John G

I have grabbed an old comment and done some cut and pasting. You will find lots of refs to this "just getting started" if you go back 100 days.... All IRAs require a custodian to hold the funds. Your choices for custodians include banks, full service brokerages, discount brokerages, internet brokerages, a mutual fund or fund family, etc. The common IRA investment options include individual stocks, mutual funds, bonds, and CDs. Yes, the interest and capital gains are credited into the account. Each custodian has a different package of investment options, some are extensive others narrow or limited. Banks traditionally have emphasized CDs, although more sophisticated banks have an array of mutual funds or brokerage options. Some of the brokerages provide access to thousands of mutual funds in a broad array of families. Annual fees for IRAs vary from zero to rediculous. Commission rates and mutual fund expenses vary from ultra low to excessive. If you are inclined toward mutual funds, I suggest limiting your search to NO LOAD funds... the loaded funds (front or back end commissions) are more common at full service brokerages and banks. Mutual funds are attractive for folks just getting started. You get diversification, easy incremental purchases. Convenience and service for custodian should be considered. Some folks like the local counter service, others have no problem with far away internet based firms. There are hundreds of custodians that will do a good job for you. Within some catagories like internet brokerages, the cost differences are just not that big and most offer too many investment options. You only need a couple of broad based mutuals funds.... there are more than 8,000 to chose from. You may want to read the retirement section in the March issue of Consumer Reports. They do a decent job reviewing some of your options and boiling down the list of mutual funds. I would collect information from atleast three different custodians. Ask them about fees, investment options, etc. Get started, then after two years if you don't like your choice you may do a direct custodian to custodian transfer of your IRA. Read this ref on interest rates vs equities: http://benefitslink.com/boards/index.php?showtopic=7176 Other refs, some duplication of content http://benefitslink.com/boards/index.php?showtopic=9321 http://benefitslink.com/boards/index.php?showtopic=9278 http://benefitslink.com/boards/index.php?showtopic=8638 http://benefitslink.com/boards/index.php?showtopic=6713

I think you have a big problem with your idea. Let me play devils advocate. I want to put more money into my IRA, 'cause 2k is not enough! I buy an obscure bond for $100k, discount the price to $50k and buy it from cash in my IRA. A month later the Roth sells it for $100k. Do you see the problem? I doubt if any custodian would allow this kind of transaction. Yes, some custodians will allow you to acquire discounted notes from third parties... but not all.

You did not provide much detail on how or where this transaction occured. The answer to your question ussually will depend if the original investment was made within an IRA or ROTH IRA. If your custodian allowed this investment as part of your account and all transactions were completed by the custodian, I believe you are fine. Custodians rarely will allow you to make an illegal transaction as they have a fiduciary responsibility. If the transaction was done outside of the IRA, then it can not be transfered into the shelter. What custodians will allow will vary from firm to firm. Custodians will NOT allow investments that will expose the account to unlimited liability. Many will have problems with any investment that they would have trouble providing a year end valuation. The IRS has additional rules, but in my experience custodians are more constraining because they tend to rule out oddball investments as too labor intensive and too risky for them.

This topic comes up a lot. You might find it covered from many angles with subjects like "help", "just getting started", and "new to investing" in the archives. In brief, you first step in getting started in IRA land is to pick a custodian. The main choices are banks, mutual funds or fund families and stock brokerages. Banks tend towards conservative investments like CDs and sometimes loaded mutual funds (load means commission fees, often up front, sometimes when you take $$ out). I think beginning investors should stick with NO LOAD mutual funds. Grab the March or April Consumer Reports for a good list of funds and some common sense advice on retirement accounts. Although you can go directly to mutual fund families like Janus and Fidelity, a second method of fund investing is depositing your IRA contributions at Etrade, Ameritrade, Schwab, etc. who all offer access to hundreds of mutual funds. Many of the brokerages will give you access to Janus funds... if they are actually open to new investors (another issue). If you have many years to go before you retire, you should be heavily commited to equities (aka stocks). I just don't think you will be very happy with the long run returns that a credit union, thrift or bank will offer. Visit some web sites. Talk to at least three different potential custodians. Ask about the range of investment options. Ask about annual fees.... these range from too high to zero. If your 401K assets exceed 10,000 you will find that almost all custodians will waive the annual fee if you just ask. They love retirement accounts because they expect to hang on to those funds for a long time. Post again if you have more questions.

