John G

I have yet to see a really comprehensive article on the various options for saving for your childrens college costs. There are multiple approaches and each option has its advantages (tax shelter, simplicity, flexibility, etc) and weaknesses (max amount you can use, tax impact, restrictions on use, etc). I agree that the first big negative of the education IRA is that the $500 annual max is just too small. Even if you start at birth, you may only end up accumulating enough to cover just one year of college expense. Note, assets in a childs name are counted more heavily in financial aide calculations. The number of state type programs have grown so fast that it has been hard to keep up with all the variations. It is also tough to evaluate the merits of some of these state programs especially the "guarentees" which often have loopholes. You might want to contact Fidelity Investments because they have an interesting program that allows more $$ set aside, in a program that has a prescribed asset blend based upon the age of the child, sans "guarentees". Some of the other brokerages have considered putting out similiar plans... I invite readers to post any other referencs. Another option: just buy some stocks and hold them until you cash them out when the bills arrive. Positives: you control the decisions, no limit on $$ you set aside, minimal tax impact (just dividends) until sale, assets can remain in your name and are marginable, if performance exceeds goals you keep the extra. Negatives: no shelter, long term cap gains taxes, no "guarentees" of performance, not professionally managed. One of the issues that you should consider is if the child gets control of the funds at some point an may use them for (ahem) "non-college expenses". Or, what happens to the funds if the child does not go to college. Good luck. My oldest starts this summer, so I am now in the write-a-check mode.

Michael, buying a house for an ancestor? Don't you have to be dead to be an ancestor? Naidae1, Your plan may not be as good an idea as you first think. The Roth is a wonderful tax shelter, but you may not qualify for it in the future or legislation may negatively change the availability. Taking money out of a shelter diminishes the value of the shelter. You might want to keep the shelter and help your child by gifting or loaning funds. It is not common for your circumstances to change significantly and unpredictably over the next five+ years. To demonstrate this effect, think back to what you knew about your year 2000 personal status five years back in 1995 , or ten years back in 1990. Unpredictable factors include: divorces, births, disabilities, inheritances, job changes (forced and voluntary), promotions, accidents, etc. Over 5 - 10 years lots of things change, which suggests being flexible in your plans.

This should fall under the errors and omissions catagory like you find in home closings... if someone makes a mistake, you sign in advance that the title company can correct the error. Unfortunately, I don't think the IRS will allow this correction. The funds had to be in the account by the end of the conversion year. Unfair? Well, your client has some responsibility for checking the custodian's work and the statements that they send. ATTENTION ALL CONVERTERS: Learn the lessons: (1) don't wait to the last minute to get a conversion done, and (2) double check the custodians work and statements. A little proactive effort to monitor your own accounts will catch these problems in time. If the client gave absolutely clear instructions in writing (one prior message board person even got a receipt that said Roth but it wasn't) then you can ask the custodian to pay for the refiling of your taxes. If the client no longer qualifies to convert now, you may need to go to arbitration over damages.

I don't see how any custodian could move money from a traditional IRA to a Roth without it being flaged as a conversion. Regardless of what boxes you may have checked, regular --> Roth is a conversion. Go back to your custodian and speak to someone in the IRA area, preferably a supervisor. Either they are making some big mistakes or you are misunderstanding what was done. You can't solve that problem on a message board. You need to clarify exactly what was done in your accounts before you get to the tax question.

Schwab is a YES. Etrade is NO. Apparently the issue for brokerages and mutual funds is the overlap between custodial accounts related to <18 yrs age and IRA accounts. You will probably find yes/no answers if you try the various mutual funds. Don't take NO for a final answer, just call a few more places. Perhaps other readers can add some info on mutual fund family acceptance of juvenile status IRA/Roths.

"Bank policy" - - perhaps because they charge a fee for each account? Time to buck this up the chain of command. I would not have an account with a bank whose focus is not on their customers wishes but rather their internal administrative rules... that lack no IRS basis.

As you describe your situation, the Roth conversion in 1998 is not impacted. Concerning your 1999 issues: if your Roth contribution was actually made this year (2000) then you can get your custodian to shift the contribution from 99 --> 2000. I do not believe 1/4 conversion income effects your current year eligibility. You may want to get help from an accountant on your exact income qualification issues.

