John G

If you are in good health, your life expectancy is three plus decades. Thats a lot of time for your investments to grow tax sheltered. That is good news. You didn't mention heirs but did note child support. The Roth can be a useful inheritance planning tool. Another plus. You did not say anything about income, your personal living expenses, or pension/retirement plans. If your circumstances are fairly standard, I don't see why you would not want to keep your Roth and fund it in future years if you are eligible. You may want to buy a couple of hours from a financial planner to review your circumstances. I am always amazed by the number of people who can spend $300 on dinner, theater, or a weekend outing, but don't see the value in gaining professional info. The answer to your question will be shaped by your personal situation.

On valuation dates: I did a conversion in 1998 in October that involved thinly traded stock, the broker took 2 weeks to get the transaction done. At year end, the broker used the valuation of Dec 30 for the IRS forms. Wrong. I was able to protest that error (which made a difference of more than 25%) and get a corrected IRS form submitted but could not get them to price the stock during the week they sat on the instructions which would have saved me more. My accountant and I differ on what further can be done. We have to Oct 15 (delayed tax filing) to decide. I also would like to hear more from people who had valuation errors that increase the taxable amount of their conversion....and what if anything was done to correct the error.

You must income qualify. The max contribution for 1999 is $2000. Since you are just getting started, keep things simple. If you believe in long term investing and are tolerant to normal investing risks, then you probably want to pick a mutual fund. For get individual stocks, your pool of funds for many years will be too small. Bank CDs are not a very strong investment option but are about risk free as you can get. You can deal directly with a mutual fund (Janus, Vanguard, T Rowe, Strong, etc) or use a brokerage (Schwab, DLJ, Fidelity, etc.)as your custodian and pick your mutual funds through their list. Your choice. You can find lists of funds and brokerages in Money, Worth, Kiplinger, even Consumer Reports. If you do not subscribe to a general personal finance mag, I would highly recommend Kiplinger. Fees: many places will charge a small annual fee until your assets grow beyond 5,000 or 10,000. Shop around... reject anyone beyond $25 per year. Ask them to wave the fees! It is a competitive world. Mutual funds come in 8,000 different flavors. Pick something broad based that has very low annual expenses. Pick a NO LOAD fund so you do not have any front end or back end charges. You may want to consider an Index Fund.... which may own all of the S&P 500 stocks or even 5000 stocks. A classic is the Vanguard 500 index fund which has ultra low expenses. Final thought: in the next couple of years you need to educate yourself about investing. Your custodian probably has some basic info on IRAs and investing. Ask them. Don't worry about short term performance. Think of any disappointments as real world tuition costs. Learning about investing is a lifelong persuit. Mutual funds can reduce but not eliminate your personal time commitment and resposibility for keeping an eye on your assets. Follow up emails are OK. It is hard to cover all the issues. Good luck. John G Blackstone.summit@worldnet.att.net

The custodian did not handle it properly. At a minimum they should have notified you of the issues. There is a very good chance that the capital gains and dividends WERE included in the value of the funds at the date of transfer. When the fund went EX in January, the value of your shares should have dropped due to the distributions. Stock splits can cause a similiar problem if handled improperly. I suggest you pull all the data from the January period for the mutual fund. Then first talk to a supervisor at the mutual fund (if they are not the custodian) about what happened. You need to pin down the dates when the mutual fund distributions were declaired and made. Then ask for a supervisor at the custodian to handle the problem. It sounds like your custodian is taking actions without being authorized. You may want to reconsider who is handling your assets. This is sloppy work. This is just one more reason why conversions should not be left to the end of the year. Good luck. [This message has been edited by John G (edited 08-15-1999).]

The first sentence of BPicker might be confusing. You can not selectively convert just the non-deductible amounts of any IRA. Lots of folks think they see a loophole to avoid Roth conversion taxes by converting just the previously taxed component. Not legal. Doesn't work. Forget about it. Another common confusion is that you can do all these calculations based upon one IRA account. Not true. As BPicker notes, you aggregate ALL the various IRA accounts (brokerage, mutual fund, band, etc.) for one person into one grand total. On area where couples can get clever is to convert the assets of the couple with the highest percent of non-deductible assets. The IRA tax calculations are seperate for each spouse. Such cleverness could cause later problems in a divorce.

If you received a check from the prior custodian, you can still fix the problem by getting money to a legit IRA custodian before the 60 day grace period elapses. Don't wait to get the funds back from the non-legit custodian. You may need to borrow the funds to get the job done in the allowed 60 days. Even a partial deposit would be helpful. If the non-legit custodian made any representation to you that you could rollover an IRA to them, you may have a legal action against them to recover your losses. What are your losses? In my view they could include the taxes, the 10% penalty, and the loss of the IRA sheltered earnings for decades. This last component is probably the largest damage to your investing. You may want to seek legal counsel. I am interested in the circumstances that created this problem. Can you tell us more?

