John G

Here are some useful references to state 529 college savings/investing plans: http://www.forbes.com/forbes/2000/1030/661...388a_print.html http://www.collegesavings.org/ http://www.kiplinger.com/magazine/archives...ary/college.htm The following web address is Fidelity's comparison of various college savings plans. They divide the options between parents and grandparents/other. There are fact sheets on five common options. http://personal400.fidelity.com/planning/college/

Correct. There are some specialty houses that will allow more "unussual" investments. But, I don't recommend them because you don't need "unussual" to be successful and these custodians charge much higher annual fees and commissions.

You have asked a lot of big questions. I will address some of them. Note that over the time frame you are talking about, options are sure to change as well as how colleges evaluate your situation. Also, there is some variation in how colleges evaluate different asset pools. For example, Carnegie Mellon does not count home equity. Some discount or do not count retirement assets. Most expect virtually all the assets in a childs name to be "consumed". You asked about starting several Roth IRAs. You can only contribute to a Roth if you or your spouse has "earned income"... payroll, salary, etc. It looks like both you and your spouse could contribute 2,000 each year to two separate Roths. That limit is likely to be bumped up with legislation that is in Congress. Yes, you can have multiple Roth IRAs but your max contribution for all is currently 2k and all accounts will be in your or your spouses name. Unless your children have earned income, they can not have their own Roth. A Roth for children is clearly possible once they have summer jobs, babysit, mow lawns, etc. There is a childs educational Roth which allows $500 to be contributed each year. Two negatives with the educational Roth: (1) $500 a year over 18 years probably only pays for one year of college, and (2) these funds are usually counted more heavily in the financial profile use in college aide. In the last few years, a wide range of state college savings programs have emerged. For example New Hampshire has set up a plan with Fidelity brokerage. There are now dozens of these plans, which generally allow a much larger amount each year to be sheltered. Initially they focused on accumulating funds for colleges in the home state. Most are now flexible about that point. Maybe another reader can add a Kiplinger or Consumer Reports reference to a comparison article on these plans... I remember seeing one in the past year. Or perhaps there is a comparative web site. Other options to reduce college expenses: staying in-state for lower tuition, military academies, ROTC scholarships. A practical suggestion: subscribe to Kiplinger Financial magazine and spend 2 hours each month reading about investing, Roths and college savings. I think it is the best mag for those getting started.

I think you will find that there is some variation among custodians as to what they will allowed. Custodians appear to be more restrictive then the IRS rules. Most custodians will allow stocks, bonds, covered calls, mutual funds or things that are readily traded with prices set my active markets. Anything that has unlimited liability (various puts/call options for example) will normally be prohibited as you can't just deposit additional money to cover. Generally, custodians detest anything whose value can not be established such as non-traded stocks, warrants, over-the-counter issues, etc. The message board accountants at this site will probably add to the above list. Call your current or prospective custodian, ask for the backroom IRA specialists, then ask them about allowed and disallowed investments. The range of "allowed" is huge and you should be able to find many attractive investments.

Before you take the route mentioned above an incur taxes, incur penalties, and shrink your tax shelter.... consider a couple of other options. You may be able to get a very attractive home equity loan or a bridge loan (to cover a specific waiting period). Or, you might consider refinancing your home at today's low interest rates. You may also try an negotiate a lower rate with the college or university. Strangely enough, some institutions are "flexible" about the terms. It is very hard to funnel money into a tax shelter because of the max contributions and annual income qualifications. This is why I suggest that you thoroughly review all your options before you act. Good luck.

The House bill related to IRAs was HR 10 which passed with 400+ votes. The companion Roth site mentioned below has references to bill summaries and complete text. While it is likely that the IRA limits will be changed, a call to your representative would nudge it along. http://www.rothira.com

I agree with Michaels comments. It is not an IRS issue but a custodian limitation... like minimum balances in checking or savings accounts. There is a lot of variation between custodians so asking a few is a good idea. A second way to solve this problem is to put your contribution into savings. Early next year you can combine your 2001 contribution with funds for 2002. Strong funds (www.estrong.com) have I believe a $250 minimum opening balance. Some custodians waive the opening minimum if you elect a monthly deposit. Finally, you might want to talk with an uncle or grandparent and explain your IRA plans. You might find someone surprised by your early interest in investing who might match your contributions. While you don't need to watch your IRA on a daily basis, you will learn a lot about investing if you read the quarterly or monthly statements and newsletter. Good luck.

