John G

Did you get a reason why they want to switch back to a strandard IRA? It seems the conversion would reduce the taxable estate by perhaps 200K which reduces estate taxes by about 90K. The "credit" from estate taxes not paid would reduce the effective tax rate for the conversion and very likely place it below the marginal rate of the heirs. Too bad your client didn't start writing $10,000 gift checks to reduce the estate size. At age 80+ that would have been a reasonable stategy.

The prior comment is misleading. Options come in more flavors and types than Baskin Robbins has ice cream. Most will not be allowed in a custodial/retirement account. For example, IRA custodians do not allow you to buy/sell any options that expose a retirement account to unlimited risk. Custodian rules may be more restricted than IRS might allow. Some custodians will only allow selling covered calls for existing holdings. The best way to answer your question is to call your custodian and ask. [This message has been edited by John G (edited 10-30-1999).]

Bad idea. Bad example of putting all of ones eggs in one basket. Start-ups fail at a very high rate.... a real "crash and burn" scenario where you can be left with ashes. Everyone thinks they are the next Bill Gates or Steve Case. I would suggest a big dose of realism. If you bet the farm and fail, you have nothing left to fall back upon. If his/her business idea is reasonable and has merit, there are other sources of funds to get started. At the small end of the scale are credit cards and family $$, at the big end angels and venture capital. To a very limited extent, you might be able to use a home equity loan. But if the idea flops you can loose your home. Cashing out to get the funds is another bad idea. That blows the tax shelter, incurs penalties, drives up your tax rate, etc. etc. I am a big fan of entrenurial activity (been there done that, been modestly succesful each time) but would not take the ultra-high risk route.

Technical answer: if your IRA (Roth or regular) is at a brokerage, you can trade... every minute if you want... and you have no recordkeeping requirement (other than for your own internal tracking), no tax consequence at all with a Roth, and no tax consequence until you withdraw funds decades later with a regular IRA. Should you trade stocks? Probably not for the following reasons: (1) your first priority is that diploma, (2) with a small initial IRA you do not have a lot of funds to buy/sell efficiently, (3) you do not have enough funds to give you diversification, (4) even low web based commisions will eat up your performance, and (5) you don't know enough to do a good job - the real world tuition of learning how to invest can be just as expensive as those greenbacks you fork over each semester to your college. I would suggest that you pick one mutual fund. If you add more next year, you could pick a second. Look for broad based no load funds. I would also recommend that you subscribe to a general financial periodical like Kiplinger to become more informed about investing. Think multiple-year process. Finally, don't worry about the performance of your first investment choice. Don't confuse investing with Las Vegas gambling.... I alude to your 1000 bucks a year comment which would represent a 50% return on an initial 2K IRA. Not a likely scenario. Reward is ussually aligned with risk... so to aim for a 50% return means you are be betting on long shots (Cleveland makes it to the super bowl this year). My view is that your first few years are a learning lab and you need measure your increased skills/knowledge rather than your rate of return. You are very likely to become a millionaire if you contribute each year and only average a 10% return. Marry someone just as wise (and an early starter) and you can add "multi-". You are to be congratulated for taking the first step so early in your lifetime. Good luck, and don't forget those grades! [This message has been edited by John G (edited 10-21-1999).]

Note IRS notice that recharacterization deadline has been relaxed to the end of 1999. See other listing on this message board.

I can not think of many likely circumstance where you want to utilize Roth IRA funds BEFORE you consume non-retirement assets or regular IRA assets. Perhaps you could construct a case with lumpy withdrawals, major changes in tax rates, problem liquidation non-roth investments, or estate planning issues. The income stream to retirees is often a complex mix of lump sum benefits, pension, thrift plans, 401K, social security, etc. These vary in terms of their $$ magnitude, when they kick-in, how much control you have over the timing and their tax status. It is very common for retirees to utilize this mix over a 15 to 30+ yr time span, especially when you consider the surviving spouse options. Given the high flexibility (no forced distributions), tax shelter features, and inheritance options of a Roth I still think the most common conclusion is to tap your other options before you utilize your Roth assets. That is a generalization. I would like to see some examples to support other conclusions. [This message has been edited by John G (edited 10-14-1999).]

Unless your conversion assets have shrunk substantially, it is probably not a good idea to try and recharacterize in the next two days. Reason: you may not be able to qualify for a conversion in the future either because of income or changes in the rules. You also may find it difficult to get your custodian to process your account in a timely fashion. Also, the market swings may catch you a second time when you attempt to convert again so you taxes could still be higher. The custodian sets the effective date of your conversion (not you) based upon the date the accounting dpt finally processes your paperwork. Your "costs" can also shift if you have a change in tax brackets between 1998 and when you convert again. Add in you tax prep fees, the value of your time, etc. Is it still worth it? I hope my cautionary notes are helpful.