Not all IRA custodians are prepared to open ROTH accounts (or even regular IRA accounts) for children. You may need to make a few phone calls to find a supportive custodian. I have been told this reluctance on the part of some institutions is related to the need for an adult to be designated for a minor child's IRA account.

Advice: (1) talk to your accountant to see if you are really over the hump before you do anything as the hassle factor is big, if you own a business you may want to do a little auto/tech buying this year, you may be able to postpone bonuses to next year, etc (2) talk to your custodian about how THEY would do it. Then go talk with your accountant again.

P A Weick, I am assuming that you are not refering to a major mutual fund or brokerage house?

Think of the general economic and market forces at work here. Lets assume you are talking about a significant player such as the Big V, F, S, TR, etc. What would happen if they were to act unilaterally to terminate a large number of customer relationships and send out checks. The screaming would be worse then when Coke changed the soft drink formulae. I for one would terminate all relationships with an organization that acted like that. Wouldn't you? They would get trashed on every financial show, radio, TV, and internet. The goodwill lost would be crushing. Rules may get changed. Fees may be imposed. But no major financial institution would cut their own throat my aggitating their customer. The IRA business is huge and constitutes very stable assets that are highly prized. Look at what has happended to annual fees. They have been slashed over the past decade, especially for large asset accounts. And, they are often waived in the interest of keeping a customer happy. I think you are reading too much into the language. Transfers to another custodian will always be allowed. Consumer demand is more likely to be the controlling factor then the legal protections built into the custodial agreement. [This message has been edited by John G (edited 06-29-99).]

Mr X is out of luck since "tax loss" is a meaningless concept with IRAs. I think the bigger question is why did he make this investment. It sounds as if everything was bet on a long shot. It is not easy for a balanced portfolio to loose 85% in a bull market like we have been experiencing. Mr X has paid a very steep tuition, but has he learned anything? If he had put his funds in balanced mutual fund that averaged 10% per year he should have seen his nest egg grow to about $32K. But you say he now has instead about 1/10th that amount. He shouldn't have a tax question. He should focus on his investment choice problem! Yikes. Sounds more like gambling and the racetrack, not investing. Conversion to a Roth might be attractive if you felt the investment would rebound, but I don't think Mr X should trust his judgement on that possibility.

Also, you can contribute $$ for next year on January 1. Note, between Jan 1 and April 15 you could be contributing based upon two different tax years. Early contributions shift assets from taxable to tax sheltered at an earlier date and boost your IRA performance. I would recommend the Roth option, but double check your eligibility based upon income. If you are a borderline qualifier, you may be able to take some action to shift bonuses or increase business writeoffs to qualify.

Not possible. The I in IRA stands for individual. Divorce court orders can force IRA funds to be shifted, but I believe this triggers tax obligations, and I doubt that a judge can supercede IRS regs. It doesn't sound like this marriage is going anywhere, so perhaps it will end up eventually as a court order. If the $$ are not major, they can commit themselves to a year by year ($2000) plan to contribute to the "short changed" spouse. You can also make wife the beneficiary of the husbands IRA, but that designation can be readily changed if the account is transfered. Others may be able to tell you if any IRA custodian can require the wifes signature to change the custodial designation. I know that is true for some type of corporate plans. My suspicion is that the transfer loophole allows the money to move around at the sole discretion of the IRA owner, so there may be little protection of a spouse. I am stretching to answer this Q and the above is based upon limited anecdotal experiences a few years ago. I invite additional comments from this sites professionals. [This message has been edited by John G (edited 06-23-99).]

This may be an option, but it is probably not a good idea. The high value of a Roth comes from putting money in and keeping it there. Congress can kill future Roth contributions, your income in the future may disqualify you, your ability to set aside the funds may erode when a spouse stops working or when college expenses hit. Use the shelter while it is there and then keep its full value by avoiding any of the "gimick" withdrawal options. It is not the lack of a penalty or tax now that should concern you but the dimished value over multiple decades of the Roth tax shelter. I'm all for homeownership. But, think of other alternatives before tapping into a Roth. Buy a smaller house, wait a few years, "borrow" the DP from relatives, etc. [This message has been edited by John G (edited 06-23-99).]

