John G

Roth IRAs are custodial accounts. Rules vary somewhat from custodian to custodian. Federal Roth rules include $2000 maximum as long as earned income is $2000, but AGI does not exceed the $150-160K range. Virtually every custodian can give you a brochure that gives you the key details. If you are starting small, you may need to make a few additional phone calls to find a custodian, but a small initial Roth contribution should not be a major hurtle. Who can be a custodian: banks, brokers and mutual funds are the most common. Some charge annual account fees, but Etrade for example does not. Ask for the fee to be waived. Any annual fee in excess of $20 should encourage you to try a different custodian. Some waive the fee when you assets grow beyond $10k like Schwab. Minimum amount: depends upon custodian, but rules are more leniant for retirement accounts, even more so if you do a monthly deposit. Monthly deposits are often automatic from a checking account. If you open a Roth with a lump, you may find $500 or $1000 minimums for some custodians, but check around. Interest rate? Woaa. You said retirement is 30 years away. And since you don't just burn off all your money in the first year, these assets will be invested for perhaps 40+ years. You need to think in terms of a mix of stocks (also called equities) and bonds. Initially, for a modest start a mutual fund is probably the most attractive. There are about 8,000 mutual funds. I suggest a noload fund that is broadly based. Noload means no up front commission charges. Why invest in stocks, because over the long haul they give a better return than "safe" CDs and government bonds. You will need to find your own tolerance for risk and a blend of investments with which you are comfortable. Target returns: a mostly stock, some bond portfolio typically will double every 7 years, which is about a 10% annual return. So after 40 years, your initial single contribution of $2000 Roth will have grown perhaps to more than $100,000 (not adjusted for inflation) and will be yours in retirement tax free. Some folks do better. But, note that the last five years have been very strong for stocks and a not a good guide for 40 years. Equity (stock) portfolios do not go up every year, but winning years out number bad years. It sounds like you are very new to retirement planning and investing in general. I recommend that you read the March issue of Consumer Reports for an article on retirement planning. I also suggest that you suscribe to Kiplinger Personal Finance mag which covers this topic in laypersons language. Both of these sources will talk about possible mutual fund choices. Your local library will have many books on this subject. Other magzines include Money and Worth. Brokerages and mutual funds all have web sites that can be a useful source of basic info. We were all novices. And even "experts" learn new things every year. You are to be commended for thinking ahead and getting an early start. Good luck. You can email more questions, but for a few weeks I will be distracted taking a daughter to college.

Whoops, I missed the comment that you were filing separate tax returns. Yes, you are right 10K is the number. My guess is that they didn't want couples that both work to split their income, but the actual 10K rule seems an excessive constraint. In earlier post, a married living separately female was overwhelmed to discover that her brief marriage was hanging over her future financial decisions. Falls under that big heading of life is often unfair. One obvious option is to file a joint return if you are eligible at the higher income thresholds.

I imagine that 10,ooo is a typo and you mean $100,000 which is the conversion income threshold. The income threshold for OPENING a Roth is totally separate issue from the threshold for conversion. Self employed and business owners have a wide range of retirement planning options that the ordinary salaried Joe does not get. Keoghs and pension/profit sharing plans which often allow a much larger set aside, sometimes 25-30% of income. If you are not aware of some of these options, you need to sit down with your accountant. Do you really think Congress needs a justification for making all the rules? Unfortunately, there are too many folks in our society that think that people who are successful, or well educated, or run businesses are the "bad guys". I have a lot of trouble understanding the public policy basis for the various eligibility issues. If a Roth is good for someone making 130K, why is it bad for someone making 170K? Why is conversion eligibility different from standard contribution? Why do married filing separately get the shaft? So many questions, so little time. Perhaps you should send an email expressing your views to the Pres, and your Senator/congressman. You might want to add a note on the recent legislation to eliminate or soften the estate taxes. (Don't get me started on that issue!) You can send a basic email to virtually every key elected offical in about an hour.