They are the same. The maximum contribution is $500 per year per child.

Whoa! Think about what you have just suggested. You plan to kill an IRA to get a 600 deduction? Assuming a 40% tax rate, the benefit would be just $240. If you leave the $1,400 in the IRA and let it compound at 10% for 40 years you amass $63,000. Don't forget the time you will spend preparing the paperwork, tracking the transaction and filling out tax forms. Keeping the IRA might be more attractive. Investments flucuate in value. I would suggest sticking with your IRA and playing for the long term values.

Supplementing Barry's comments: The best way to combine IRAs is to do a direct transfer. Try to avoid having a check sent to you. If both accounts are with the same custodian, often a letter of instructions is sufficient. If two different custodians are involved, get the receiving firm to give you the special form that authorizes them to vacuum the assets from the other custodian into your account. Be aware that custodians often like to charge account close out fees (sometimes $100) and some investments may have constraints such as backend loads on some mutual funds. Stocks and most mutual funds can be transfered whole, but if you do not specify the custodian you are leaving may liquidate your holdsings (pocket the commissions) and transfer just cash. In the case of CD's you can ussually specify the transfer on the date of maturity to avoid penalties. In all cases, follow up all instructions to insure that they have been completed. This means reading all the mailings and checking your monthly statement carefully. Never assume that requests are done per your instructions, on time, or without error.

The most common custodian options are banks, brokerages and mutual funds. They vary in terms of their levels of service, automation, efficiency, and the types of investments they support. If you are just getting started, I think mutual funds or brokerages that offer mutual funds is probably the best way to go because you get good diversification and can buy in discrete dollar amounts instead of being concerned with shares. There are many custodians that either charge a small annual fee, have no annual fee, or waive the annual fee either upon request or if your total assets climb above 5 or 10 k. Just avoid anyone that wants to charge you per fund or a single large fee. If I recall, Etrade and many of the internet based brokerages have no fee IRAs. Schwab drops the fee if you assets are over 10k. You actually have many choices and can readily search the web. Don't focus entirely on fees. Customer service, hours of operation, convenient locations, and supported investments should probably have a bigger impact on your choice.

Good idea to go full time and finish. I also would like to suggest that you consider any of the various loans, work/study, dorm RA, teaching assistant, etc. It sounds like you would also be highly likely to qualify for a scholarship if you have been paying your own way... go see the financial aid office on that point and check the web references on scholarships. I would tap retirement resources if that was the only way to pay to the accelerated completion. A tax shelter started early is worth a lot because time is very much the investor's friend. You did not provide any numbers on college cost, time to complete, prior year's income.... but I think you will find alternative ways to finance the education finish if you keep looking.

The "I" in IRA stands for individual. You act to create and fund an IRA, it is not an employer option. Current max funding is $2,000 per year if you have earned income that is at least that level. Roth IRAs are a recent variation of the standard IRA where you can build a retirement nest egg that is tax free. You must select a custodian such as a bank, mutual fund or stock broker. See some of the earlier links about "just getting started" on this site for additional info on investing choices.

You did not indicate your other assets or income, but I am going to assume you are in the early stages of your career. I would suggest you look to other sources to solve this problem. It is not easy to get money back into a tax shelter once you have taken it out. The Roth is your absolutely last resort. First, consider internal family financing. Can you think of any relative complaining about the rates on CDs? You could probably handle a five year loan and offer a rate 3% above the going CD. Do a senior a favor! If that is not possible, start talking with your banker. If your credit rating is in good shape, you should be able to find some short term mechanism. That the Roth has not changed much in value is not relavent. That is just market history for the last two years. What is more important is that you could have many decades of tax shelter and that trumps the short term financial hurtle from my perspective.

