John G

Dodd, You need to find a good local accountant to advise you on your circumstances, both concerning defered compensation and the advisability of converting the existing assets to a Roth. Facts and circumstances will be the controlling factors in the first question. It is fairly common for bonuses for a given year to be issued in the following year. However, states and the IRS can get very upset about employees not getting paid. You might wonder if the agreeable employer will actually "remember" the agreement. Also note that mutual fund capital gains, Sub S corps, state tax returns!, etc. may upset your careful plans to be eligible.

I also believe you can do this. But, with complicated IRA issues avoid the front counter staff of any bank, brokerage or mutual fund and ask for the back desk experts where they are more likely to understand the question and have the appropriate training. I agree with Barry, the simplest solution is to proceed with another custodian. Keep careful records in case the IRS later questions the transactions.

I have never seen any Federal rules governing a "legal" age for an IRA, what most people thing are IRS rules are in fact custodian specifications. For example, Etrade wants all IRA owners to be 18 while Charles Schwab places no such restrictions on children but has a parent custodial setup. The key requirement is to have earned income. A two year old child could have earned income if the child was a advertising model, but I would have a hard time accepting any other kind of work. A 12 year old can deliver papers, baby sit, clean cars.... so earned income is a possibility. Three suggestions: (1) the grandmother may want to consider the college investment options run by states and some brokerages like Fidelity, and wait for IRA eligibility, or (2) consider a tax managed mutual fund or index fund where the annual tax implications are zero or near zero and eventually distributions will be taxed as long term capital gains, and (3) split the $1000 into two parts and fund an educational IRA for the child [current max is $500 per year] half this year and half next year. Money in a child name is a bad idea? I have an alternative view. Willful kids who will want to "blow it" when they are 18 are something of a boogie man and assumes parents have no impact of the morality and common sense of children. Yes there are bad apples, but the frequency is low. A second negative is that money in a childs name counts more heavily in college financial aide calculations that money kept by parents. On the positive side, teaching children about saving and investing may help counter the credit card culture of spend and spend.

Edited from 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. 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. You don't need to chose the same bank for this years contribution that has your rollover. At some point you may want to roll you bank IRA into another vehicle if the bank does not offer reasonable investment options. Got more questions? Post 'em here. We aim to please and be informative.

You can have multiple Roths, multiple regular IRAs and multiple Roth and regular IRAs. The IRS constraints are not in the number of accounts but in eligability and maximum allowed contributions which are annualy determined by person, not by account. For example, if you qualify for the full $2,000 Roth contribution for a specific year, you can divide that into multiple brokerage accounts or mutual funds. But, you can NOT have multiple accounts each with $2,000 contributed for the same year. Many people do have multiple Roth and regular IRA accounts. For example, some have old regular IRA accounts but recently have opened up Roth accounts. Direct investors in mutual funds may have accounts in different locations to participate in different types of funds. There are practical limitations associated with multiple accounts: often higher annual fees, more recordkeeping, more custodians to contact when making changes. If you are just getting started, I would recommend that you keep your life simple... choose a low cost brokerage (there are dozens of good ones) or mutual fund/family (hundreds of choices) and put your initial investments into a broad based stock index fund. Why? Good diversification, lower expenses/costs, and simple to track.

Michael, The tax court ruling was interesting and sensible. Last year we had a couple of postings about requests for conversion made in December (with receipt!) and a failure by the custodian to complete the transaction before year end. I would think that the brokerage would have an internal way to fix that problem... but they seem to say "too bad". Brokerages seem to back date other stuff that goes wrong or gets lost. Another lesson in not waiting to the last minute, keeping records, and most important checking that stuff gets done on time!

Great states for Roth conversions include: NH, NV, AL, TX, FL, TN, and WY (did I leave one out?) which have no income taxes.

The 60 day rule will no doubt come up again. I wonder what qualifies as meeting the deadline. For example, if you take the check and hand it to the new custodian 6 weeks later (constructive receipt) but they don't book it in (perhaps due to IRA backlogs) until after the 60 days have you met the requirement? Note in the original question above they took 8 days to record the transaction! I would assume that you have met the requirement. I would certainly want a date stamped receipt from the custodian to show the IRS if questioned. Is constructive receipt sufficient? If you mail/fedex the check before the 60 days, does that meet the requirement? Clearly, most folks should use the custodian to custodian direct transfer rule which keeps you out of any 60 day rule problems.

