John G

"My wife and I (filing joint) are slightly below that 150-160K range right now. I anticipate being above that range by year's end (raises, new job, etc.). Do I need to manage my monthly contribution to ensure I am not over-contributing? What are the penalties for over-contributing?" The phase out issue is discussed in detail with examples at www.rothira.com and I suggest you look at the the Gary Lesser article, page 152 example. The maximum Roth contribution drops from 2,000 to zero as married filing jointly income goes from 150k to 160k. Sounds like you may have no problem qualifying for 1999. In 2000, you might be able to have an employer shift any bonus to the following year. At your income level, you clearly should seek the assistance of an accountant or tax preparer. The rules are complex and you are likely to have other options for shifting income. The qualification for a Roth is done based upon the entire calender year income. You don't qualify on a month to month basis. Since this is a transition year, you may want to wait until early 2001 to see what you final income will be for this year. You may have surprises such as moving expenses, former employer cash outs, vacation pay and other events that may make planning difficult.

There are multiple income issues involving IRAs and the answers depend upon your marital status and the type of IRA you have in mind. For example, you need earned income to qualify for either Roth or regular IRA. It can be your earned income or the earned income of your spouse. When thinking of earned income, think paychecks, commissions, bonuses etc that show up on your W2. Capital gains, dividends, and interest do not count as "earned". The contribution to an IRA can not exceed earned income. For example, a teenager making $1500 this summer is maxed out at that amount, rather then the theoretical $2000 (assuming no spouse!). Sounds simple? Well, there is a second income issue. If you have too much income (what a thought!) then you may be prohibited from contributing to an IRA. For Roth IRAs, married couples with incomes in the 150-160K range have a phaseout of eligibility. Just to make things a little more complex, this is based upon your total income, so capital gains, dividends, interest, as well as payroll income are all included. You said "Does the max decrease as the income increases?" I don't know what this means. The requirement for earned income is a totally separate issue from the issue of maximum income that effects eligibility. Read the IRS publications on IRAs very carefully, or visit the www.rothira.com site to read articles there, and of course talk with your tax preparer.

Actually, my original response said you must have earned income to create a Roth and that capital gains, dividends and interest did not count towards earned income. Neither the question (nor the original answer) addressed the max income threshold issue. The scenario was a retire women over 70 with only stock gains who want to have a Roth. The earned income issue is distinct from the max income threshold. The max income threshold is based upon MAGI which is essentially the 1040 front page income, and includes salary, bonuses, interest, dividends and capital gains. Two different tests, two different methods of measuring income. Don't count on Congress to write a simple Roth law, and they needed a major technical corrections bill to fix some of the things they overlooked. Please note it is extremely difficult to write a simple answer when there are so many parameters. It is also clear that it is very hard to cleanly write the question. Communications in the computer era, an ongoing concern! Lets be clear on one point. Everyones circumstances are unique and the rules are complex. It is not uncommon to have very large assets involved. Each tax payer should seek professional assistance, and if mega assets are involved, two opinions may be desireable. A frequently cited maxim is "don't buy a house without and attorney", in IRAland the rule should be "consult your accountant or tax preparer before taking action". [This message has been edited by John G (edited 03-31-2000).]

Barry, your cautionary note about the checking the knowledge of your professional is well observed. I am amazed that someone would do a six figure Roth conversion based upon something they read in Money or what a friend suggested. I have suggested getting two opinions on any major Roth/IRA action, but that still leaves the problem of "opinions from whom?" I agree that many accountants do not understand the details. Barry, perhaps you can add some commentary what a lay person can do or questions to ask to ascertain the skills and experience of professionals. Is retirement accounting/law a posted specialty?

Regular and Roth IRAs must be funded with cash. I know of no exceptions. To "use" the stock, you will have to sell it. The tax implications of a sale are not clear, perhaps you will get favorable long term capital gains treatment. Talk with you company and an outside accountant before doing anything. Another possibility is to borrow against the stock (margin) to fund your IRA. Some hurtles to surmount: the stock is listed, trades at a price above $5 and has sufficient volume for a broker to code it as marginable.