I guess I was not clear on this. There is little reason to pay IRA fees unless you totally turn over your investment decisions to a broker with lots of service.... and quality service is very rare. For example, anyone with IRA assets over 10k can go to Schwab and select from hundreds of mutual funds. Etrade does not charge any IRA fees. If you have a small IRA, why not place it with a no fee brokerage until it grows were it is eligible for zero fees elsewhere. Fees are nickle and dime thinking. Most IRA money stays put for a long time, so many custodians will bend over backwards to "lock up" your IRA assets. I prefer no fees than deductable fees, don't you?

quote: Originally posted by Art E: I realize that when evaluating a Roth conversion it's mandatory that the IRA and the Taxable accounts' pre-tax, composite performances (interest, growth, dividends, distributions, etc.) are the same. That is, if the IRA's overall performance is less than the taxable account, it's an unrealistic bias against the conversion, and if it's more it's an unrealistic bias favoring the conversion. So, for a meaningful evaluation of converting vs. not converting, both accounts must have the same composite performance. There may be very valid reasons for having different assumptions for the two pools. If the taxable assets are expected to be used first for early retirement years, college tuition, etc. they might be more conservatively deployed, such as with a significant bond or money market component. If the Roth assets are not likely to be tapped for 20 years, then the investor may perhaps be more aggressive, such as with growth mutual funds. However, the longer the period of time the less likely the two asset pools will be significantly different. Another issue may be the kind of investments the custodian allows vs what can be undertaken with taxable assets. For example, collectables, privately held stock, IPOs, and real estate may be restricted or just difficult via an IRA/Roth account. For most folks, these will not be issues but the investment opportunities of some may be very different. You are correct to point out that if you have a built in bias for annual return you are likely to skew the answer based upon the bias built in to those assumptions. Given the possible difference in planning horizons, life expectancy, estate planning issues, tolerance towards risk, experience with investing, possible residence changes (state tax issues), etc. it is darn hard to generalize. Not every person that poses the question is a 38 year old, married, aggressive investor with a half million in assets and high tolerance for risk. I always think of the base case as two parallel scenarios of Roth and taxable assets with identical investments, time periods, taxation rules, etc. This scenario is not likely to be realistic, but it is probably the most easily comprehended scenario and a simple place to start. You mentioned a combination of tax free paper, dividends (prefered stock) and stock. The first issue you face with these is chosing a mechanism for equalizing these investment. I would suggest translating all to after tax returns.

I don't get any "scheme", this is business as ussual. You can convert prior IRA contributions if you income qualify. Sounds like you need to talk to a senior person in the IRA/retirement dpt of your custodian. They should not unilaterally act without your instructions. If a supervisor doesn't acknowledge that they screwed up, then get a new custodian. If your instructions are clear (first 99 regular IRA, then converting to Roth) they made a mess and should correct it pronto. No custodian should assume that you qualify for a Roth in a prior year. Do note: the income qualifications are different between conversions and regular Roth contributions. See WWW.rothira.com site for more details.

IRA Fees: you have many choices of brokerages and mutual funds that have no IRA fees. Ask you custodian to waive their fees, some will do so upon request. Consider consolidating your IRA assets, many custodians waive the fees after assets exceed $10,000. Some mutual funds will waive fees if the combined assets in various funds is significant. Some brokers/funds will waive fees if you have an automatic deposit each month. All things being equal, no fees beats deductions. It is worth a few phone calls. Rules vary. If you are paying more than $20 a year in fees, you should consider finding a new home. But first, ask for a waiver. Smart custodians do not want to lose a customer over small fees!

Frequency of conversions: There do not appear to be any limits on the number of conversions you can make, although administrative burden would suggest that if not a single Roth conversion then at least major blocks of assets. Some folks convert a modest amount each year to avoid tax bracket creep. Some conversions are associated with dips in the stock market or when corporate retirement assets can be rolled into a Roth. Sometimes multiple conversions are due to requests for Roth conversions from different accounts. However, a multiple conversion approach means you must income qualify each year you convert. Self employed, or persons that own a company have some different retirement plan options than those who are employed by others. You may want to take your accountant to lunch and discuss your options. Self employed persons ussually have greater flexibility in shifting income and expenses to enable them to qualify for a Roth conversion. [This message has been edited by John G (edited 06-05-2000).]