In brief, a Roth IRA is a tax sheltered asset building tool created by Congress for people who have earned income (aka salary or wages). You can currently set aside a maximum $2,000 per year, recent legislation will increase this amount eventually to $5,000. The Roth is a tax shelter, if you follow the rules the withdrawals are tax free. Someone who starts at your age on continously pumps 2K into the Roth each year could very easily build a nest egg of more than $1 million. While the money is yours and you direct the investment, a "custodian" holds the assets. Potential custodians include banks, mutual funds and stock brokerages. You have lots of choices and companies often have promo materials for helping someone get started. Financial firms love IRA customers because the accounts usually have a long life. To find out more about Roths, try reading some of the material at the companion site www.rothira.com , or go to your local library and read articles in Money, Worth, Kiplinger, or Consumer Reports issues from the tax season (March or April). You will also find information on the web sites of many banks, mutual funds and brokerages. Want to get started? Get info from atleast three different custodians and compare what they say. The post your questions and we will do the best to answer them. This is a very simple overview of the Roth. Most folks meet the various requirements. This is one of the premier ways to build a nestegg over the long haul. just 16W on this end

I can't answer your complex question, but you seem to be heading in the right direction on evaluation. You should also consider one other option: a pension/profit sharing plan . My wife and I own a sub-S and in the early 1990s adopted a "global" P/P plan that we found through Schwab. An independent agency/accountant obtained IRS approval for this plan, but it was essentially self directed at Schwab. Under this prototype system, you choose the ground rules such as eligibility, vesting, level of control, etc. For a number of years, we were pumping a max amount into the plan. If I recall the maintenance cost was about $150/year to the agency/accountant, and nothing at Schwab because of the amount of assets. Try NRPTC 800-IRA-N-KEO in New Brunswick NJ to see what they currently offer. I am sure that this arrangement can be found with some other brokerages. This approach substitutes for a local legal draft plan which has much high costs. It is best used for simple systems such as a sub-S with just the family drawing salary. The more complicated the circumstances the more likely you want local legal expertise.

Your designation of benefitiaries is the first factor that determines who receives the IRA or Roth. Most custodians want a benefitiary declared. You can have primary benefitiaries and back-ups, and you can give percent allocations. For example, you can declare your wife as primary and kids as backup. When you die, you wife could decline being primary and the IRA would be given to your kids. Or, she could decide she needs the funds and keep the funds. Estate rules are in flux, but right now the amount of the IRA is counted as part of the overall estate. Don't die this year... next year the initial exempt part of an estate bumps up! If you are below the estate tax thresholds, then the Roth would pass to your heirs and have no income or estate taxes owed. The problem with the estate tax threshold is that it is now catching too many families. Historically, estate taxes were imposed on the super wealthy, but the tax threshold did not float with inflation and with 401ks, ESOPs, IRAs and rises in home values more folks are getting caught and complaining about the fairness issue (but not Buffett or the senior Gates). I think the WSJ talked about only 1.5% of families in the late 1990s triggered estate taxes, but that number could easily climb to 10% in this decade. The republicans would like to completely eliminate "death taxes" and "double taxation". From a practical matter, Congress can eliminate 80% of the families that might owe estate taxes but only lose 20% of the revenue.... which is why something less than a total elimination is likely. I would suspect that in a few years estate taxes will only apply to estates above $5 or $10 million.

This is an old refrain from me.... but STOP. Think twice before taping into a Roth. Just because something is allowed does not mean it is smart. It can be allowed and tempting and still be financial foolish in the long run. {told by a fellow who was once seduced by a ten year averaging on a lump distribution that subsequently cost many thousands of dollars.. and counting... in taxes} The Roth is an extraordinary tax shelter with very generous rules governing distributions and estate planning. Before you tap into it, you should consider a wide range of alternatives: not spending the money, bridge loans, home equity loans, borrowing against other holdings in a brokerage, intra-family loans, refinancing, selling something, negotiating an scheduled payout, asking for a bonus/raise, etc. The whole point of a tax shelter is to maximize the dollars sheltered and the time sheltered. Even in retirement, the answer of what assets to tap first can be complicated. Often you want to consume the Roth last, but the optimal solution for you will be a function of your likely income stream, future tax rates, pension plan, other assets, etc.