You need to be more specific. Ages of children, approx family income, do you expect private or public college (a proxy for college cost). Do you mean both children or both parents have income? If children, approximate annual income and if it is "earned" or other sources. What state of residence? And please clarify what you mean in the "college financial aid" sentence. I will try to help... I have one in college now and one going next year.

It is always difficult to project income for the next year. Circumstances can change. Someone could make an consulting job offer you couldn't refuse, you could inherit money, etc. The new child is going to change your life in unpredictable ways. No one could ever definitively tell you if conversion is right or wrong. One clearcut advantage of a 2001 conversion is that you probably have a better sense for the outcome after logging four months. There is always a slight chance that Congress will modify either tax rates or Roth rules. Right now, it looks like you might see a modest tax cut. Possible Roth changes do not appear to the aimed at your situation... atleast for the moment. Conversions are not an all or nothing proposition. You can do a partial conversion this year and a partial conversion next year. One advantage of partial conversions is that you can convert up to the point where you would get a tax bracket bump. For example, you might want to convert in three installments. Note, the non-converted IRA is likely to grow so you might pay more in taxes, but not immediately. If you make one big conversion, then you may need to make estimate tax payments. Conversion rules and regs and the planning and projections that justify the action are complicated, so plan on consulting an accountant or tax pro before taking action. If you can not pay the taxes with funds outside of the IRA, then conversion is not likely to be a great idea. Best wishes with the new family. You might want to look into educational IRAs for the baby.

I don't want to appear overly negative by the above comments. If a child has earned income, then a Roth IRA is an excellant idea since the assets are sheltered longer. For example, starting a Roth for a child at age 6 versus age 20 creates two extra doubling periods using 10% and the "Rule of 72". So, 1M in assets accumulated in a Roth started at age 20 (which is a common IRA example) could be over 4M in asset with the early start. Funding a childs Roth IRA for 14 years (age 6 to 20) at the maximum involves transfering 28,000 but would create a very significant tax free estate for the offspring... which could readily grow to over $2M by the time the son/daughter was ready to retire. Note, a rebellious child would have access to the IRA after they turn either 18 or 21 depending upon the state of residence.

The excess contribution will always be an excess contribution since it is tied to the year of earnings. The excise tax will be an annual event until you correct the problem. Because of the valuation flucations of the IRA and your income changes, I would recommend that you see an accountant about how to handle this. This year, you may have some option to income shift if your employer will slide a bonus into the next year. Mutual fund cap gain distributions, state tax refunds, etc. can be last minute factors that bump you income and change your qualification. Last year, a friend was comfortably qualified until the NASDAQ class action law suit added $5k in the last couple of days in December. Hopefully, Congress will act to relax the income standards. It is hard to justify that a Roth is a great savings vehicle for someone making 94k but prohibited for someone making 110k... especially when the first person may live in Iowa and the second in NYC and the entire income difference is eaten up by taxes and higher cost of living.

IRAs for children has come up before, see these reference: http://benefitslink.com/boards/index.php?showtopic=9284 http://benefitslink.com/boards/index.php?showtopic=8885 http://benefitslink.com/boards/index.php?showtopic=7683 http://benefitslink.com/boards/index.php?showtopic=7656 Another short citation on children and Roths http://detnews.com/2000/business/0007/04/b10-85589.htm From my prior posts: Your child MUST have earned income to qualify. Dividends, interest, gifts and capital gains do not count. It is unlikely that a very young child would have a paper route or babysit or be able to effectively contribute to a family business unless you pay someone $2000 to take out the garbage. I know an attorney that uses his infant son in an advertisement and pays a modeling fee... but that is a rare arrangement. If none of these situations seem to apply, then just wait a few years. My kids were mowing lawns and delivering papers at age 12. Age 6 is not impossible but highly unlikely. Do NOT open an IRA if you can not document the earned income of the minor. If you have a credable earned income, then you need to think about two things on the front end: who is my custodian, and what type of investments am I likely to make. Custodians can include banks, brokerages, mutual fund families, etc. Many of the brokerages such as Schwab and Etrade give a chance to buy stocks, bonds and mutual funds. You can move a Roth account, so initial choices do not bind you forever. NOTE: Etrade will not accept IRAs for minors, but Charles Schwab does. So, you need to ask a few potential custodians if the age 17 is a problem. Lots of folks have no problem dealing with out of town firms, especially now that they almost all have outstanding web sites. Banks used to have fairly conservative choices but are starting to offer more options. Banks are ussually local and you may value face-to-face service. But don't expect to call a bank employee using an 800 number at 11pm, and many have poor internet options. You may want to read the March issue of Consumer Reports or subscribe to Kiplinger Personal Finance mag. Both a good sources for beginners. Ask about fees. There are many firms that do not charge any annual fees for IRA accounts. Others charge $10-20 per fund or per account. Some eliminate the charges if you just ask, or when your assets grow. The brokerage commission fees for trades range from ultra low to high. Same with the imbedded expense rates for mutual funds. Since there are perhaps 8,000 stocks and another 8,000 mutual funds it is impossible to generalize. The nice thing about Consumer Reports is that the boil down the mutual fund choices to a hundred or so good ones and explain things in laymen terms. My suggestion for beginners: invest in a growing future by putting your IRA funds into a general stock mutual fund and a very good version of these is a broad based index fund like on that mirrors the S&P500. Why? Easy to track, easy recordkeeping, market performance, diversification and low cost/expense. After 4-5 years of contributing and letting this account grow you may want to split your assets between a couple of funds. Later still, when you pass the 100k mark you may feel comfortable with owning 8 to 12 individual stocks. Equities (aka stocks) are an investment in growth. Sure, stock markets go up and down. But good years out number bad years by anywhere from 5:1 to 8:1 and over many decades equity investments will do a better job (much better than CDs) of growing above the general rate of inflation.