We have seen a lot of issues about Roth conversions at this site. Problems with qualifying, paying the taxes, getting the custodian to act, etc. In you question, you did not indicate why you decided to recharacterize. Can you explain?

Barry, we need to remind people that as you get close to the April tax filing, the IRA departments get flooded. It is always useful to get an early start, avoid the lines and waits. Plus, check the statements that custodians provide to ensure the right deposit and your deposit is is tagged for the right tax year. During the IRA rush, lots of mistakes get made. [This message has been edited by John G (edited 03-06-2000).]

Capital gains: only apply to mutual fund holdings outside of retirement accounts. Most mutual funds have gains and dividends that are distributed often near year end. With a taxable account, you can get a surprise tax liability depending upon the turnover and performance of the fund. Tax liability is lower at tax managed funds and index funds. On target annual return: 8% over the long term probably represents an IRA that has a blend of cash, bonds and equities. It is wise not to overestimate results before they happen. If you have a string of good years, you can adjust your targets. The "Rule of 72" says that at 8% annual, your assets will double (without additional deposits) every 9 years (72/8 = 9 yrs). At a 10% return, assets double about every 7 years. In any given year, the annual return can swing rather dramatically. For example, lets look at the long term track record of the ICA fund. Over 66 years (since 1934) the fund's best three years were +83%, 56% and 45% and the worse years were -38% [ouch, ouch!], -18% and -17%. Big swings for a blue chip fund. Twice the fund had back to back down years, but UP years out numbered down years 56 to 10, and the average annual compound rate of return was just under 14%. There was no 10 year period when the fund was down. Note, ICA is a loaded fund and I do not recommend it, but 66 years makes for a good long term example. I use it for my Junior Achievement classes on the stock market to address risk and "time is your friend" aspect of investing.

Wonderful 21, and thinking about investments! wow Here are some of your answers: 1. you can readily learn the basics from mags like Kiplinger Financial Mag, Money, Worth, etc. I think Kiplinger might be the best for a 21 yr old since it covers lots of topics including credit, major purchases and careers besides decent coverage on investing. A very short summary that might be a good start can be found in the March issue of Consumer Reports. 2. You can only have an IRA if you have earned income. You apparently do not for 1999 so no IRA for 1999. 3. You can invest in an IRA for 2000 if you will be working this year. You can put the max ($2000) if you eventually will make that much this year, even if it is later. Nothing magic about $2000, you can start with a smaller amount. Many custodians will open an IRA with just $500. 4. You can still invest, even if you will not be working this year either. As long as you do not expect to be using those funds for a few years, you can get started. Vanguard is one of many mutual fund families which might be helpful for you. They feature lots of very low cost index funds, check their web site for specific details. There is not a lot of portfolio turnover in index funds so your taxable capital gains each year should be very low. Index funds have performed very well the past decade relative to stock picker funds, partly because of much lower expenses. 4. I agree that you might want a more aggressive fund since you are so young, but do not buy into all the hype about some of the hot sectors such as internet stocks. Hot investing areas come and go. There are dozen of great growth funds that might meet your need for speed. Try Janus Mercury or American Century International, but hey, there are probably hundreds of funds that might qualify. You would want to find a NO LOAD fund with the right minimum, annual fees, etc. Remember, in a down market, hot funds can go down a lot in a very short time. Reward is typically comensurate with risk. You should only be investing funds you don't need for years. What do you think should be your annual expected rate of return? It is not uncommon for someone new to investing to say 80% or even 200%. Realistically, think more in terms of 10, 12 or 14% annual over the long haul. The last five years have been abnormally positive, a very rare combination. Expect some years to be net losers too. Good luck. [This message has been edited by John G (edited 03-05-2000).]

This situation is a good example of why a direct custodian to custodian transfer can be desireable. If you had gone to a low min broker and requested a transfer form, you could have moved the $900 and interest to the new account without touching the funds and without the nuiscance tax/accounting issues. Go direct transfer when ever possible. Second point: Investing in equities with $900? This is going to be difficult. You can only own 9 shares of microsoft or maybe 6 shares of Cisco. How do you get any diversification? Even with a discount broker, you commission costs are going to be high relative to the annual expense % of many mutual funds. Your time and effort will be higher for researching individual stocks.... although building up your investment knowledge is for many folks a positive value. Since there are about as many mutual funds as there are stocks, you certainly have lots of choices if you initially go that route.