Stock gains are capital gains/losses, and like interest and dividends they DO NOT count as earned income. You need earned income to qualify for a Roth so you need a paycheck or related earnings from commissions or bonuses that would count as earned income. The initial amount of earned income is needed to allow you to open or subsequently fund a regular or Roth IRA. Note, there is also an income ceiling which is based upon total income. If you exceed the income ceiling, then you are not eligible for a Roth. Having earned income qualifies you at the bottom end of the scale, having to much total income can disqualify you at the high end of the range. Two diffent issues. If she is thinking about estate planning, she can help other family members start or fund Roth or regular IRAs. The family members must still meet the income qualifications. This removes funds from her control. Since the amounts are below the 10,000 annual gift exclusion, these actions would reduce her estate. [This message has been edited by John G (edited 03-31-2000).]

Last minute of the last millenia was the last chance you had to do a conversion in 1999. You can convert any time in this calender year and it counts as a 2000 conversion. You must meet the income requirements for this year. You can not convert just the non-deductable amounts. The proportion that is D and nonD is fixed by the totals. This percent applies to the amount you convert. To do this math you lump ALL of the IRAs for one person regardless of custodian, date of creation, etc.

In addition to the IRS site, you will find a wide range of topics at the www.rothira.com web site.

First, you must qualify for a Roth by having some earned income, but not too much. Perhaps you may be in the window of residency where you will qualify. At some point you will be making a doctors income and may no longer qualify for an Roth. However, depending on how your future practice is structured you may be looking at a 401K, 403b (if paid by a city owned hospital or similiar public entity), or pension/profit sharing plan which are various types of tax shelters. These approaches typically allow you to set aside much more than the $2000 limit on Roths. But, the tax treatments vary. I was under the impression that med schools offered a class on the business side of being a doctor. If they do, take it. Your education loans if fixed at 6.5% should probably not be repaid with available cash. This is a lower rate then mortgages, credit cards, etc. and is probably on atleast a ten year repayment schedule. The first use of cash should be to pay down any credit card debt, which often has rates that far exceed what investors dream of for an annual rate of return. Opening a Roth at a young age is a fine thing to do. You may want to do this as part of the process of educating yourself about investing, after considering the concerns mentioned below. A 12% annual return target is reasonable if you are talking about equities with a slight bias towards growth companies, but year to year results can vary widely. If the question is purely hold cash vs Roth, then you still might want to hold cash. Why? Because you are about to transition from student to career and can probably not predict the transition expenses which could include an income gap (post graduate vacation?), moving, furnishing a new place to live, etc. I would hold off on the decision until these issues are resolved. Good luck. [This message has been edited by John G (edited 03-28-2000).]

As a first time homebuyer, you have a range of programs that may be applicable independent of the IRA approach, depending upon where you live and your income level. Ask around. Some towns offer very attractive loans to first time buyers with modest incomes. Have you considered internal family financing for the downpayment and leaving the retirement funds sheltered? For example, grandma has a CD that is paying her 5% while you might be able to pay her 7%. Some creative approaches might let it work to the advantage of both parties. If you are just starting to think about buying a house, you might want to create a separate account to build toward that day. If you invest in a tax efficient mutual fund or an index fund, you would have minimal tax impact until you cash in. At that time you would have long term capital gains at a max rate of 20% under current rules. You should consider this route if your house buying is 4 or more years away. [This message has been edited by John G (edited 03-27-2000).]

You can replace all, or part of the amount taken out. Your tax impact, if any, is on the net not returned in 60 days. Be careful about this kind of transaction. Get everything in writing with date time stamps, and don't wait to the last day. Custodians make mistakes, especially during the tax season rush. Have you considered asking your boss for a raise, bonus or advance? Just a thought!