I don't like to give specific stock suggestions to anyone but long term close friends where I know the person/family well. What I suggested to you as someone just getting started is that you consider a single broad based equity mutual fund. Just one to keep things simple and minimize annual fees. You can do that directly with a mutual fund family or through a brokerage or bank that supports mutual funds. I would recommned a NO LOAD fund, that means one that does not have either initial or termination commissions. One group of low expense, broad based equity mutual funds are the S&P500 or "Total Market" index funds. These have low portfolio turnover and typically very low annual expenses. The prototypical index fund is the Vanguard 500 which was one of the first of this kind. Annual expense are extremely low, I believe less than 0.3% and you "own" a portfolio of 500 major companies. You will find a list of successful mutual funds in the March issue of Consumer Reports. The article covers a lot of basics. Call the 800 numbers of a few mutual fund companies like T Rowe, Scudder, Janus, and Vanguard. Ask them for the "getting started" package. Some of them are excellant. I do not recommend beginners invest in stocks because they ussually can not own a diverse portfolio with beginner assets. Beginners generally lack some of the experience to make educated choices and commissions are a significant cost. I hope these suggestions are useful. It is your money. You need to make decisions and keep track of your funds. Learning to invest wisely is a lifelong process. Most investors learn as much from the mistakes they make (that's me, every year) then from hitting the books. Good luck.

IRAs for children has come up before, see these: http://benefitslink.com/boards/index.php?showtopic=9284 http://benefitslink.com/boards/index.php?showtopic=8885 http://benefitslink.com/boards/index.php?showtopic=7683 http://benefitslink.com/boards/index.php?showtopic=7656 Another short citation on children and Roths http://detnews.com/2000/business/0007/04/b10-85589.htm From my prior posts: You need to think about two things on the front end: who is my custodian, and what type of investments am I likely to make. Custodians can include banks, brokerages, mutual fund families, etc. Many of the brokerages such as Schwab and Etrade give a chance to buy stocks, bonds and mutual funds. You can move a Roth account, so initial choices do not bind you forever. NOTE: Etrade will not accept IRAs for minors, but Charles Schwab does. So, you need to ask a few potential custodians if the age 17 is a problem. Lots of folks have no problem dealing with out of town firms, especially now that they almost all have outstanding web sites. Banks used to have fairly conservative choices but are starting to offer more options. Banks are ussually local and you may value face-to-face service. But don't expect to call a bank employee using an 800 number at 11pm, and many have poor internet options. You may want to read the March issue of Consumer Reports or subscribe to Kiplinger Personal Finance mag. Both a good sources for beginners. Ask about fees. There are many firms that do not charge any annual fees for IRA accounts. Others charge $10-20 per fund or per account. Some eliminate the charges if you just ask, or when your assets grow. The brokerage commission fees for trades range from ultra low to high. Same with the imbedded expense rates for mutual funds. Since there are perhaps 8,000 stocks and another 8,000 mutual funds it is impossible to generalize. The nice thing about Consumer Reports is that the boil down the mutual fund choices to a hundred or so good ones and explain things in laymen terms. My suggestion for beginners: invest in a growing future by putting your IRA funds into a general stock mutual fund and a very good version of these is a broad based index fund like on that mirrors the S&P500. Why? Easy to track, easy recordkeeping, market performance, diversification and low cost/expense. After 4-5 years of contributing and letting this account grow you may want to split your assets between a couple of funds. Later still, when you pass the 100k mark you may feel comfortable with owning 8 to 12 individual stocks. Equities (aka stocks) are an investment in growth. Sure, stock markets go up and down. But good years out number bad years by anywhere from 5:1 to 8:1 and over many decades equity investments will do a better job (much better than CDs) of growing above the general rate of inflation. Got more questions? Post 'em here. We aim to please and be informative. Starting so young! Good for you.