When Roths were first created, there were technical issues that had everyone assuming that you had to keep conversions and contributory accounts separate. After a series of techinical clean-ups and IRS rulings, the current rules do not require segregated funds. Your custodian should know that by now. If they don't, buck you question to a supervisor or the IRA dept. and if that does not work, try a different custodian. You might want to consider some of the mutual fund options that involve bonds. Lots of choices in that area, a range of risks and annual returns. You won't have the government guarantees however.

The I in IRA stands for "individual". No comingling of accounts. Don't forget to think about the designation of benefitiaries. Each account has their own. You might want to list the spouse as primary and kids as secondary. Under some circumstances, the surviving spouse might want decline the inheritance... and the assets would then pass to the kids.

Minimums are set by your custodian (not by the IRS) and vary among banks, mutual funds and brokerages. Some will allow a $250 minimum initial but not all. Some will allow a lower minimum if you make automatic deposits from your checking account. One potential solution to the small minimum problem is that you flip a coin and one of you opens a $500 account this year, the other gets dibs next year. This also has the added advantage of cutting any potential annual fees in half. Ideally, you would like a custodian with no annual fee. If you still have less than a minimum amount, then I suggest that you set aside you funds and "pay yourself first" by writing a small check each month for your future IRA. Maybe you can elect to work an extra weekend or some overtime. Another option is to take your current initial amount to a successful grandparent or uncle and ask if they can help you get started by matching your initial. Sure beats a birthday or Christmas gift you may not need. Good luck.

I have had some exposure to this problem. Be prepared for a real mess. Yes, the custodians of brokerages have had some exposure to these Roth "divorces". But expect misunderstandings about the circumstances, dates, and procedures. Don't assume that each staffer at your custodian execute the procedures in the same way, so if more than one person handles the problem your risk of a screw-up increases. Don't assume that they use the correct prices for shares on the proper dates. My suggestion is that you bypass the local staff and talk directly to the upper levels of the IRA department that is more familiar with these issues. It is my understanding is that the big firms have proceedures in place for how to do this, you may get to provide some input, but that is probably at the custodians discretion. Do check their results. I have some experience with a pricing problem where Bear Stearns was off about 35%. Sounds like you need better income forecasts. Some of the wild cards include mutual fund distributions, state tax returns (often overlooked!), bonuses (probably not an issue for a retiree) and K1s from S corps. Unfortunately, these sources of income can hit you in late December or in the case of partnerships or K1s even after you have begun the next year. You may want to consider shifting some income earning assets to tax free municiple accounts to give you more breathing room.

Not all custodians are up to speed on the revised rules. Yes, they can be merged. If your custodian says no, ask to speak to the IRA dept or a supervisor. If they still say no, find a better custodian. If these accounts are with different custodians, work with the receiving custodian to request a direct transfer of funds. You want to avoid having a check given to you in IRA transfers as it limits your future options and may trigger tax issues if you don't get the tranfser done during the grace period. For some folks, there is also the temptation factor of short term using the funds and then running into problems getting the assets redeposited.

Some downsides: (1) Roth rules are very likely to change over the next 15 years and how potential changes might effect your plans is uncertain. For example, you might be less eager to tap this source if you no longer qualified for contributions. (2) Dollar amount is currently limited to $2K per worker which might not be enough for a college savings plan (if you child was perhaps 14 you might want to save more, or if you were thinking of private schools) Money in retirement accounts is not counted against scholarships in the same way as assets in the childs name, or non-retirement assets or non-home equity assets of the parents. Those rules will not doubt change many times over a 15 year period. Generally speaking, you don't want to take out early withdrawals from an excellant shelter... the key point of a tax shelter is to "shelter" for a maximum amount of time. But by the time those college tuition bills come due, you may find other alternatives.

Sounds like you did not get professional advice before you made the conversion. You should go see an accountant or tax preparer now. You need too clean up this problem before it becomes a audit/penalty issue with the IRS. You did not mention the amounts involved. One of the option you might want to take is short term borrowing to cover the gap in 2000. The 10% penalty is more harsh then the <10 home equity loan. Get a tax/accounting professional to advise you.

Sarkey, when you just have your initial $2000 in a Roth IRA you have practical limitations on what kinds of investments. In my opinion, you logical choice is a mutual fund. Please read string of comments on 2-16 for Jeffrey M "Help, I guess it is time for me...." I covered a number of issues in that prior post.