There is no perfect answer to your question. Built into every answer are a series of assumptions about your future lifestyle, income, tax rate, etc. But, what the heck. I will take a whack at your Q. Most folks in their 20s (excluding web page designers and e-entrepenuers) have an entry job and a relatively low tax rate. They are likely to meet the income qualifications for a Roth. They may plan on keeping this tax shelter (assuming they can resist the urge to tap into a Roth to pay for a first house or grad school) beyond age 62. In your case that means 40 or more years of compound asset growth. Why start early? Because time is the number one friend of investors. Because your more likely to have extra cash compared to when you own two cars and have two kids in college. Because your smart and you listen to the good advice of older friends who started late that now tell you "start early". Will Roth IRAs be around for ever? Hard to say. The current formulation is a spectacular tax shelter, especially for a young investor. Note, the rules have already been changed before the first year was completed. It is likely more modifications will be made in future years. I think existing Roths will be grandfathered regardless of future changes because Congress would outrage millions of Roth accountholders if they reneged. But what investment option to select? You have lots of choices, too many options to review them all here. I would recommend that you keep you investment simple and remember that you should look at the first couple of years as a learning period... don't get crazy about instant results or your annual percent gain. If you are very risk adverse, choose an insured bank CD which will perhaps earn 5-6%. Comparison shop for rates and annual fees. If you want to take a little more risk, start a relationship with one of the no load mutual fund families (Vanguard, T Rowe, Janus, etc.) and pick just one broad based stock fund that has been around for 10 or more years. This fund will typically own 200 to 600 different stocks so you will have a very diversified investment. Another possible option would be to select one of the broad index funds such as the Vanguard 500. The stock fund option might over the long term give you about a 10% annual return. I specifically do NOT recommend a first time investor start with individual stocks because: (1) it is hard to have a diverse portfolio with a small lump, (2) commissions will eat into performance, and (3) researching individual firms takes time and experience. Both the bank CD and the mutual fund option are very low maintenance. You don't need to track them day to day... perhaps you look over a monthly statement. That is the simple plan for year one. In year two, you get to choose a new option or just double up the first. Regardless of what choice you make, you can change your mind, especially as your assets grow. $2000 invested every year in an IRA can often grow to more than a million by the time you are in your 60s. Isn't this a great county! Two important final thoughts. First, get started now. Don't wait for tax season which wastes ten months and puts you into the annual IRA crowds. Second, place an emphasis on educating yourself about investing. Read Kiplinger or Money. Join an investment club. Use the WWW. A good education on investing takes many years of both reading and learning from your own experiences. Good luck. JRG [This message has been edited by John G (edited 06-18-99).]

While 1998 is kaput, you can convert all or part of your existing IRAs as long as you qualify each year. The partial conversion allows you some control over the tax bite. Note, the IRS will treat all of your IRA assets as one lump, you are not converting a specific mutual fund or stock but rather some fraction of your total IRA assets. The fraction of your entire IRA amount that was originally non-tax deductable contributions will be subtracted to give you the taxable income from your conversion. It sounds like you may be a borderline qualifier. You can help yourself out by defering into 2000 any bonuses you might get at year end. You also have some control over the timing of capital gain sales/losses. If you own a business, you may be able to buy more "stuff" this year and use the Section 179 expense which flows through Schedule C to the front page of the 1040. Talk with your accountant NOW about your tax planning. One last point, if the market corrects you may be able to get your IRA assets converted at a lower total amount. So if the Dow drops 1000 pts, you might have a reason to be happy. The timing is tricky because custodians may process your request days after you give them a letter of instructions. [This message has been edited by John G (edited 06-11-99).]

The Roth is a spectacular tax shelter that has immense value over your lifetime. Think twice before using the assets for buying a home. You might find the cash for a down payment within your family for example. Grandparents are often complaining about CDs that yield 5% or less. Make them an offer that splits the interest gap. Delay purchasing for a year or two. Buy something smaller. Ask the owner to take a second. Etc. Be creative. Before you use Roth assets, sit down with an HP12c calculator and run out your nest egg 30, 40, 50 years. Just because Congress gave you the option doesn't demonstrate that it is smart to take it. And the same goes for 401K assets. Keep your shelter intact and working for you. My viewpoint, based in part of my own short sightedness in 1980s when I took assets with a 10 year tax treatment instead of maintaining the tax shelter. I did not project far enough into the future to see my folly.

Rather than focus on the tax issue... you need to think about what you are doing with your investment. You just paid over $2000 "tuition", did you learn anything? If you are new to investing, then perhaps your mistake was putting 4K into one investment which went south. I am just guessing, but perhaps you should have been in a more broadly based mutual fund. The longer you are an investor, the more you realize how often you are wrong. Long shots bets... been there, done that, got burned a few times. Time is your one true ally. Think long term. Good luck. [This message has been edited by John G (edited 06-11-99).]

No taxes due on any transaction. None on dividends, none on capital gains. No differences between long term and short term gains. Note this can have an interesting impact on investment choices since there is no difference between short term or long term gains. Holding period is irrelevant! For example, you can buy a stock at $24 and if it spikes to $36 five days later you can sell it for a 50% gain and have no tax consequence. Outside of the Roth, you would give up a significant part of this gain to taxes.