"replace it" clarification: you can not stick the lump back unless you act in 60 days as BPicker has said. However, you could if you qualify in the future contribute 2,000 each year again. You may have alternatives: a tax refund, borrowing against home equity, borrowing on margin against other non-IRA holdings. The benefit of a tax shelter is substantially a function of how much time you keep the funds sheltered. What is easy to do or legal can often be unwise.

Let me give you some examples: Investing $2,000 in a Roth for next 5 yrs, then no further contributions. Total invested is therefore $10,000. Investments made in some broad based mutual fund (a mix of bonds and stocks earning 10% a yr) will yield $0.6 M (million) after 30 years, and 1.6 M after 40 years. The same money but invested in a more aggressive growth fund at 12% annual return will make your assets grow to $ 1.0 M in 30 years, and $ 3.0 M in 40 years. There are dozens of mutual funds with more than 20 years of history that have returns in the low teens. I think this is a reasonable scenario for someone investing in equities (stocks) with a slight bias towards growth. There are plenty of folks who have done better, and some clearly do worse... I look at this as the middle 50% result range. If you invest less than 2K per year just scale the numbers up or down proportionately. Inflation knocks down the value of these results. For example, if inflation runs at 2.5% (a low number) then you cut the 30 year results in half to represent todays buying power. All of the above, if done in a Roth, would under current rules could payout in later years tax free. If you use a traditional IRA as the vehicle, then you would pay ordinary income taxes on any distributions. My return question to you: given the above scenarios, do you think it is worth pluging $10k over 5 years into a Roth? Good luck with your residency. [This message has been edited by John G (edited 03-24-2000).]

Technical answers: Roth gains are tax free under current rules, plus unlike your normal (taxable) account you do not have those fun Schedule D forms to fill out each year. You clearly want a system to keep track of how you are doing, but you don't have to prep and file and forms each year. In that regard, the Roth eases one of the obvious burdens of a very actively traded account. Additional advice: don't assume that you can make money day trading, many folks lose money (a real shame in a tax shelter) and lots of others underperform. Some very good recent studies based upon thousands of brokerage accounts found the following two interesting facts: (1) more frequently trading accounts underperform by 1+ percent, and (2) women out perform men by about 1 percent a year. If you are a guy involved in day trading, this research suggests you have two trends against you. And guys have this nasty tendency to think their actual market returns are higher then they are.... self deception. It's your money, go ahead and plunge in. But, don't bet the farm. What you are probably doing is paying real dollar tuition to learn that making a fast buck is just not that easy. You don't need spectacular annual results to amass a fortune, time and compounding are an investors friends. "my Roth portfolio doubles" was the phrase that made me post these cautionary notes.

