribution deposit - - you MUST verify the results. Some mistakes can be corrected or will be forgiven, but avoid all those hassles by putting a post it on your monitor or journal entry two weeks ahead in your daytimer (preferably both) to double check that everything was done correctly. On this site, we have had reports of conversions that never got done, moneys put into the wrong account, accountants that forgot to include relevant tax data in filings, wires that did not show up, etc. You, the citizen, must take some responsibility for checking the work of others. It will save you time and hassles. Been there, forgot to do it myself a few times.

I believe that students do not qualify for the tax credit. I seem to recall reading something about this but can't remember where.

I am not sure if Paul is talking about a reversing a Roth conversion or reclassifying a current tax year contribution. Concerning the later..... It seems to me that there is an awful lot of running around time to get that done. Plus, you have no control as to the exact timing and markets can move around a lot in a few weeks... timing is up to the back room of the custodian. You also have check to make sure it actually gets done by the custodian. If you are pushing around 2K, it seems to me that at some point the value of your time erodes away a possible benefit. I am surprised that custodians don't establish some fees for these kinds of transactions which clearly must annoy the retirement dpt. of brokerages, mutual funds and banks. If Paul is really talking about a Roth conversion..... Then you can un-do the deal if take timely action. Remember that you may not qualify for the conversion in a subsequent year: the rules may change, your filing status might change, Congress may pull the plug, etc. So, if the change in relative value is small you may just want to leave the conversion stand. Final point, if the drop in value is a large percent.... you have a much bigger question you need to face. You don't want to do an Enron with your retirement money. A well diversified equity portfolio or equivilent mutual fund(s) or even an index fund will ussually get the job done if given time. You don't need to or want to be betting long shots in the stock market to get good results. Time, diversification and patience are all very good friends of the savy investor.

Sorry, you can't cherry pick winners and losers to recharacterize (unconvert) a Roth. You may want to read the middle of this Barry Picker article that warns against cherry picking and includes an example.... http://www.rothira.com/recharacter.htm

While YES is the answer to the question, you may want to consider a few other factors. 1) If your custodian charges annual fees you might eliminate fees by building assets with one custodian. For example, some custodians waive fees if assets are greater than 5k or 10k. 2) In a few instances, you may have trouble meeting minimum initial balances of a few mutual funds. While many have very low initial balances for IRAs, you should check on any specific fund in which you are interested. 3) What more paperwork? It is easier to track your investments if you don't split up your funds excessively. Two IRAs for you, two for your wife, a teenager account, brokerage, 401k.... don't let your paperwork get unmanageable. I volunteered to help a divorcing women sort through her finances... we were still identifying misc. accounts on the third meeting. And... the more accounts you have the more jumping around from web site to web site with multiple passwords if you are an active investor, it can drive you nuts. {If you are paying an annual fee for your IRA, you might want to "ask" for the fee to be waived. Some custodians will waive fees if asked.} Of course, many custodians do not charge any annual fees.

"She would only owe taxes on the conversion amount" The above is only true if all prior IRA contributions for your wife were deductible. Otherwise you pay tax on a fraction of the conversion. You can not cherry pick what you convert, the math is based upon a universal fraction of nondeductable contribution compared to total IRA assets (even if the assets are in different accounts, locations or custodians). See IRS Publ 590 for examples.

Adding to Barry's comments: You have some other options. These include just buying some stocks and holding them. When you go to sell you would be paying long term capital gains. Since you might not be able to hold a specific company without having mergers, dividends or other untidy events for two decades, you could purchase a tax managed mutual fund or a broad index fund like the S&P500 which would minimize taxable events. Another option is the educational Roth which while improved just isn't big enough for the complete job. The 529 plans have a much bigger capacity. Many states offer prepaid tuition plans - I personally don't like the ones I have seen since they are often not flexible enough and the fine print says the promised returns are not guarenteed. If you do absolutely nothing for your child and spend the money on yourself, then you make it more likely for your child to get a scholarship! Sad, but true. Families that don't plan ahead get more financial support. If you put any money in your childs name, you run some risk of the child becoming of legal age (18 or 21, varies by state) and spending the money on questionable pleasures. Next year I have 2 kids in college: one ivy, one big U with out-of-state tuition. I recommend that when your kids are freshman in high school you start talking up the benefits of your local university! And, if the quality does not measure up try moving to Virginia (where UVa and William and Mary are outstanding in-state tuition schools) or Michigan (U of Mich). Another interesting option right now is McGill University, a very elite school in Montreal, were the cost to attend is about 15k US$ due to the exchange rate with Canada. Over the next 18 years you will no doubt see more options for meeting college expenses.

If you qualify for a Roth, you and your spouse can put new funds into the Roth... $3500 each if you are both over 50 and otherwise qualify on income/tax filing status. You can do a multi-year IRA to Roth conversion, but you must meet the income qualifations each year. The above comment is correct in that you use the "composite" picture of your assets and therefore about 1/2 of the amount converted would not be taxed. You can't cherry pick the conversion. Of course, if you do a multi year conversion, your assets are likely to grow... so taxes could change. You have to make some guesses as to eligibility, tax rates, portfolio growth. The multi-year conversion gives you some ability to control the timing of your tax liability and to avoid any serious tax bracket creep. Do not undertake any conversion if you can not pay the taxes with assets outside the IRA.

Source of funds is not the issue, you could even take out a loan , borrow from a relative, use margin from a brokerage account, etc. (not recommending, just saying it is possible) to fund either an IRA or Roth. The primary limitations are related to earned income qualification, various annual income ceilings and tax filing status. If this answer does not seem to hit the mark, please clarify the question further.

Plain speaking from Barry's 1998 article (http://www.rothira.com/pickroth.htm ) "Not everyone is eligible to make a contribution to a Roth IRA. In order to qualify, a taxpayer must have earned income, at least in the amount of the Roth IRA contribution. For married couples, either spouse can have the earned income, so that a spouse with no earned income could still make a Roth IRA contribution, as long as the other spouse has earned income. There is also a maximum income cap for taxpayers to be eligible to make a Roth IRA contribution. For married taxpayers filing a joint return, the ability to fund the Roth IRA starts to phase out at $150K of modified adjusted gross income (MAGI), and disappears completely at $160K. For single taxpayers, the ability to fund the Roth IRA starts to phase out at $95K of MAGI and disappears completely at $110K. For married taxpayers filing separately, the phase out starts at $0 and ends at $10K." I have not seen any info that says these income ranges have changed with the new tax rules. Not sure why there should be any income ceiling, certainly it only cuts off a few percent of all taxpayers for a couple of thousand... but hey I only studied mathematical applications of public policy. We put a clamp on a 2k or 3K (now) Roth tax shelter but leave open a huge capability for 401k and other shelters. Go figure. I wonder how many person years will be spent writing the legislation, writing the rules, programming the computers, paying the accountants on the goofy phase out rules. Real productive work. All hail tax simplification!