IRR, thanks for the input.... I know breakpoint in other applications but not mutual funds. Sorry about the gimick remark. Ah, the power of NO LOADs, you just don't get those technicalities or "critical dates". Since in a Roth or IRA you don't need to worry about capital gains and dividend distributions either.... why not go all the way and banish the sales commission by going no load? Yes, some people need help selecting investments and the advisor should not work for free. But I think the majority of Americans can read a couple of articles on diversification of investments and choose a couple of mutual funds without all the extra help. And, if they need help they have Money, Kiplinger, Worth and even Consumer Reports. Then there is Uncle Ruckeyser's newsletter and Morningstar evaluations. There is actually too much info. Having sold three different houses on my own, perhaps a bias toward self help is showing! But I have a hard time giving away 7% up front to someone who probably has not read the prospectus either. As of former consultant, I know the game of asserting hidden wisdom. But mutual funds are pretty transparent. The average college educated American can learn and act. Too many advisors steer consumers to products that offer them a commission and not many are truely up front about that.

Mutual Fund Terms: Sales charge: these can be front end, back end, declining with longer holds, etc. Way back when Neandrathals were roaming the planet, mutual funds charged about 7% up front to participate. The trend has been away from these commissions, in fact a whole new breed of mutual funds called NO LOADS have emerged. No loads do not charge any fixed commission up front or on the back end. From my perspective a good rate is zero. Transaction fees: probably refers to the sales charge, see above. I do not know of any mutual funds that charge a fee on each transaction. Avoid any fund that charges you for a transaction. Breakpoint pricing: no clue, this maybe part of some gimick sales pitch.... provide fund name and context and I will try and respond Mgmt fees / expense ratios: all funds, including NO LOADS, have operating costs that need to be recovered. Just look for the annual expense percent which must be reported. Index funds with little analyst support (like a Vanguard 500) can get their annual fees below 0.3% while international growth funds could have fees in the 1.8% range (all those junkets to Thailand and New Zealand to look at companies). Lower annual expense rates are better, which is why the index funds often score well. Analyst guided stock funds range from .4 to 1.5%. Above that range becomes more questionable... and often you can find a similiar fund with a lower rate. Annual IRA fees: some custodians charge an annual fee for each IRA, supposedly to pay for extra IRS reporting requirements. Etrade and many of the new online brokerages do not. Annual fees can range from absurd $100/yr to zero. Some firms like Schwab waive the fee if your IRA or total assets are above 5k or 10k. Some custodians will waive the fee if you just ask. Use your judgement and compare service, convenience and fees. I prefer zero annual fees. Performance / annual returns: First, understand that previous track record is no guarentee of future performance. Trends change such as the wide spread decline of tech and growth stocks compared to value over the past two years. Another possibility is that the fund manager/analyst might leave. Short term returns like 1 year are USELESS, they draw your attention to the recent radical performance of say energy exploration firms (this year) or internet commerce (last year) or plastics (in the 60s). If you chase last years top sector, you will get burned. It is very common for last years "winners" to be next years big "losers". A more useful indicator of a successful fund is the 10 or 20 year return. High returns would indicate a high percent of equities (stocks) and most likely growth stocks. Annual returns in the 10 to 14% range are respectable over the long haul and will build a substantial nest egg. Since there are more than 8,000 mutual funds, you can easily get lost and distracted. Try the March issue of Consumer Reports for a thoughtful list of about 100 no load mutual funds that seem to consistently get good results. Initially, you need one good broad based mutual fund. After your assets grow, you may want to pick up a different fund or two but there is no reason to own dozens of mutual funds.

I can't comment on the technical or IRS limitations on the IRA owning part of your own company, but I could see a lot of abuses if this was allowed. I am sure someone would find a way to funnel money into the IRA shelter by exagerating the performance of the stock, that is favoring the stock over perhaps payroll or bonuses. I also know there are required annual valuations for IRAs that become extremely difficult if not impossible when there is no active market to price the stock. From a more practical point of view, having your life and retirement assets both bet on the same enterprise puts you at a great risk if the business fails to thrive. I would not recommend this. It is the same as a couple that both work for the same firm and have most of their assets in company stock... there is not diversification to protect you in the even of a downturn, hostile acquisition, downsizing, etc. I have friends who thought this was not a realistic risk that are now eating their savings while they are both on the job market. Ouch. One of the major reasons for business failure is undercapitalization. If you are severely stretched to buy this business, you may want to think twice about the timing or how you are financing the purchase or even if you should proceed. You need more than just the front end money, you need operating capital and reserves for the unexpected.