Bill, you are right on target about the multiple benefits of a brokerage account. The down side of brokerage accounts: some have higher fees and higher minimum opening balances then just a no load mutual fund. If someone just wants to put $500 or even $1000 into an IRA each year, they may be better off with a direct connection to a no load mutual fund. For assets of $10,000 or more, a brokerage account will often have no fee... and you could open a couple of mutual funds. Folks with less than $5000 in assets should probably not be using brokerages to own one or two stocks. Three reasons: (1) Not enough diversification. (2) Commissions become a significant % of trade. and (3) Time requirements to research make picks and track are often more than a 20 something wants to spend. I have helped get a few people started that had very little to contribute to an IRA. They were very pleased to see their broad based or index mutual fund moving up. It got them hooked on investing and wanting to learn more. One has blossomed into a mini-capitalist! The worse possible start would be for someone to go the brokerage route and buy 35 shares of some "hot" company only to see the price per share go down, ditch that stock and repeat the mistake with another "hot" stock. I knew someone who was doing this with a broker and paying $1.50 per share for trades. I continue to be amazed that college graduates can spend hours deciding about a cell phone or vacation but make investment decisions with near zero thinking and relying upon "experts". Learning about investing is a lifelong assignment. It really takes many years to develop a good understanding. Since Wall St tuition is very expensive, I like to recommend that newcomers start out with a basic mutual fund. [This message has been edited by John G (edited 02-16-2000).]

Should look at the inbox more often. Consumer Reports March 2000 issue covers 110 mutual funds and has a decent overview article. Another good source for folks early in their career is Kiplinger Finance mag.

I should have said: you can get an IRA or ROTH IRA at a bank, brokerage, mutual fund, etc. Banks have very conservative options. One question to ask all potential custodians of your funds is what annual fees they charge. Anything over $20 is too much. Some charge a fee, but may waive the fee if you ask and waive the fee when assets grow to 10K or so.

Jeff, I am glad you asked. You have come to a good place for getting answers. But since the question is very broad, I will give you an overview. I assume: you have never invested before, and maybe this is your first IRA. Age 32, single (ah the young life1)... renting only means you have not bought a place yet, so I am assuming you are saving for a future down payment. Jeff: you probably want to keep things very simple and learn a little more about investing over time. Probably your best option is to pick a "mutual fund" instead of individual stocks. They come in about 8,000 flavors.... and you only need 1 for the first couple of years. I would suggest that you read last years March issue of Consumer Reports which boils down the list to about 100 well run funds. I believe they are all "no load" which means no front end or back end commissions. However, every fund has some general expenses... and the lower (like below 1%) the better. I recommend a very widely based general stock fund, not some narrow special purpose fund (like computer software, or electronics). Use CR mag to find perhaps three of these and call the 800 number or find the firm on the web. Ask them for a "just getting started" package (general intro to IRAs, how to invest etc.) and also one or two prospectus on a broad based fund and an application form. You will get these in about a week. Act now, as you get near April 15 all these places are overwhelmed with requests. I would also recommend the Roth IRA over the regular IRA since you are very young and decades later you will probably want to take the funds out tax free. The current max allowed investment is $2000 per year if you make atleast that much. You can actually make a smaller initial investment if that is too much (check custodians as min amount to open varies), but you also could right now put in $2000 for 1999 and $2000 for 2000! Next year, just add to this existing account. You probably only need to think about opening a second fund when you assets grow to perhaps $10,000 or in about 3-4 years. Long term annual returns for a general stock mutual fund can run in the 10-14 percent range, but individual years do vary greatly and you can see a down year. At age 32, you should not care about any single year.... time is your friend, think 20, 30, 40 years. At 10% annual growth, your assets will double every 7 years. There are options for tapping your Roth to buy a first house or pay for college. But that diminished the value of this great tax shelter. Hope that helps. Good luck. (post another note or email me if you need more detail) [This message has been edited by John G (edited 02-15-2000).]

It is nice to know all your options... such as Roth withdrawals. But remember that the value of a tax shelter is partially a function of how long you shelter the funds. I would imagine you are aware of how hard it is to get funds into a shelter, and your personal access could change if you income goes up, you get married or someone in Congress sneezes. Therefore, in most cases, you want to consider other sources of funds before taping into a Roth.