Contributions must be made with cash.

Funds that are legally contributed to an IRA or ROTH IRA become assets that must be managed. Cash will earn interest, stocks may yield dividends, bonds in various forms will produce income through "coupons" or capital gains, mutual funds will declare dividends/gains and stocks should appreciate. Over the life of an IRA you will typically make multiple decisions to deploy and redeploy assets to keep the funds productively engaged. During the long "accumulation" period in an IRA there are no federal recordkeeping requirements on transactions since no taxes are paid. Long term gains, short term gains, interest and dividends have no real distinction within an IRA. You make your best investment decisions considering your personal risk/reward perspective and keep the records that you need to evaluate your progress. Distribution period: For a Roth, legal distributions are tax free. For a regular IRA, distributions are taxed as ordinary income. If your IRA assets are relatively small, I suggest that you consider a mutual fund rather than a stock or two. Why? Because you want diversification, small stock puchases are not efficient when you consider commissions, and the fund approach requires less time to evaluate corporations.

I don't believe there is any linkage between moving/rolling a 401k and future monthly contributions.... you need to provide a little more information about the specific circumstances you are considering. Are you changing jobs? Do you mean by rollover going to a regular or Roth IRA? Are you talking about moving your 401k to the plan of a new employer?

1. Yes, you can find better rates if you are just looking for an IOU type investment. That is pretty cautious investing. Normally I would suggest a mutual fund that is broadly based. However, you may have a problem meeting some of the minimal investment levels. If you elect the monthly deposit system, you can often start small... ask a few mutual fund families about the monthly option. It is ussually set up to work automatically. 2. Should you? Well, maybe not. If you have very little "reserves" established, then your first objective is to create a cash reserve fund. 3. Any IRA can be moved from one custodian to another. Direct transfer is preferable. You can also switch investments.

If I understand your question and circumstances, you recharacterized the entire partial Roth conversion in the same year as the partial conversion. If so, then you have no tax liability for any conversion.

First off, good forward thinking. A Roth will accumulate a small fortune if started very early and left to compound. Not every potential custodian will accept an IRA for a minor child. For example, last time I checked Etrade said no. But, Schwab does. You need to ask around. W2 payroll income clearly is earned income, but so is paper routes and babysitting if declared. Taxes are not the issue , earned income is. Good luck. Hopefully your child will also learn something about investing.

1. Conversion is a totally separate issue from standard 2k contribution, you can do both if you qualify. 2. No tax implications for 2000 as Roth's are not deductable. Roth conversion has a tax consequence for the year in which the conversion was made... so if now it would be reported on your 2001 tax return. Note, you can also make your 2001 contribution now if you feel your are likely to qualify.

The source of the funds can be mom, dad, grandparents, etc., the contributions do not need to come from the child.

I think this original question poses an interesting question of custodian liability for failure to act upon instructions. I have never seen anything that sets a standard on reasonable time to act. Custodians can always argue IRAs have a work que that sets processing time (especially in December and April) but I would suggest that 5 working days should be sufficient. Some custodians seem to have clever ways to backdate blown transactions, it is not clear to me where the legal line should be drawn but some firms seem to be able to solve these problems by waving a supervisors magic wand. Months ago we had a couple of really disasterous cases of custodial malfeasance involving Roth conversions. Clearly there is an opportunity for legal damages when the customer gives instructions in writing with adequate time and the custodian fails to perform. Calulating potential damages raises lots of interesting theoretical questions, but that aside, you would think that custodians would pay more attention to requests and deadlines.

If you qualify in 2001 for a conversion then just accept the action and record it on your 2001 return next year as it would appear that little damage has been done. If you can not qualify this year for the conversion, then you need to get your custodian to "undo" the conversion and re-establish the original IRA which can be accomplished by letter of instructions. Don't deal with the general counter help on this matter, work directly with the IRA specialists. Your question reveals two great lessons for others: (1) don't wait till the end of the year to request an action and (2) follow up your requests to make sure they are done correctly and timely. Unfortunately, this kind of mistake is made very often by custodians. I have no info on "exceptions", perhaps others can comment.