Using the IRA assets to pay for the taxes is not a good idea from an investment perspective. That would reduce the size of your future tax sheltered dollars, while your taxable assets are unchanged. The ideal situation is to burn off your taxable assets to maximize your tax shelter. Remember, the income from assets outside you IRA get taxed each year while the Roth is your long term tax shelter. If you are likely to qualify for ROTH conversions the next couple of years, you can put yourself on an "installment" plan, converting a part of your IRA each year. For example, if you convert only 1/4 each year, the tax bite would be spread over four years. The drawback of this system is that you IRA assets are likely to continue to grow larger each year, so you would pay more in conversion taxes. You may be able to manage your tax bracket better in a step conversion. Another thought, a partial conversion often gives you many of the benefits of a full conversion. The Roth part can be left untouched and become an inheritance issue since there are no mandatory distributions. This makes more sense if some (but not all) of your IRA assets will be needed earlier in retirement. [This message has been edited by John G (edited 10-13-1999).]

Responding to Oldtimer - David Ardito's problem was very specific, the failure of a custodian to complete a Roth conversion in 1998 and how to calculate his potential damages. My comments addressed this issue and raised some of the difficulties in defining a methodology. You have missed the point of my phrase "standard ROTH evaluation software". His problem is going to be resolved by negotiation, arbitration or litigation. I recommended STANDARD evaluation software over his own spreadsheet for "credability" reasons. There are a number of choices in sophisticated Roth evaluation software packages available to accountants. It would be extremely naive to use a simplistic mutual fund worksheet to examine Arditos damages question. If Ardito created his own spreadsheet, the door would be wide open to arguing about the basic structure of his personal spreadsheet. So STANDARD in this context means a third party model or evaluation tool that would be accepted by both sides. The arguement would then focus on assumptions and not algorythm/structure. Oldtimer, you seemed to go nuts over the idea of using computer models to evaluate the Roth conversion. Is there any alternative that can address Ardito's problem. Do we stop crunching numbers because we have to make some assumptions? You seem to presume that every Roth evaluation model would be inadequate. You said that Roth models are sensitive to future and current tax rates. That is only true if you make radically different assumptions about tax rates now and later and if the time period is short. Most of the managers I know are unlikely to move 3 tax brackets in retirement, perhaps this is your view or bias? Ardito is in his 30s and has already accumulated a large IRA lump which could easily grow beyond $2M in his lifetime on growth of the current lump alone. Do you expect that he would be taxed at a LOWER rate in the future? For Roth conversion scenarios for people early in their career, the assumption about the duration of the shelter is often a more significant issue. And since Roths have no mandatory withdrawal, the Roth funds are likely to be sheltered a long time and be the last assets used. Oldtimer, you never mention the name of any Roth evaluation software. Then you make charges about software "biased in favor of the Roth", "flawed standard Roth software", errors in opportunity cost methodologies, and models that do not evaluate total portfolio (why?). If you have a beef with a specific package perhaps you should start a new topic. Please don't shoot from the hip with generalizations. The rothira.com site has lots of material on roth evaluation models. Very specific analysis. The custodian has offered a 30K settlement. Ardito's math may now look something like this. Assume that the settlement is taxable income and you might reduce it by 40% to 18K, then grow it at 10% to about a pretax $288K in his 70s. His unconverted IRA in the mean time has grown from 118K to about $2 million. Over that period of time, the conversion taxes he did not pay ($47K) might grow to a pretax 750k. I would guess that leaves him about 500K (aftertax of 288+750) to pay the taxes on the IRA $2 million or about a 25% coverage. My guess that falls short of making David Ardito whole. But that is the result of just one set of assumptions. Ardito needs professional help to define a range of results before he decides to accept, decline or counteroffer the settlement. David, the comparison is not just the 30K settlement vs the taxes you would pay to convert. Post again and let us know how this is resolved. [This message has been edited by John G (edited 10-15-1999).]

Yes, he can start a Roth IRA at age 14. The key is to have earned income. Not every custodian is prepared to open Roth accounts for children. You may need to some additional phone calls. Schwab supports kid Roths, I would assume that most mutual fund families also support these Roths.

As you can see from the above, it takes about 20 minutes for a response that is in error (IB Watchin) to get corrected on this message board. Kathy and BP have done an excellant job on the accounting issues. I certainly appreciate the level of effort.

My view is that a Roth is a great idea. The earnings are sheltered. While you can take funds out for education, you may find other means of financing her college (scholarships, inheritance, Rotc, etc.) and keep these funds sheltered for a very long time. Two downsides to consider: First, assets in a childs name can be misused when the kid becomes an adult. Drugs, fast cars, problem boyfriends... it happens but is not common. Second, assets in a childs name are currently counted more heavily in the financial need calculation then say your retirement account or home equity. These cautions not withstanding, I thing a kid Roth makes a lot of sense. Good luck. [This message has been edited by John G (edited 10-04-1999).]