Barry, can you comment on how you handle withdrawals when multiple accounts and multiple custodians are involved. Regular required or otherwise. Thanks.

You did not indicate the amount of funds involved. If you are talking about significant assets, you better talk to your accountant and find an attorney. In my view, your custodian did not live up to their fiduciary duties and will be liable for any damages you incur. The acquisition problem is understandable but not a valid excuse for their failure to act and keep you informed. If this involves a small amount of money, then you might be able to solve the problem with either just your accountant or directly with the IRS. I hope you gave all instructions in writing and have the documentation. Understand that part of the risk of transactions involving private placement stock is yours since you selected this illiquid investment for your account. One of the reasons custodians do not want to hold these assets is that they have no mechanism for establishing a price. If they sent you the certificate, you are indeed now on the clock. Act immediately. Find local professional advice this week, and get started finding a new home for the account. It will take multiple calls, talk directly with the compliance dpt or IRA dpt of any brokerage as the counter staff are not likely to know the firms rules regarding this type of stock. [This message has been edited by John G (edited 05-01-2000).]

Above info is on target. One of the reasons you may have gotten conflicting info is that IRA rules change. Spousal rights for full 2K were expanded. Do not rely on any IRA explainations that are out of date. Roths for example were created in 1998 and the regulations have already gone through one major technical corrections cycle.

Use the email in my profile and send me a note. I will respond with another possible custodian.

IRS is wrong, Dan is right. The suggestion to do it in stages to avoid tax bracket creep is a good one. But first you need to think through the reasons for a conversion very carefully. If she is unlikely to tap these funds and they would pass to an heir with a much higher tax bracket, then a conversion might be smart. If she is going to use up these funds, then it probably makes no sense as it appears that your mom is likely to always be in a low bracket. You need to consider the impact on estate plans as well. Check that the beneficiary designation is current.

I can not address the issue of when the deal is too close to be allowed, or the specific IRS requirements. However, it is possible to buy a private placement and some other unussual investments in an IRA or Roth. For example, when EWBC (now a publicly traded company) had a private placement in 1998, a number of initial investors used IRA accounts. You had to be a qualified/sophisticated investor to participate, but to my knowledge none of these investors had any relationship with the corp. The firm went public six months later. (EWBC was a California thrift owned by an Indonesian family) Besides IRS rules, one of the keys is finding a custodian that will allow some of these transactions. In the example I cited, a broker who cleared via Bear Stearns was one of the participants. I got an email a few weeks back that said a Denver broker/custodian specializes in unussual deals, but I have no direct knowledge of them. Clearly conventional banks and brokers will often say no, even if it would meet IRS requirements. So, you need to ask around to see who will consider your idea. Dad should understand that this proposed stock will be not be liquid.

I am a little confused about the 95K income issue. A Roth conversion is based upon MAGI, so it is essentially the front page 1040 AGI you are looking at, not the after deductions part. Your eligibility may evaporate if your numbers change. Things that my affect your MAGI would include K1 items from a business, partnership income, capital gains from mutual funds, state tax refund, etc. Depending upon how your business income/expenses are reported, they may end up on page 1 or not. Since you are close to the boundary, you need an accountant to make sure you qualify and the paperwork is done correctly. I would recommend that you file an extension, and wait until the April 17 rush blows over to get this all worked out.... new accountant and all. [This message has been edited by John G (edited 04-13-2000).]

The conversion deadline for any given year is Dec 31st, therefore you can not convert now for 1999. If you are getting contrary information from your accountant, you need to find a new accountant. This Roth reg is almost as basic as knowing April 17 is this years tax deadline. The conversion deadline is mentioned in IRS documents, on the WWW.rothira.com web site, and in virtually every article ever written on the subject. Every accountant should know this info, it is not an obscure reg but a very basic Roth rule.