I have direct experience on this issue. The answer is yes and no. I will assume you are talking about a PUBLIC "IPO" not your own start up which would raise additional questions. The accountants can comment on those issues. There are two kinds of public IPOs where the answer maybe yes: direct access (my term) and brokerage offered. Direct access is via some kind of subscription and may involve your rights, examples include local savings and loan or a mutual insurance company (Metlife is coming up) going public. Brokerage offered means the brokerage will accept a conditional offer for something they are handling and you hope you get an allocation of shares. Broker supported direct access opportunities are rare, they have their own internal/fiduciary reasons for not allowing this. For example, Fidelity would not support this type of transaction in the early 1990s, not even for their very large customers. You mentioned "discount brokerages" - do not expect any of those low cost internet firms to monkey around with your special situation. Yes side: Charles Schwab does support direct access IPOs, but not every office may know this. Some brokerages that clear through Bear Stearns have also supported direct access IPOs. I am familiar with 30+ examples involving myself and others. Both firms have "approved paperwork" you must use and you need to give them about 2 weeks lead time. In atleast two instances, the paperwork got lost going back and forth from local/regional/main offices. A good example is a local savings and loan or your insurance company (like Metlife) going public and you have options to buy. Note, if the "rights" are in a specific name, only an IRA with that registration can be used. An opportunity in the wifes name can not be connected to the husbands Roth. Maybe you are talking about brokerage supported direct IPO offerings. Well, Schwab has one of these programs but they are revising it and have not had many offerings in the past three months. Etrade and Wit Capital also have IPO opportunities and Roths or Regular IRAs are just fine as long as you meet the general income/asset qualifications. However, you will get an allocation of 50 to 100 shares (most firms have initial prices in the $10 to $20 range) in perhaps 1 case out of every dozen requests. If you ever get more, then you probably bought in to a real dog. IPOs are brokerage "candy" that is handed out to big clients, new clients, and in some instances randomly to stimulate business. All of the above was targeted at the technical requirements and eligibility. Let me add some words of caution on should you do this. If you are new to investing the answer is NO. If these Roth assets are your primary assets, the answer is NO. If you are putting all you assets into one deal hoping to make a killing, the answer is a BIG NO. Go look up the TWE IPO from the fall of 1999, it is below water. In my home town, the big deal in the 1990s was WestPac a new airline... now bankrupt and shareholders lost everything. I have been involved in IPOs for more than 15 years and I can guarentee you that they do not all go up, that access to shares is difficult, and that everyone require lots of study. One additional problem is that under some systems your dollars are tied up for a while. For example, with an insurance subscription you may be in the deal for 30 to 90 days while they get all the funds collected, which is another element of risk. The brokerage IPOs often have a 30 to 60 aftermarket hold period to maintain your future eligibility. I have written a general response based upon the limited facts you have provided and hope that the cautionary notes are of general use to other readers. Feel free to email me if you want a more specific reply. [This message has been edited by John G (edited 03-23-2000).]

BPicker, a question for you. Who makes the calculation? The custodian or the taxpayer/tax preparer? I had the impression that the custodian wants to do the math because of fiduciary responsibilities.

How about sending that sawbuck to United Way! You just got some advice that will keep you out of a lot of trouble. It is deductable, of course.

If you are married, you can only qualify if you file jointly. The income threshold for married couples filing jointly is a MAGI of 100,000. The value of the converting IRA is not counted in this income threshold. You may want to download Gary Lesser's article from the roth web site for some of the details. You will find multiple articles at this site. If you are near the 100,000 mark, you may want to consider options to shift income out of 2000 in to early next January such as bonus checks or commissions. Some employers can offer this flexibility. Note, shifting deductions is not helpful since this does not affect your front page income numbers. Beware of hidden sources such as mutual fund distributions or state tax returns. If you own a business or file a Sched C, you may want to invest in some of the marvelous technology and use the Section 179 expense option to offset some of your income. You could also shift income earning assets to muni bonds. Your accountant may have some other ideas. Do not wait to the end of the year to get the process started. Start monitoring your situation and working with your tax professional. [This message has been edited by John G (edited 03-21-2000).]

I reach a different conclusion, but the facts are easily confused. Here goes: "1. I contributed $1500 to my Roth with "Company A" from 5-98 to 12-98. 2. I contributed $500 to same Roth from 1-99 to 3-99." "I recently received 1999 FORM 5498 (IRA Contribution Info.) from "Company A" which says: Roth IRA Contributions $500." The answer to the 1998 question is found in the above. The $1500 must be 1998, but the $500 will only be credited to 1998 if you designated it to the prior year and the custodian correctly designated the contribution. Looks like from the statement you got from "A" they assumed the $500 was for 1999. You may want to attach a letter to your tax return listing the contributions and the designated years since you are unlikely to get a former custodian to make a correction. "3. I closed "Company A" Roth and rolled over funds to "Company B". Here is what my "Company B" statement says: 4-6-99 Rollover contribution 1999 $1500 4-6-99 IRA Contribution Year 1998 $500 4-6-99 IRA Contribution Year 1999 $2000" This statement does not make a lot of sense. You told us the total account was rolled over, therefore you should see $2000 plus earnings as a rollover. I am not sure why they would know anything at all about your $500 contribution or why they would credit it to 1998 when "A" thinks it is 1999. The last line is also puzzling. You did not say you deposited any additional checks. Did you perhaps make a $2000 additional deposit that you did not mention in your post? If not, then this record is wrong.