Before people jump off this bridge, consider some of the practical downsides of splitting up an IRA: (1) limitations on making some investments because each lump is smaller (less of a problem if using mutual funds), (2) more effort required to make changes (even toggling between e-accounts), (3) harder to keep the bulk of funds invested, likely to have cash residuals in multiple accounts, (4) more statements to review, (5) due to variable results (it would be hard to maintain identical investments) over time 1 account could dwarf the others (more effort to rebalance the accounts every couple of years?), and (6) more transactions more accounts surely means more errors to correct. While the accountants above gave some good reasons to consider this option, I wanted to raise some cautionary flags.

Don't give up on qualifying in the future. You have more options if you own your own business or have some influence over the timing of income such as bonuses. For example, you might be able to start up a business and end up qualifying due to first year expenses. You may be able to push some income into 2000. In addition, Congress may eventually change the qualification parameters. Concerning your circumstances: your problem is indeed complex. I don't believe there is anything the custodian can legally do to "fix" the error. Under current qualification rules, your custodian's negligence has prevented you from taking advantage of the Roth conversion. You definitely need to seek legal counsel on this issue, I would not negotiate without legal support. Creating a Roth is not the same as asking for a conversion. If you set up a conversion or standard Roth but never gave them instructions in writing to convert your existing IRA, you have a weak case. But if your instructions are clear, and they acknowledged in November that actions were being taken, then you have a very strong case. Your damages can only be estimated by making some assumptions about tax rates, investment returns, time schedules, etc. I think you may want an accountant to run some scenarios on standard ROTH evaluation software. This would have more credability then your own spreadsheet. Your hard facts are the amount you asked to convert and 1998 taxes rates. Don't forget to add your state tax income tax rate to the bumped up Federal for the future. Your damages will be much larger if you can make a strong case for a higher annual investment return. While lots of folks plug in 10% automatically, I think you can make a good case for 12 to 14%. Some of the oldest mutual funds have 30+ year averages in this range. Your damages increase if you can make a strong arguement for a very long tax shelter period. I understand what you are saying about passing it to your heirs, but I doubt you will be able to prevail on anything beyond your lifetime. Understand, that any sharp economist could punch holes in your scenarios. For example, at time of conversion you might live in a state with income taxes now but later on live in a state like Tx or Fl (no income taxes) when the funds come out. That example would reduce your damages. I would not be surprised that you could develop scenarios that would show a future delta between IRA and Roth conversion of 100K to 700K. A good economist would then argue to reduce the damages to present day value (reduced for long term imbedded inflation). For example, at 4% inflation and 50 yrs hold this means that you would roughly divide any damages by 7.1 ! That would mean a settlement check 14K to 100K. The more I think about this the more convoluted the calculation seems. This is not the best forum for providing you with a methodology, but your problem is a very good warning to others about custodian sloppiness. From that perspective, you are helping a lot of folks. Post another note when your problem is resolved. Good luck.

One extra point. You said "financial planner" in your question. If your financial planner is not the same as your IRA custodian, your problem becomes even more complex. The transfer is done by the IRA custodian.

Your question is complex. You would need to provide more details before anyone could give you some perspective. For example, are you qualified to convert this year? What is the difference between the total assets when you made the request and now? What are the tax rates in prior yr, this year, the next three years, at retirement, and at a possible withdrawal date. What is you state income tax rate for those same periods. How old are you now, when do you expect to retire, what age do you expect to take out funds from the IRA. If you still qualify to convert this year, your damages may be minimal. You have lost the opportunity to elect a four year averaging for taxes. That is a time value of money question since 75% of the taxes would be paid an average of 1.5 years later... maybe around 10% of your conversion tax obligation. On the other hand, if your assets shrunk in this recent stock sell off you could convert at a lower cost. A bigger question is do you really want people managing your money who fail to do basic administrative acts? Time to find a new home for your money. Next time you take an action, double check to make sure it was done. You bear some responsibility for not following up on your request. Your note suggests that you attempted to make this rollover in late December. Some custodians notified customers that their cutoff for conversion was mid-December. If you missed a well noticed deadline such as this your entire question might be moot.

Does this company force you into owning just their own stock? Are the selection of investment options limited? If so, you may want to see a lawyer. A company that refuses to let you rollover the funds faces more stringent standards in terms of their fiduciary duties. Depending upon your circumstances, you may be able to shake the tree with a letter from a lawyer. The company may also be in trouble if they failed to provide mandatory documents... a common problem with small companies. Before you take that route, be sure to read the plan. As noted in prior comment, the plan may allow for the transfer/rollover.