Seems kind of underhanded for the accountant to blame a clear cut mistake in HIS KNOWLEDGE on a software package. You are paying for the accountants experience and knowledge, not a software package. If he is using a package, he is supposed to be trained. Apparently he does not really know the software. Time to find another accountant. And be sure to dispute a second run at your taxes based upon his mistakes. {BPicker, see what I mean about the value of an accountant that clearly tells you what he knows and what he does not. This is a good example. The lady clearly expected him to know the rules and he was at best "shakey".}

quote: Originally posted by Loxielady: ...questions that my accountant asked. How do you know that the gov't won't go back on its word and tax these accounts, because of lack of participation. They are not very popular. What if the gov't. doesn't exempt them from Social Security. How do I know that my tax rate won't be less later.... All I can do is plan now the best I can. Your accountant asks valid questions to which no one knows the answers. But here is my take. The number of Roths are in the multi-million and growing so I do not understand about the "popularity" reference. Perhaps your accountant was refering to Roth conversions which have had lower numbers due to the income thresolds and up front tax payment. Since you live in Florida, you know how big an influence senior citizens are on public policy such as SSN. Well it is just a matter of time before the Roth participants start wielding that influence. Will there be changes? Sure, there already have been and will be more. But on the key attributes, I doubt if any politician would want to go on record for reneging on the original rules. I would assume that early participants would be grandfathered. Can you imagine the back lash if the government told Roth converters they had to pay taxes twice? They have enough problem convincing people to pay taxes once. So, there is some safety in the growing numbers, especially with well educated and more likely to vote group (aka Roth owners). Second point, I think there is a very slow general policy creep towards the idea of self funded retirement income. Witness the talk of privatizing SS. No one really wants to make a wholesale change in the system but at the edges things are changing. Roths are part of that movement. I would call it an un-named movement that has no single leader or blueprint. You can't move towards restructuring the "entitlement" without providing alternatives. Future tax rates? Good question. My view is that many successful folks who are worried about this issue are on track for accumulating very large assets in 401, 403, Keogh, and IRA/Roths. It is not uncommon to see or expect to see a million or more in retirement assets. I have a hard time imagining these households getting taxed at a lower rate (unless the bulk of their income is in tax exempt bonds and Roth earnings). A large number of future retirees will be able to draw 80+K a year in perpetuity. I know my sample is skewed, but probably similiar to many of the people who read this board. The more successful a household becomes, the less likely they could move down in tax bracket. {As a point of reference: the number of millionaire households is expected to jump to over 13 million by 2010 according to some articles I have recently read.} Direct future attack on Roths is not as likely as indirect attack such as via SS and alt minimum tax. You last line is very valid. If you waited for certainty before you acted, you would be perpetually paralized. [This message has been edited by John G (edited 04-09-2000).]

Dear Loxie, I understand your plan. Just one comment, please do not assume a 25-50% annual rate of return is normal. The last few years have been jacked up far above normal. There is a significant arguement among professions about a long term target return. The balanced or conservative portfolio guys that own both bonds and stocks suggest 8 to 10%. The folks totally committed to equities and especially growth stocks suggest the mid-teens. I know of no one who even remotely suggests planning based upon a 20% annual return. I have collected data on about 30 stock mutual funds that have operated from minimum of 20 years to as long as 75 years. After you drop the top and bottom 25% performers, the average annual rates of return fall in the 11 to 16% range.

If you are single, you qualify for a Roth if adjusted gross income is less than 95,000 and you partially qualify if your income is between 95,000 and 110,000. If you are married filing jointly, then you qualify until you hit an adjusted gross income range of $150,000 to 160,000 where your eligibility phases out. Married filing separately is probably a non starter because of income restrictions. Does converted income count toward income levels? I found a paragraph in the Gary Lesser article at www.rothira.com as follows: "Conversion amount not considered, for purposes of applying the $100,000 AGI limit on IRA conversions to Roth IRAs and for determining AGI-based Roth IRA contribution phase-outs, the conversion amount (to the extent otherwise includable in AGI) is NOT {my emphasis} taken into account in computing AGI." page 155, column 1, from the Journal of Taxation of Employee Benefits vol 6 number 4 Look for a confirmation from one of the accountants that this is the correct interp for your Q1, but it appears that your accountant is making a mistake.