More on the specific fund: 1. very low expense rate of .44%, no load. Very Good 2. 90% equity 10% bond right now, this ratio can vary between cash/stock/bond. Currently bolder than my prior suggestion by just a bit 3. equity part is a blend of value and growth, with emphasis on very large companies. Good, but I would like to see midcap and small cap. 4. track record over ten years is above average at 13.5% annual since the fund was started in 1998. Note, only one negative year in past 12! Good, most retirement plans work if you can over long haul make 10+% per year. Conclusion: looks like a very decent choice for an IRA account, above average returns with low expenses, enough of a track record, Vanguard is a solid firm. Only slight negative is that the blend of assets (s/b/$) is variable, but Vanguard folks are not normally rolling the dice. I would watch the asset allocation over time, if you see wild swings of say 90% to 50% then you may want to consider a switch.

Your choices for custodians include banks, full service brokerages, discount brokerages, internet brokerages, a mutual fund or fund family, etc. The common IRA investment options include individual stocks, mutual funds, bonds, and CDs. Each custodian has a different package of investment options, some are extensive others narrow or limited. Banks traditionally have emphasized CDs, although more sophisticated banks have an array of mutual funds or brokerage options. Some of the brokerages provide access to thousands of mutual funds in a broad array of families. Annual fees for IRAs vary from zero to rediculous. Commission rates and mutual fund expenses vary from ultra low to excessive. If you are inclined toward mutual funds, I suggest limiting your search to NO LOAD funds... the loaded funds (front or back end commissions) are more common at full service brokerages and banks. Mutual funds are attractive for folks just getting started. Convenience and service for custodian should be considered. Some folks like the local counter service, others have no problem with far away internet based firms. There are hundreds of custodians that will do a good job for you. Within some catagories like internet brokerages, the cost differences are just not that big and most offer too many investment options. You only need a couple of broad based mutuals funds.... there are more than 8,000 to chose from. You may want to read the retirement section in the March issue of Consumer Reports. They do a decent job reviewing some of your options and boiling down the list of mutual funds. I would collect information from atleast three different custodians. Ask them about fees, investment options, etc. Get started, then after two years if you don't like your choice you may do a direct custodian to custodian transfer of your IRA. Good luck.

Attitudes towards risk is a very personal issue. No one can tell you how you should weigh the factors. No doubt you will factor in your personal track record to date on investments, attitudes your parents imprinted on you, experiences from co-workers, etc. Some folks also get too emotional about their investments and react poorly when the market plunges.... selling in a panic... then buying in again after the market rises. I will try to give you some "clinical" advice. First, thanks for tell me you are 45 -- the actuarial tables would say are very likely to live another 30 or 40+ years. 45 also says you maybe about two decades away from taping into your tax sheltered account in retirement. You should probably have a portfolio heavy on equities and light on bonds. In addition, a significant part of you portfolio should be in more aggressive equities like growth companies or perhaps some international. You need to sit down with a spreadsheet and run some numbers and see if an average return of 10%/yr gets the job done. You do not mention the current total retirement assets. If you obtain asset appreciation of just a hair over 10%, you current assets will grow 8x by the time you are age 66. Inflation would reduce that future dollar amount by about 1/2. What mix? Well, now out comes the less clinical personal bias. I would have 50% growth, 25% blue chip stocks, 10% international and 15% bonds. While I am not familiar with this specific Vanguard fund, they are ussually a very lean operation with very low annual expenses. If I get my stuff done this weekend, I may be able to add specifics about this specific fund. I have assumed normal health, mid 60 retirement age, and no problems with employment until you elect to retire. Here is were the personal part comes. You need to think about your facts and circumstances. Post again if you like.