Don't panic. The rules for Roths are complicated, but assuming that your income is under 150k then both you and your wife can have a $2,000 annual Roth even if one of you is not working. The earned income of either spouse qualifies both and becomes the deciding factor. Spousal equality finally caught up to IRA rules a couple of years ago. Here is a rather long tax practitionare article by Gary Lesser on the Roth site which has some flow chart decision diagrams you may wish to review: ftp://rothira.com/lesser.pdf Please note: you can not transfer assets between IRAs owned by different people. The "I" stands for individual. [This message has been edited by John G (edited 03-20-2000).]

I agree with all of the above about earned income limitation on IRA/Roths and the rollover option. There is another option your mother might find useful..... She could write checks to fund the Roth IRA accounts of children and grandchildren if they have earned income. For example, she could give a working teenage grandchild the funds to start a Roth IRA. Same IRA/Roth rules apply, just the source of funds (all or part) is your mother. This would not benefit her directly but might be an element of a estate plan. On the down side, the funds leave her control. On the upside, you get multiple decades of tax shelter and you might pass on the "educational" value of teaching a new generation the potential of saving and investing. Note, the funds for the IRA do not have to come from the person with the earned income.

You may convert an IRA to a Roth in the same year you make a standard contribution to a Roth. They may involve the same account of different accounts. If your custodian says otherwise, they are not telling you IRS requirement. They may be mistaken or ill informed... either way it suggests you find a more knowledgeable custodian.

Would it be worthwhile? I guess you may be thinking about (1) how much bother to have a Roth, and (2) value of a Roth. On the first point, both you and your husband would qualify so we are really talking about two Roths. Probably the simplest way to do this is to find a low cost mutual fund, fill out a one page form and attach a check. You can use the March issue of Consumer Reports (or any Money, Worth or Kiplinger) to find a custodian and call for documents. Or you can use the web. Two hours to search, select and contact. One hour to fill out the forms and mail. While this is only one approach, it is probably involves the least amount of time. Second issue, Roths can accumulate an amazing amount of assets if invested wisely and given a lot of time. So if you are young, the tax free compounding is more valuable. For example, $2000 x 2 invested at age 30 might growth to $128,000 at age 65 if your investments average a 10% annual return. A second benefit of the Roth is that there are not required distributions. Some couples also use the Roth as an estate planning option. You did not indicate your other retirement/investment options. You certainly want to participate in any corporate matching programs such as an ESOP, thrift, 403B or 401k plan. If you have additional funds to invest, a Roth might be the next choice. Remember, you can fund a Roth for both 1999 and 2000 right now, so if you qualify you might be starting with $8,000 (2yrs x 2 people x 2000). Good luck.

Was on the line with Janus Funds today. They said minor child is not a problem, just requires additional custodial designation.

You might want to look at two alternatives to early pull down from the retirement accounts. First, if you have substantial home equity you can arrange for a home equity loan, or even a credit line based upon your home equity which might allow you to take funds only if you need them. Second option is fairly similiar, a reverse mortgage that would give you an income stream. It sounds like you are just looking for a bridge strategy until you reach 59 1/2 or perhaps even social security kick in date. There are probably other options that might work for you. Your considerable retirement assets will qualify you for these kinds of programs. However, I very much agree with BPicker in that you should find a competent advisor/accoutant. What is best for you clearly will depend upon your circumstances. If you are only looking for $10k each year, the penalty of $1000 (10%) may be the simplest approach. You need to exercise some caution because the rules are complex and you could have 4+ decades of retirement. Do not count on your custodian understand the details. One further note, go talk to a good attorney about estate planning if you have not yet done so.