ZM: Roths are funded with after tax dollars. There is NO DEDUCTION on your income tax, however, the assets compound and are eventually dispersed without any tax liability. Some regular IRAs have deductable features depending upon you qualifications. You may have been thinking of the "original" version of IRAs which under some circumstances are deductable but distributions are subsequently taxed. Roths were created in 1998 and operated under slightly different rules. You may want to look at the articles at www.rothira.com for more details.

You can request a full or partial recharacherization by delivering a letter of instructions to your custodian. Call them first to get the details. This is the peak period for IRA depts. so act quickly.

The above MFS limits mean you either must just squeek under the 10K , or file jointly and you can put 2K each into a Roth. Lets say you are over the 10K and filing jointly is a non-starter, then you can go the regular IRA route and perhaps next year when your income is still low you may be able to convert the first IRA amount to a Roth.

You have a couple broad catagories of custodians: banks, mutual funds and brokerages. Banks - you have choices in your city, tend toward very conservative investments like CDs (which are generally insured against loss), some offer mutual funds and other investments Mutual funds - about 8,000 different kinds, often clustered in fund "families" which ussually allow you switch funds easily within the group, come in LOAD (initial or later commissions to buy) or NOLOAD (no commissions) and both kinds have various annual expenses. Brokerages - firms like Schwab, Fidelity, Etrade, etc. offer IRA accounts that allow you to buy a variety of mutual funds or stocks. This option becomes more useful when you assets grow beyond $20,000 as there are practical limits such as being diversified or owning reasonable size blocks of stocks with smaller ammounts. You need to educate yourself on your options. Try reading the March issue of Consumer Reports. Other sources like Kiplinger and Money cover the IRA topic. You can find all of these at public libraries. You can find virtually all brokerages and mutual funds on the WWW. There is no one best way to start a Roth. You need to balance issues of how much time you want to dedicate, convenience, annual fees (max of $20/yr, some are zero, and many go to zero after your assets grow), and types of investments. Roths are a very attractive tax shelter, so thank your dad for encouraging you to get an early start. If you qualify for a 1999 contribution, you must act by April 17 so get started. You can always do a direct transfer from one custodian to another if you do not like your initial choice. Good luck. [This message has been edited by John G (edited 04-05-2000).]

Hey, you exceed the limit on questions ! I will only attempt to answer a few. First, if you want to open a Roth for 1999 you better get cracking. You have two weeks to get it done and this is the busy season. Any rollover and conversion could easily get messed up in this peak period and not get done by April 17. Therefore start with the contributory part, and that can include both 1999 and 2000 at the same time (just use two checks and mark the contributory years clearly, then check statements for correct designation). Give those custodians a break and wait until after April 17 to handle the conversion, unless...... One caveat, if your 401 is in some tech stocks, then you might want to get the rollover/conversion started now to take advantage of a depressed stock price, and therefore lower taxes. But don't think that you set the timing... the custodian might just sit on that request for a couple of weeks, so unless you have some pull with your custodian, the admin timing will be set by them and therefore the stock prices are beyond your control. You don't need a special tax calculator. What ever you convert will be added to your total taxable income, just like a bonus. So you can use basic the IRS tax tables. You do not have the 4 year average option, that was a 1998 feature only. Conversion during a year of depressed income (such as when you end employment) can be advantageous. But remember you still must meet the income qualifications. Since your income is likely lower, you are mostly likely going to pay estimated taxes. Get can ask your tax preparer to run out a sample 2000 tax return to give you a guide for a schedule tax liability. There are other issues you raised which I can not address, wait for additional comments. [This message has been edited by John G (edited 04-04-2000).]