From your second post, it is clear you are at square 1 on investing. Briefly... all investments have risk, ALL. Even CDs that are insured have risk: the risk of inflexibility for the CD term, the possibility that inflation will erode the value, etc. Stocks also have risk: prices flucuate, some firms die, technology changes, business trends change, etc. In a crude way, the level of risk is often inversely related to the likely reward. But, over the long haul, equities (stocks) have offered better returns then the IOU investments like CDs and bonds. With stocks, you get both years with gains and years with declines. However, up years out number bad years between 5:1 to 8:1 and the up years typically go up a higher percent then the worse years drop... which all nets out to better long term performance of stocks when you are thinking 20+ years. There has never been any 20 year period where stocks ended up lower than they started, but you can get back to back single year stinkers. But, there is no guarentee of performance with stocks. You are investing in capitalism and the USA economy. Sort of like backing the Yankees. You are picking the long run winning team. Mutual funds: when you invest in a mutual fund you are buying the performance of a very large cluster of investments. For example, the Vanguard 500 holds positions in the 500 largest companies that make up the S&P500 index. While some mutual funds will only hold 30 stocks, most have hundreds. This gives you diversity. Since you own a portfolio of stocks, one bad apple does not hurt you. You can also start mutual funds conveniently at low $$ levels for a fixed amount. One way or another you always pay someone for holding your funds. The amount charged can vary as well as how "visible" are the charges. Annual IRA fees are just one type of charge. When you talk about bank IRAs, one of the hidden charges is the lower rate of return offered. NO LOAD mutual funds, especially index type funds have the lowest expenses or the funds. An index fund picks stocks from a list (like 100 largest Nasdaq firms, or Standard and Poors 500 industrials) rather than having analysts review the company performance and visit the firm. Index funds outperform many analyst based mutual funds because their expenses are lower. Maybe you can find a class on investing basics. I teach this for junior/seniors at some local high schools via the JA program. If your college doesn't offer any classes, your first option is to teach yourself by reading. You may also want to ask around to see if there are any investment clubs you could join. They vary in quality. The best are great learning tools.

I am a great believer in young folks investing for the long run in growth stocks, typically via NO LOAD MUTUAL FUNDS while they build their IRA assets. But if you are still in school, I would suggest that you focus on the academics and just keep contributing what you can to the bank IRA and earning 6.7%. That is not a bad rate while you finish school. I suspect that you will have a more time to brush up on investing basics after you are out of college. At that point, I would either transfer the bank IRA account (when the CD becomes due to avoid any penalties) to either a mutual fund family {Vanguard, T Rowe, Janus, or any broad based growth fund} or an internet based brokerage {like Etrade, Schwab, Ameritrade, etc} where you also have access to a wide range of mutual funds. NO LOAD means a fund that does not have a front end or back end commission. They still have annual expenses, and you should select something below 1% annual expenses. Read Kiplinger Finance or the March issue of Consumer Reports for ideas. They ussually list dozens of funds with long term track records. If you are invested in equities (aka stocks) or equity based mutual funds, you normally look for a return in the 10 to 12% range. On the high end are the all equity, growth funds with higher volatility and risk. On the lower end are the blue chip and bond blend funds. Lesson One: the "Rule of 72" says that you divide 72 by the annual percent gain to determine the double period. Therefore, if you get just a hair over 10% your assets double in 7 years. 2k becomes 4k when you are 28, then 8k, 16k, 32k, 64k.... and finally 128,000 when you are 64! You don't need to bet on long shots, penny stocks, options, etc. to amass a small fortune in a tax sheltered IRA. This example is the growth of just one year of max IRA contributions. Yes, you need to reduce the "pile" to account for inflation, but if you fund your IRA every year (and hopefully your spouse will as well) you should be very pleased with the result. Sure hope you started with a ROTH IRA, since all withdrawals are tax free in later years. Post another question, if you need more info. Investing is a big topic. If you spend 1 or 2 hours reading about it (and acting) each month, you will be miles ahead of most of your classmates. You are wise to start early. Good luck.

Some custodians allow IRA account holders to pay annual account fees by check instead of account withdrawal. You might want to inquire if the nature of the advisor fees associated with your account are similiar and might allow this.

You did not like Barry's answer? Sounds like you would qualify for a Roth conversion and be able to convert at a very low tax rate. You also could do a partial conversion if you wanted to stay below a particular tax bracket. Then, if your circumstances were the same next year, convert another amount. You did not provide any numbers, but it sounds like you have just about the best possible conversion scenario. At 15%, you might be able to convert the entire Roth for $1,500. Only elect to convert if you can pay the taxes using money outside of your IRA.