Some disadvantages of split: smaller asset amounts to invest probably restricts choice to mutual funds with low initial deposits and individual stocks would be very cumbersome, split might trigger additional IRA fees, more to track, decisions must be made in two locations (a negative for active traders primarily) If you are young, the Roth is probably a better option because: you qualify now but may not in the future, Roth rules can change, the longer your holding period the more likely your future income tax bracket is higher, if your income is currently modest your initial tax deduction might be small relative to future tax savings, Roth gives you greater flexibility over the timing of withdrawals. The split approach does not seem to offer much of an advantage. I would opt from keeping it simple.

Thanks for all of the above comments... but I think they leave some of the question unanswered. Other than the 9 month window, are there downsides or cautions to spouse=1, children=alt. My first reaction is that this is a simple way to preserve the option of how to treat assets at the time of first death. If the spouse does not need the funds on first death, disclaim and pass assets to the alternate beneficiaries. It seems simple, which is why I ask if their are any hidden dangers or problems with this structure.

Not so fast Wmyer... His contributions to the 401k are pre-tax. The implied tax savings if invested year after year would go a long way to paying the taxes due on 401k distributions in future years. Granted, it is hard to create a separate tax set-aside fund and the earnings from that set-aside typically are eroded by taxes. My point is that when you assume equal tax rates now and in retirement, the comparison with a 401K or standard IRA to a Roth is more difficult and some of the financial advantages of a Roth shrink. Note, if the 401K has matching funds, the math starts to swing in favor of the 401k over the Roth. For example, working in industry you might encounter a 401k with a 6% match. This can give a 100% return at the front end. (no claim that Jemedwards has something like this related to a government job) Another advantage of the 401K is that the annual shelter amount often exceeds the 2k Roth max... a blessing for those that start investing late in life. There is no way to precisely answer the original question. You might think you could answer this question with an accurate spreadsheet model (no small accomplishment to create) and assumptions about life expectancy, tax rates, other income, investment yields, etc. As a former consultant who specialized in models, I can safely say that over even such a short period of time as 5 years this would be a very difficult problem, over 20+ you are mostly using any model to make "guesses".

Any questions about future tax policy involves a lot of guessing about annual asset growth rates, tax policies, etc. and more than enough political and financial unknowns. If you are very young, an aggressive saver and an equity investor... you may find that your retirement "draw" will push you to higher tax brackets. If you are more of a spender than a saver, or closer to retirement age then your conclusion has a higher probability. If your health and family genetics indicate a very long life then the math tips towards a Roth... in my view. Upside surprises probably favor the Roth (higher annual yields, longer life, inheriting from others, real estate asset growth, etc.) since bracket bump becomes more likely. One factor to consider is that the Roth assets (unlike conventional IRAs, SSN and pension funds) have no set distribution requirement, having some retirement assets in this catagory gives you some flexibility. The Roth tax shelter can also extend via inheritance.

You may also want to document the transfer by including your letter of request and the opening statement of the new account as part of your tax return. In case of an audit or querie from the IRS you can point them to the additional documentation attached to your return. My wife's 1040 has twice generated queries because the wrong box was checked or wrong code provided on IRS submissions from employers or custodians. It is a straight forward issue to resolve but with a high hassle factor. If you post again, please identify the custodian.

Examine your mutual fund account rules very carefully before acting. If you have a generic no-load fund (like Janus, Twentieth Century or T Rowe) you are probably going to have no problem. But, if you have a brokerage based fund find out how it might be sold. Some brokerage supported funds have back end loads and you might want to avoid them by waiting a few years (if the load decays over time). Some firms also like to hit you with a termination fee (I have seen some as high as $50). Barry is right on the mechanics, definitely use trustee to trustee direct transfer route.

Is there any downside to designating a spouse as primary benefitiary and children as (equal or otherwise) secondary benefitiaries with the view that the spouse could choose to disclaim and allow the Roth to pass to the children? I could see this as an attractive option to allow some additional flexibility at first spousal death. And, is there any practical time limitation on disclaiming?