Pax, be careful, this was a father leaving to a daughter, not a husband leaving to a wife. Barry, Is it correct to say the "over the lifetime" would be true even if a ten year old child was the beneficiary? I think the "wife" part is just confusing this story. You have to wonder about these bank employees who just are not trained on the rules! All those books on "excellance" and the importance of training clearly collect more dust than readers.

Ask your accountant, the penalties are steep. I believe it is a 6% excise tax of the excess EACH YEAR until the excess is withdrawn. That is a $120 penalty for each extra 2k each tax year. For example, if you have put in 4k for three years, then you have a $720 excise tax. You should not try to "game" the IRS on this issue. Start trusting your accountant to know IRS regulations. I don't understand how you could just assume the 2+2 contributions. You apparently have not read articles on IRAs or any of the IRS publications. You may want to read IRS publication 590 which covers "more than one IRA" on page 7 and has a specific caution on the combination of Roth+regular. Excess contributions are covered on page 33. If you act to correct the problem before the IRS comes to you, then you may either eliminate or reduce the damage. For 2000, the damage can be undone if you withdraw the excess by the date your tax return is filed, including extensions. So, file an extension (form 4868) and fix the problem. Your accountant and custodian can help you. If you persist in continuing your excess contributions, you will probably have to find a new accountant. Very few professionals are willing to risk their reputation on a deliberate violation by a client. If you use the same custodian, they should have caught the duplicate contributions and refused the deposits.

Your accountant is correct. Your maximum contribution to all combinations of IRAs (Roth and regular) is currently $2,000 per year if your earned income is more than 2,000 and you satisfy all other qualifications. The number of accounts is a totally separate issue. You can have as many IRA accounts as you wish. If you qualify, you can have a mix of Roth and regular, although Roth ussually is the better strategy. You can also have IRA accounts at multiple custodians. BUT, you can NOT contribut 2k to a Roth and 2k to a regular account. Yes, you will eventually be penalized. You should act now to correct the problem. Call your custodian ASAP. Two additional notes: If you are married, your wife (even if she is not working) could qualify on your earnings and have her own IRAs. Congress has proposed to increase the IRA contribution ceilings, and this appears to be a popular measure that will eventually pass.

Rates? Sounds like you are looking for money market or CD type investments. Rates are driven by overall economic conditions including the underlying level of inflation. Rates vary slightly between institutions and vary more significantly based upon the duration of the investment and the perceived risk. Risk? Well, some investments are insured against loss of principal like bank CDs so they have the lowest rates. Reits (like "CARS") and commercial paper have higher, but more risky yields. Duration? I am talking about the differences between floating, 1 yr, 3yr, 10 yr etc. Before you jump into an investment driven by interest rates, you should consider equity (aka stock) investments. The differences in performance between "asset classes" (equities vs CDs vs bonds) is more significant than the slight variations in rates. Over the long haul, stocks have historically provided a better return. Interest yielding investments typically offer annual returns just above the rate of inflation. Equity investments have averaged around 11%/yr return. Roth IRAs are ussually very long term investments. Over multiple decades, a portfolio with a significant equity component will produce a much larger nest egg. Investing in the stock market is investing in the future which in the USA has been a plus. Investing in "rates" is typically just picking an IOU. Perhaps a crude way to put it, but in a successful capitalistic country money flowing (via stock market) to GE, Microsoft, Best Buy and Merck does better. If you are just getting started, you may want to look into an index based mutual fund such as the Schwab 1000 or Vanguard 500. You do NOT need to pick a winning stock, you own a small piece of 500 or 1000 companies. You will find the March issue of Consumer Reports covers the basics on retirement planning. I would also suggest that you suscribe to Kiplinger Financial magazine, which in my view is the best $15 a novice invester can spend. One hour a month spent learning about investing is a good starting point. Got more questions? Post 'em here and we will try to help.