To add to the good advice from Kathy: Don't presume that what one person tells you about transfers is the rule at mutual funds or brokerages. Ask someone else. Roth issues are new. With all the staff turnover, it is not unussual to get conflicting advice. Ask for the retirement dept. as they should be better informed than the counter/phone staff. I recommend that you use a direct transfer between companies where you never see a check. You can do more than one of these in a year, there is no withholding, and you can not "forget" to get the transfer done in the allowed days. I would not recommend a lot of "splitting" since this increases your paperwork and tracking burden and may add nothing to diversification if the funds are similiar. In one block of more than $10,000 you should be able to find a home that will wave annual fees. If you break the block into pieces and use different firms, you may end up paying small annual fees.

Kathy's comments match my experience. If you seek control of a spouses IRA, you will need to get a court order. Seek legal advice immediately. The IRA can be transfered or cashed out and you will loose track of the funds. In one divorce case that had an IRA issue, the final resolution took 2 years and was uncertain until the end (finally cemented by bad behavior of one spouse).

All of the prior advice is very good. You need to educate yourself about investing. Besides web sources, I would highly recommend Kiplinger or Money magazines that provide good general coverage. The previous message listed some good mutual fund families, who typically have material for the first time investor. I might suggest adding Charles Schwab because of their educational material and connections to a wide range of mutual funds. You talked about "interest rates". I would suggest that you need to take a good look at stocks or mutual funds that seek capital appreciation, especially if you have a long term retirement planning horizon. To say it simply: absolute safety such as bank CDs offer very low returns (4-6% annually). Over a very long period of time, equity investments (stocks) have traditionally had higher returns. For example, an investment with an annual return of 5% doubles in about 14 years. The same investment at 10% (more typical of the long term return of stocks) doubles in about 7 years. If you start your retirement investing in your 20s, add the max each year and invest in stocks it is very possible to accumulate a million dollar retirement account. (my bias is towards stocks or stock mutual funds) Your education in investing will occur over many years. I would not want you to wait to get started. Pick something simple -- a bank CD, an stock index fund, a blue chip fund, etc. and get started. Next year you will have some experience with your choice and hopefully will have learned more about investing. In year two, you can add more to the first choice or make another selection. A few last words: time is your friend in investing, think long term, ignor the day to day headlines and you will do fine. Good luck. [This message has been edited by John G (edited 05-25-99).]

One of the problems with the recently proposed "college savings options" is that the maximum contribution ($500) will not amount to much, even if you start at birth and run 18 years. ($500*18yrs = $9,000 which grows at 10% to about $23,000 or perhaps just ONE YEAR tuition/board at a state university in the year 2018!) You may want to consider simply buying stocks of good companys and holding them until you sell to pay for tuition. Benefits: no interim taxes (except on dividends), long term capital gain tax rate, and the possibility of capital gains at your childs rate if the stocks are in his/her name. An index fund or tax managed mutual fund would come close to these benefits and might be more convenient due to the size of investment blocks and transaction costs. Downside: if the stocks are in the kids name they can at 18 or 21 go and buy a car/drugs/vacation, interim transactions (switching stocks) can cause a tax event... these come to mind. Concerning jeopardizing financial aide: the more you plan and work to fund your childs college, the less likely you will be to receive need based financial aide. Reckless spenders and careless parents are more likely to receive financial support. However, you are to be congradulated for thinking about college costs for a 4 1/2 year old. Starting a systematic savings program not only will go a long way to pay for your childs education, it will give you peace of mind and set a positive example for your child. Bear in mind, a lot of that financial aide is in the form of loans, rather than outright gifts. I am not a big fan of the state sponsored prepaid tuition programs. You probably can do better investing yourself. However, you may want to call Fidelity and ask about their college investing plan. The plan has some interesting bells and whistles (it was set up in cooperation with New Hampshire but is open to other states, allows larger contributions, and has an interesting investment scheme). Good luck. PS: I have followed my own advice and feel comfortable about my two high school girls. An added plus, my soon-to-be sophmore has shown some skills picking good growth companies and likes to crunch numbers. [This message has been edited by John G (edited 05-25-99).]

Gunter says ...... what ?

You need to clarify your Q. Is the trustee someone other than the mutual fund or fund family? If so, then you probably want to channel $$ through the trustee. You also could just set up a new separate mutual fund for an IRA. No limit on the number of IRAs or mutual funds other than the practical matter of keeping records and making decisions when things get too fragmented. If you designate funds as IRA money on the check and with the appropriate cover letter, all you need to do is make sure they actually do what you requested.