As I have noted previously in this forum, taking money out of a Roth early for education, buying a home, etc is unlikely to be a good idea. A Roth is a amazing tax shelter that you want to keep sheltered as long as possible. The average family just doesn't have many options to shelter income, and either because of income changes or legislative changes you may not always have the Roth option. Think twice before pulling $$ out from a Roth. In my experience there are ussually other alternatives that may make more sense in the long haul.

You need to list your income in two columns: $ where you can shift the date, and fixed date. Things that you can control include when you sell stocks. Selling any losses to offset gains. If you are self employed or have a small business, think about maximizing the use of Sec 179 expense for equipment purchases. You might also start a business which typically has first year losses. If you have a corporate position, see if you can have any bonuses shifted into January. Hidden income issues include: capital gains and dividends from mutual funds, tax refunds, partnership income, etc. If you think all is lost, then hope for some legislative relief. Some proposals have been floated to relax the income test on Roth conversions. They may not make it or may be vetoed, but there is a reasonable chance they could be inserted next year. Perhaps you ought to call your reps office and show your support. [This message has been edited by John G (edited 09-10-1999).]

You can get some good general info by calling brokerages (like Schwab or Fidelity) or mutual fund families (like Janus, Vanguard, Scudder) and asking them for a "just getting started" brochures. Try a few places. Most of them have good materials. Novices can learn a lot from readying Kiplinger Finance or Money. You will find these mags in all libraries. You are wise to start early. You may want to talk with an Aunt, Grandparent, or your folks. This is adult stuff, and who knows, maybe they will match your initial contribution. Remember, you can start out smaller that 2,000. Even a couple of hundred gets you going.

You literally have thousands of choices. Banks, brokerages, mutual funds, etc. Just like IRA choices. If you are new to investing I would recommend that you stash you new funds in a mutual fund. Use Money or Kiplinger or even Consumer Reports. Pick one with a reasonable (<$20 annual) fee or no fee. If you are young, consider a more aggressive stock fund. NO LOAD is the key phrase, you don't want to be paying front or back end fees. If you already have investment accounts somewhere, they may waive the fee and report activity on the same statement you are now getting. A good starter mutual fund would be an S&P index fund, almost every fund family has something like this. Yes, like a 401K you can manage your own investments. BUT, you can't buy much for $2000 and commissions on small sales hurt performance. That is why I suggest starting with a no load fund. After a few years of adding 2K and watching it grow you can transfer the funds and take advantage of other options. Splitting up $2K between funds is probably not a good idea. Keep it simple.

If you put in the $3400 before you filed your 1998 tax return, you may allocate $2000 to 1998 and the rest to 1999. This assumes that you qualified in both years.

Make sure you are very likely to meet the income requirements before you take action. The conversion is accomplished by sending your broker a letter of instructions and probably entails filling out some forms. Online brokers don't seem to like to answer the phone, so you may have to write to them requesting the conversion. The tax impact will be documented by an IRS form that the brokerage will generate based upon the date of conversion. Think of the date of conversion as if it was the date of a lump sum of income, you will either need to change your withholding or make some estimate payments to cover the taxes. Timing? Don't wait to the end of the year because conversions are low priority and are often delayed a couple of weeks. A good time to convert is after the market has sagged and your assets have shrunk, but you remember that you are not in control of action date. If your online brokerage gives you a problem you can always roll your account to someone more responsive.

You are not likely to get company specific info from mutual funds or brokerages for competitive reasons. You may want to consider these sources: (1) IRS definitely compiles this info but it will be persons with IRA accounts not how many mutual funds they have, probably done on a sample basis, (2) Congressional committees that have studies IRA/tax policies or individuals (such as Senator Roth) that serve on these committees or have sponsored legislation, (3) Investment Company Inst or similiar associations that may have an interest in tabulating this data (assoc for accountants or tax preparers). I am assuming that you have already tried the WWW for possible disertations and white papers on the topic. Some of these sources will be interested in the raw count of persons, others the percent of households, and others just the total $$. Good luck in your search. If you are asking a personal question of which companies provide IRA services that you may need, then the answer is just about every bank, thrift, brokerage and mutual fund.... tens of thousands.

One of the options with wills and estate plans is that a parent can decline to accept an inheritance knowing that upon refusal the will/trust specifies that the assets will pass to their children or some other family member. Under some circumstances, this reduces the potential estate tax impact upon the parents death. A useful feature if the loss of control is acceptable. My question: Can you accomplish the same arrangement when your children are secondary beneficiaries on an IRA (either with spouse or parents). Upon death, can the primary beneficiary decline and allow the assets to flow instead to the secondard beneficiaries? In other words, can the primary beneficiary elect not to receive the IRA ?