You need to connect with a "custodian", which can be a mutual fund, bank or brokerage. Most web based systems are form style, that is you fill in the blanks as you go and enter a paperless version to the custodian. You might try Etrade, Schwab or Fidelity to see if they have a downloadable form. Otherwise try any clerk at a bank or brokerage in your town.

Whoa! You are making some confusing statements about your situation. I am going to attempt to answer your questions, but I will make some assumptions about your actual facts. When you switch an IRA to a ROTH it is called a "conversion". If you elect to reverse this transaction, it is called a "recharacterization". It sounds like you did a 1998 conversion and elected to spread out the tax over four years... you said you did a recharacterization and 4 year spread and that is apples/oranges. From your prior statements, it is not clear that you have any 2000 transaction that can be recharacterized. Tax payers that made a conversion in 1998 had an option to pay the taxes due over 4 years. This applied only in 1998. Note, these conversion were booked completely in 1998, just the taxes owed are spread out. The deadline for reconverting any Roth from 1998 has long passed. If the 1998 conversion was in error you have a chance to go to the IRS to request a correction. What you can NOT now do is reconvert 1/4 or 1/2 of the 1998 conversion. Do not confuse the 4 year tax payment with a 4 part conversion. The entire conversion in 1998 is purely a 1998 conversion. You can NOT change a 1998 transaction because the market is down, the deadline has long passed. You are clearly confused about these transactions and also have a major problem in failing to make timely tax filings. Please take my advice and go see an accountant ASAP and get your financial papers in order. Conversions and recharacterizations are complicated transactions and you should have the guideance of a professional. You run a major risk of incuring fines or having transactions ruled illegal.

I am curious as to the circumstances that is driving your large withdrawal. When you consider the taxes and penalties, I surely would want to exhaust all the alternatives. For example, you could consider a home equity loan or borrowing within your family. If you are close to retirement age, you might be able to arrange a bridge loan with a bank. You also have the 60 day grace period if you move your IRA, although I do not normally recommend that option because of the possible pitfalls if you blow the timing. The 10% penalty is about equal to the one year cost of a loan! Generally, you want to maximize the time money is kept in a shelter. Dollars that flow out of an IRA/Roth are not easily restored. If you have no other option but to withdraw the funds, then you will have a significant tax bill. Work with an accountant to discuss how to structure withholding and estimated taxes. You may have other options then having everything taken out the day you get the check.

Appleby: We are not in disagreement. I was refering to exactly the circumstances that you elaborated. The IRS has allowed tax payers to correct mistakes, probably because of the confusion surrounding the first year of the Roth program when many tax preparers, accountants and citizens were making mistakes. Apparently, these corrections have only been allowed when the taxpayer brings it to the IRS attention first. I did not think I was suggesting unilateral action by the taxpayer. I thought my statement "The deadline has long past" was pretty clear. This individual has lost control of his financial records and reporting and is unlikely to get a sympathetic response from the IRS. I suspect that the desire to recharacterize is more likely due to the market decline and absolutely would NOT be allowed.

You may be able to recharacterize if you were not eligible in 1998 for the conversion if you act immediately before the IRS contacts you. But if you just want to change the conversion because of other reasons you can not. The deadline has long passed. But... you seem to have bigger problems in that you have not filed your 1999 tax return which is way overdue. Why? I would imagine that you do not have a tax preparer or accountant. Time to get one and get your financial affairs in order.

IRA stands for individual retirement account. Roth IRA is a more recently created IRA option, named after former Delaware Senator. Both options are long term retirement investment mechanisms established by Congress, broadly applicable to most tax payers. Distributions from traditional IRAs are taxed as ordinary income while distributions from Roths are not taxed at all. IRAs are funded by individual tax payers, the investment decisions reside with those tax payers, and the ultimate value of those accounts lie in the combination of savings discipline and investment success.... no guarentees of results. You may want to visit the site below and read some of the general articles on IRAs: http://www.rothira.com

If this couple has a business, they should look into pension profit sharing options where they can set aside approximately 25% of the income. Another option could be tax managed mutual funds with the objective of obtaining 100% long term capital gains. This is not a IRA/Keogh type shelter but is perhaps the next best option.